CAPÍTULO 3. RESULTADOS Y ANÁLISIS
3.1 Confección del software
Surveillance and TA are two instruments which are very useful in the prevention of a financial crisis. However, if a financial crisis emerges, then these preventive measures are placed on the back burner and the crisis-affected country needs an immediate cure. In this scenario, the IMF considers the whole picture and helps the crisis-affected country to stabilise its external position and also the health of its internal financial system. This involves the IMF‘s third tool in the context of the promotion of financial stability (restoring the financial sector); that is, financial assistance to the country in crisis.
According to the Articles of Agreement, the IMF has the discretion to extend financial assistance to a member country in order to resolve the member‘s balance of payments difficulties.
Article I of the IMF's Articles of Agreement maintains that the object of loaning by the IMF is "...to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity."
However, there are strings attached. The reason for this is that the IMF wants to make sure that financial difficulties are fully resolved through comprehensive economic reform.415 These strings are known as conditionalities and the member country concerned needs to agree and implement these conditionalities in order to obtain financial assistance from the IMF. The IMF provides
414 For basic knowledge about lending by IMF visit: http://www.imf.org/external/about/lending.htm
415 Moreover, the IMF is not a developmental organisation and thus needs to make arrangement for the recovery of
155 money in instalments which are spread over the duration of the assistance program; however, the imbursement of the money depends on the member‘s implementation of the IMF‘s recommendations and on the achievement of specific economic targets (which is part of the conditionality).
At this stage, I am not going to focus on the types of financial assistance provided by the IMF to its members.416 However, the focus will be on the rationale for attaching conditions to the financing, the types of conditions attached, the nature of conditionality and its overall effect.
a) Rationale for Conditionality
It is highly logical that a lender would want to know and make sure that whoever is in recipient of his loan is capable of returning his money. Otherwise, how can recovery be assured? This is the case with the IMF; it is a financial institution which lends money to member countries with balance of payment difficulties. As the lender, the IMF tries to make sure that the member country has recovered from financial distress and is capable of returning the IMF loan. In this context, the IMF‘s conditionality is perfectly justified and is also helpful to the member concerned (which is a view very often challenged by many scholars).417
416
For a good discussion about IMF financing see generally, Alexander, Kern (2005). The Fund‘s Role in Sovereign Liquidity Crises, in Current developments in monetary and financial law. International Monetary Fund.
417 Guidelines on Conditionality, Prepared by the Legal and Policy Development and Review Departments of the
IMF, 2002, para 1. Available at: http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf ; see also, Buira, Ariel (2003). An Analysis of IMF Conditionality, G-24 Discussion Paper No. 22, p3; see also, Alexander, Kern, Dhumale, Rahul, and, Eatwell, John, (2005). ‗Global Governance of Financial Systems, The International Regulation of Systemic Risk.‘ Published to Oxford Scholarship Online: September 2007, p88.
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b) Scope of conditionality
The scope of conditionality is mentioned in the guidelines on conditionality provided by the IMF. The text below illustrates the governing principles which outline the scope of the conditionality.
Box 2
Decision 1, paragraph 7, of Guideline on Conditionality: Scope of conditions
―Program-related conditions governing the provision of Fund resources will be applied parsimoniously and will be consistent with the following principles:
(a) Conditions will be established only on the basis of those variables or measures that are reasonably within the member‘s direct or indirect control and that are, generally, either (i) of critical importance for achieving the goals of the member‘s program or for monitoring the implementation of the program, or (ii) necessary for the implementation of specific provisions of the Articles or policies adopted under them. In general, all variables or measures that meet these criteria will be established as conditions.
