Rethinking Bretton Woods | Thu, Nov 13, 2008
The article is a quick survey of highlights that emerge in assessing the final IEO issues paper for the evaluation from the standpoint of the comments submitted at that time.
Review of IMF Work on Trade: is the IEO listening ?
The IEO final issues paper for the Evaluation of the IMF Approach to International Trade (“the IEO Paper”) was released during the summer, and is posted at http://www.ieo-imf.org/eval/ongoing/Trade_IP.pdf. Previously, a number of CSOs had submitted a paper with comments on the original paper (“the CSO Comments”) , posted at http://www.coc.org/files/IEO+Evaluation-Comments-Final-05-08.pdf.
The following is a quick survey of highlights that emerge in assessing the final IEO issues paper for the evaluation from the standpoint of the comments submitted at that time.
a. The IEO Paper starts by finding the basis for the IMF involvement on trade in Art. I(ii) , that states the IMF purpose to “facilitate the expansion and balanced growth of world trade.”
The CSO Comments had pointed out that Article I(ii) as quoted by the IEO omitted its last part which reads “and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy” and that ignoring this key aspect of the IMF mandate would lead to an incomplete framework and yardstick for the evaluation. The reference to international trade in the Articles of Agreement does not allude to the means by which trade should be promoted by the IMF and, thus, at least the possibility that the Articles of Agreement did not refer to direct interventions on trade of the type taken as subject for evaluation by the IEO should be entertained.
The IEO Paper maintains the original incomplete quote of Art. I in its initial paragraph, and has further added that such mandate “is reinforced by references in Article IV to members’ obligations on economic policies in collaborating with the Fund to assure orderly exchange arrangements and in Article V to the IMF’s role in assisting members in solving balance of payments problems.” None of these two articles refers explicitly to trade.
But the IEO Paper maintains the recognition that the mandate “leaves substantial scope for disagreement on whether the IMF has overstepped its proper role on trade policy or not done enough.” and now acknowledges the mandate to be “relatively soft.” It this context, it maintains the line that it will assess “whether interpretation of the mandate for involvement in trade policy is sufficiently clear.” Two questions it raises in addressing whether the role of the IMF on trade is sufficiently clear is whether guidelines and precedents are “consistent with the mandate in the Articles “ and whether “a clear and effective delineation of the role of the IMF vis-à-vis the WTO and the World Bank.”
These questions provide a good enough platform to launch into an honest inquiry on whether the IMF is structurally able to deal directly with trade matters, especially given the judgments on employment, long term development, distributional consequences and social costs that they entail, and that exceed the IMF’s expertise and jurisdiction.
b. The CSO Comments had brought up the irony that questions more central to the IMF mandate on trade, such as the implications for trade of its role on exchange rate issues were explicitly singled out as outside the scope of the evaluation.
The IEO clearly took note of this objection and, while apparently not departing from the initial position, does include a longer justification for its view that “the IMF’s role in trade policy [should be considered] separately from (though in tandem with) that in exchange rate policy.” According to the IEO:
“ This is because of the fundamental distinction between exchange rate and more narrowly-defined trade policy in the Articles of Agreement. Specifically, with respect to exchange rates, members undertake an obligation “to collaborate with the Fund and other members … to promote a stable system of exchange rates” and to “avoid manipulating exchange rates…to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members” (Article IV Section 1). In turn, the Fund has the explicit responsibility “to exercise firm surveillance over the exchange rate policies of members” as it oversees “the compliance of each member with its obligations (Article IV, Section 3).” These provisions unambiguously place exchange rate policy and its implications for trade at the center of the Fund’s mandate. In contrast, the mandate for the Fund’s involvement in more narrowly-defined trade policy is based on “soft” obligations (for example that each member shall “endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth…).” ( Article IV, Section 1, i, Gold, 1986). Thus, especially in view of the fact that the IEO recently completed an evaluation of the IMF’s advice on exchange rate policy and to help focus this evaluation on the Fund’s role in the context of this softer mandate, this evaluation, focuses on the IMF’s role in providing advice on trade policy narrowly defined.”
