International financial relations

Within the past decade, questions to do with international financial relations have increasingly moved to the forefront of the international agenda. A noticeable feature of this development is the rise in importance of the IMF and the IBRD as international institutions responsible for the coordination and management of international liquidity and development finance. This chapter explores two areas: the main developments in the organisation and work of the IMF since 1973 and the management of the international debt crisis, including the role of the IMF.1

Historical background

The IMF and the World Bank were formally set up on 27 December 1945, following the Bretton Woods Conference, attended by 44 countries.2 Bret-ton Woods in fact was one of several major conferences held during the closing stages of the Second World War on the establishment of post-war institutions, including the UN conferences on food and agriculture at Hot Springs, Virginia, in May 1943, which culminated in the San Francisco conference of April 1945 that set up the United Nations. The Havana Charter, which was intended to establish an international trade organisation (ITO) to complement the IMF and the Bank, was, however, never ratified. It was not until 1947 that a much reduced version of an ITO in the form of the General Agreement on Tariffs and Trade (GATT) was established at Geneva.

The framing and drafting of the Bretton Woods agreements were strongly influenced by the wartime setting and the need to prevent the recurrence of a collapse of the international monetary' system similar to that of the 1930s.3 The themes of reconstruction and the transition from a wartime to a peacetime international economy dominated the original conception of the IMF and the Bank. In this respect, too, the original conception of the Bank was weighted in favour of the reconstruction of the economies of the war-torn European states, rather than addressing the economic concerns of developing countries. It is interesting to note in this context that the Indian proposals at Bretton Woods to include specific reference to the need for assistance for developing countries in the articles of agreement made little headway.4

The Bretton Woods system

The IMF’s main tasks, as set out in Article 1, were the provision of international liquidity and assistance to members with balance-of-payments difficulties. Associated with these functions was the aim of promoting the orderly development of trade by discouraging direct controls, such as import quotas or discriminatory tariffs, to influence the balance of payments. However, the failure of states to ratify the Havana Charter, partly because of uncertainties caused by the scale of post-war reconstruction, meant that institutionally the IMF and the Bank were weakened since trade matters were not closely grouped with their work.

A key element of the Bretton Woods system was the maintenance of orderly exchange rates. An initial par value for the currencies of individual members was agreed, which could only be altered in the event of fundamental disequilibrium. The resources that the IMF has at its disposal for extending balance-of-payments assistance to member countries are derived from subscriptions equal to their quotas (ordinary resources) and borrowing from official institutions. Subscriptions are paid partly in an acceptable reserve asset and partly in a member’s own currency. Apart from their reserve position in the IMF, members have access to IMF credit in four tranches or segments of 25 per cent of their quota, up to a limit of 100 per cent of quota. This is not necessarily an absolute limit and may be exceeded depending on the type of programme, assessed needs and the current guidelines on access.5 Drawings (purchases) above 25 per cent of quota are subject to increasing conditionality. This involves fund consultations with the member on performance criteria and reviews of its macroeconomic policies.

The original functions of the IMF can be summarised as regulatory (exchange rates), financial (providing additional liquidity) and consultative (providing a forum for the collective management of monetary and financial relations). As Cohen notes: ‘For the first time ever, governments were formally committing themselves to the principle of collective responsibility for the management of the international monetary' order’.8

The institutional arrangements were based on the clear distinction in principle that the IMF was to be a revolving fund, lending surpluses to deficit countries on a temporary basis. The IBRD, on the other hand, was to be responsible for long-term lending. In more recent times, however, the blurring of this distinction is especially noteworthy.

Institutional arrangements

Under the articles of agreement, the principal decision-making body in the IMF is the Board of Governors (Article 12). It consists of one governor and one alternate governor appointed by each member of the IMF, who is usually the minister of finance or governor of the central bank and who serves for five years, subject to the approval of the appointing member. The Executive Board, which conducts the day-to-day business of the IMF, consists of both appointed and elected members. The members with the five largest quotas are each empowered to appoint an executive director, while the remainder are elected on a group basis. Elections are normally held every two years. In addition, the two members with the largest reserve positions in the IMF over the preceding two years may also each appoint an executive director, unless they are already entitled to do so by virtue of the size of their quotas. The Executive Board is chaired by the managing director, an office that has increasingly acquired significant, if discreet, political importance.7 The Board of Governors has a number of powers not shared by the Executive Board, including the admission of new members, the determination of quotas and the distribution of the net income of the IMF. Since 1953, the governing bodies of both the IMF and the World Bank have held consecutive meetings in Washington, DC, and every third annual meeting is in a member country other than the United States.

In many respects, the original aims and purposes of the Bank were not dissimilar to those of the IMF. As originally conceived (Article 1), the Bank’s purposes were to facilitate the investment of capital for productive purposes, including the restoration of economies destroyed by war; the conversion of productive facilities to peacetime needs; and, only third, to encourage the development of productive facilities in less developed countries. These aims were to be achieved through Bank guarantees and loans, although in practice the greater contributions to capital flows have not been through guarantees but direct lending. The Bank was established as a joint-stock bank, initially capitalised at $10 billion. Under Article 5 (Section 3), each member has 250 votes plus 1 additional vote for each share of the stock held. Whereas in the IMF, quotas were the benchmark for drawing rights, in the Bank the ability to borrow was independent of capital contributions.

The institutional arrangements of the Bank closely follow those of the IMF. These provide for a board of governors, executive directors and president, supported, like the Fund, by an international staff. Some 23 countries have traditionally provided 10 or more staff to the Bank, with the largest concentration being made up of nationals from the United States, UK, Germany, Japan, Australia, Canada, Pakistan and India.8 There are three main institutional differences between the Bank and the Fund. First, the Bank’s articles of agreement provide for an advisory council, although in practice this rapidly fell into disuse. Second and most importantly, the Bank (unlike the IMF) contains no jurisdictional provisions that limit the sovereignty of its members in the financial field. As such, the Bank’s power of supervision, formally at least, is related to control over its own loan operations. The other difference relates to requirements for information. The IMF contains provisions on a wide range of information that members are obliged to provide on their payments, reserves and import-export positions. These have no counterpart in the Bank’s articles of agreement, except for information required about projects financed by the Bank.

A special organisational feature of the Bank is the strong position of its president who, as the chief executive, is responsible for recommending the terms and conditions of loans to the governing directors, as well as organisational questions relating to the staffing and running of the Bank. In practice, the office of president has acquired importance, from the latter period of Eugene Black’s presidency through that of George Woods and particularly Robert McNamara, when the Bank’s role changed from being a bank per se to that of the central international development agency with a philosophy geared to project lending rather than more general programme aid.

Apart from operating as a development finance agency, the Bank has also acted in a dispute settlement role, as well as providing financial and other consultancy services to members. For example, President Woods acted as a mediator in the negotiations after the Suez Crisis which led to the financial settlement between the United Arab Republic and the Suez Canal Company shareholders.9 The Bank subsequently acted as fiscal agent for funds contributed by various governments towards the cost of clearance of the canal. A further example of the successful mediatory role of the Bank can be seen in the long-running negotiations involving the Bank, India and Pakistan over the development of the Indus waters, which culminated eventually in the Indus Waters Treaty of I960.1" With the creation of the International Finance Corporation (IFC) in 1956 and the International Development Association (IDA) in 1960, the three institutions became known as the ‘World Bank Group’.

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