(b) Conditions will normally consist of macroeconomic variables and structural measures that are within the Fund‘s core areas of responsibility. Variables and measures that are outside the Fund‘s core areas of responsibility may also be established as conditions but may require more detailed explanation of their critical importance. The Fund‘s core areas of responsibility in this context comprise: macroeconomic stabilization; monetary, fiscal, and exchange rate policies, including the underlying institutional arrangements and closely related structural measures; and financial system issues related to the functioning of both domestic and international financial markets. (c) Program-related conditions may contemplate the member meeting particular targets or objectives (outcomes-based conditionality), or taking (or refraining from taking) particular actions (actions-based conditionality). The formulation of individual conditions will be based, in particular, upon the circumstances of the member.‖
According to this, conditionality can require a member country to achieve certain targets or objectives or it may be required to perform or, in some cases, not perform certain activities.418 However, these conditions are vital to the success of the IMF financial assistance program and significant for the implementation of the IMF Articles of Agreement and its related policies.419
418 Guidelines on Conditionality, Prepared by the Legal and Policy Development and Review Departments of the
IMF, 2002, para 7(c). Available at: http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf
419 Guidelines on Conditionality, Prepared by the Legal and Policy Development and Review Departments of the
157 The last part of Paragraph 7 (a) of Guideline on Conditionality by the IMF (―In general, all variables or measures that meet these criteria will be established as conditions.”) makes the scope of the conditionality very wide. However, the following paragraph i.e. 7 (b) of the Guideline tries to limit its scope by elaborating that the conditionality is normally related to the core areas of the IMF‘s responsibility but that other things can be included in it with detailed reasoning to do so.420
In short, IMF conditionality is of significant importance to enable the IMF to exist as an effective IO. As discussed earlier in this chapter, an IO‘s power to enforce its decisions on a member country is, in fact, the most critical attribute of an IO. Thus, with the help of conditionality, the IMF tends to be an effect IO. The reason why conditionality is so important to the IMF is that it lacks a comprehensive institutional structure, because it lacks an effective adjudicating body.
D. Conclusion
This chapter looks at the legal framework of the IMF which is based on its Articles of Agreement and the decisions of the Executive Board. The IMF endorses stable and balanced global economic growth which is an essential goal of the liberally institutionalised (rational) international community. This goal is achieved by the IMF by means of its primary activities, which comprise surveillance, technical assistance, and financial assistance. The legal bases of these activities have been documented in this chapter. However, a significant trait of the IMF‘s
420 For example IMF can use conditionality as a tool to get implementation of standards and codes by the member
countries. [Access to the CCL (contingent-credit lines) is subject to the adherence of, at least: ―(1) subscription to and use of the IMF's Special Data Dissemination Standards, which guide countries making economic and financial data available to the public; (2) compliance with the Basle Core Principles for Banking Supervision; (3) use of the IMF-designed code on fiscal transparency; and (4) use of the IMF-designed code on transparency in monetary and financial policies. A more comprehensive analysis of adherence would be possible where a Report on Observance of Standards and Codes (ROSC) has been prepared. ROSCs include assessment of adherence to seven other sets of standards and codes.‖ IMF Executive Board Meeting 17 November, 2000.] [FSF, Report of the follow-up group on incentives to foster implementation of standards, September 2000]. See generally, Dr. Benu Schneider (2002). Issues in Implementing Standards and Codes, Paper presented at the ODI conference on International Standards and Codes: The Developing Country Perspective.
158 methodology in achieving the above-mentioned goal is its emphasis on advice, persuasion, and eventually cooperation (which mostly involves conditionalities for needy countries).
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V.
The Institutional role of the IMF in achieving stable and balanced
growth in the global economy through the International Economic Cycle
The ideal institutional role of an IEI has been discussed in detail in the theory chapter.421 This chapter is dedicated to highlighting the institutional role of the IMF. This institutional role of the IMF, which the IMF itself does not explicitly admit to, actually does exist and contributes significantly (as part of the IELR) to enhancing the certainty and predictability of the rules of the game in the international economic scenario.
As discussed in the theoretical framework, the Economic Cycle constitutes a causal relationship between financial sector development and the expansion of international trade.422 Thus this chapter tries to characterise the IMF‘s functioning in an institutional role (as described in the theoretical framework) in the context of both constituents of the Economic Cycle (the financial sector and international trade). The purpose of this exercise is to show that the institutional role of the IMF does exist and that the IMF needs to explicitly pay more attention to its institutional role. This institutional role has a direct link with the stable and balanced growth of the global economy through the Economic Cycle, therefore, improvement in the institutional role would lead to better opportunities for achieving a more stable and balanced growth of the global economy.
In this context, this chapter is divided into two parts, A and B. Part A is dedicated to the IMF‘s contribution to the development of the global financial sector and part B is devoted to the IMF‘s
421Chapter II.A.3 on page 38 422 Chapter II.B.3.e) on page 90
160 contribution to the promotion of international trade. As a whole, this chapter highlights the IMF‘s contribution as an IEI in promoting the certainty and predictability of the rules of the game within the IELR. The following part of the chapter will examine the IMF‘s international institutional role in achieving economic growth through the development of the global financial sector (Patrick‘s supply lead hypothesis423).