The explanation brings welcome clarity to the point and if “the IMF’s role in providing advice on trade policy narrowly defined “ will not be approached as a given, or as necessarily consistent with the mandate in the Articles of Agreement, the question of mandate that underlined the CSO Comments seems to be fairly taken.
In addition, in addressing the issues of surveillance and trade, the IEO Paper now draws the important connection that “Following the 2007 Bilateral Surveillance Decision, views on trade policy will need to be informed by assessments of external stability.“ which may signal openness to pay some attention to exchange rate issues in, at least, this context.
c. The IEO final paper includes some welcome changes is the way it frames issues of “evenhandedness.”
The original framing as ““Does the IMF treat industrial and developing countries uniformly in addressing the need for trade reform when it is relevant?” was questioned in the CSO Comments by, inter alia, questioning what is the practical relevance of even-handedness, given the vast diversity in the terms of relationships of large industrial countries not likely to request an IMF program and those that do, and asked consideration of the issue of how often is trade policy advice followed by countries that are not likely to request an IMF program (e.g., the OECD members) and countries that are.
The IEO Paper, in referring to evenhandedness in trade policy advice of the IMF, says: “This is a difficult issue because the nature of trade policy issues and therefore advice differ significantly across countriesparticularly between developing and advanced countries. Also, the IMF’s involvement with countries differs according to whether it is solely through surveillance or also through the use of Fund resources. Nevertheless, indicators, such as the frequency of advice, breadth of advice, and country-specific depth of advice, will be compared to assess evenhandedness.“
In assessing the effectiveness of trade policy advice it will also consider the question “the record of countries in following IMF policy advice by determining to what extent changes in a country’s trade regime have been consistent with IMF advice.” Hopefully this inquiry can engage in a comparison of changes in OECD countries, compared with developing countries.
d. The IEO Paper has added a whole new question for examination:
“How has the IMF’s role in trade policy evolved since the establishment of the WTO? Particular points of interest concern whether the Fund has adapted its role to the new environment and whether cooperation is working.
Have cooperation agreements (with both the WTO and World Bank) been effective in ensuring collaboration and coherence in positions on policy issues?
Has it become more difficult for the IMF to gain traction on its advice since the establishment of the WTO? If so, it will be important to establish how this has changed the way the Fund engages on trade policy issues.
Is there any unproductive overlap in the roles of the IMF on the one hand and WTO and other international institutions that address trade issues on the other?
Is there evidence of opportunities for productive cooperation between the WTO and IMF that have been missed? “
In assessing this evolution, there is potential for a productive inquiry on whether the recipient countries have actually seen their policy space increase or decrease as a result.
e. The CSOs comments had requested that the IEO examines “ whether the IMF has, in its surveillance, assistance, and lending activities, provided governments with the necessary flexibility of policy scenarios and choices with regard to trade liberalizationor whether the Fund has stuck primarily to a singular prescription of how trade liberalization should be approached.”
It is unclear whether the IEO would go into this exercise, though under the current scope of the IEO Paper it arguably could. This would be a mere iteration of the IEO’s own recommendations in the 2004 Evaluation of PRSPs and the PRGF that the IMF should be encouraged to give more active inputs into policy discussions that analyze alternative policy options and tradeoffs. (IEO 2004 ,p. 18). Furthermore, monitoring this aspect would be very easy and straightforward. All it would take is, e.g., a survey of country policy documents to find out how many alternative scenarios are proposed by the IMF when it addresses trade issues.
f. The CSO Comments had emphasized the need to consider privatization dynamics as part of the assessment of trade, because of its close links to the liberalization of trade in services in Mode 3 of GATS (commercial presence). Concessions under GATS Mode 3 are, essentially, a way to lock up unilateral openings that typically happen in privatization programs. So the IMF approach to privatization definitely warrants examination in assessing trade in services. However, though the IEO Paper mentions the latter a couple of times, it does not –explicitly at least –mention the former. It would be unfortunate to miss this opportunity to shed light on the link between IMF prescription on privatization and trade in services. This is an area whose neglect is expression of the lack of knowledge and resources on trade that the IEO intends to assess.