mexico and the development of the practice of the international monetary fund

World Develo;?menr, Vol. 16. No. 10, pp. 1127-I 142. 1988. 0305-7SOW88 $3 .oo + 0.00 Printed in Great Britain. 0 1988 Pergamon Press plc

Mexico and the Development of the Practice of the International Monetary Fund

JOSEPH GOLD* International Monetary Fund, Washington, DC

Summary. -Mexico has had a striking influence on the IMF’s Articles and on the development of some of its most important policies both before and after the present version of the Articles took effect. In more recent years, the problem of Mexico’s external debt has produced changes in the IMF’s relations with commercial banks. its practice of surveillance, and on the use of its rc- sources under stand-by arrangements. In addition, impending changes in the IMF’s response to external contingencies can be attributed to experience with Mexico. One of the generalizations drawn from this experience is that the IMP’s practice is not determined solely by the major in- dustrialized countries

1. SOME EARLY DEVELOPMENTS

Mexico’s relations with the International Mone- tary Fund (IMF) have led to the development of some of the most important policies of the organization. Although the main emphasis of this paper is on recent developments, some early developments will be cited to show that Mexico has always had a notable impact on the practice of the IMF. It can even be said that Mexico’s activities before the IMF came into being affected the character of the organization on which agreement was reached at the Bretton Woods Confer- ence of July 1944. For example. Mexico was a contracting party to a bilateral agreement that can be regarded as one of the precedents for - or, in other words, part of the prehistory of - the Articles of Agreement of the IMF as a multilateral international agreement. The bilateral agreement was one of the early stabilization agreements of the United States. The agreement with Mexico was entered into in November 1941. The United States agreed to make US dollars available to the Government of Mexico, under conditions to safeguard the interests of both countries, for the purpose of promoting exchange equilibrium. The agreement contained the germ of the idea of combining regulatory and financial provisions that is so prominent a feature of the IMF.

The similarities. however, went beyond this aspect of the bilateral agreement. To cite one example, transactions under the agreement took the form of exchanges of the currencies of the

two contracting parties and not loans by one party to the other. In this way, the parties avoided the indignity that might seem to attach to borrowing. The basic transactions of the IMF to assist its member countries (members) also involve exchanges of currency for the same reason.’ At least, that was an original reason for the form of the main transactions, and no change has been made in this technique by the two Amendments of the IMF’s Articles. The legal language of the Articles avoids the terminology of loans and credits, and refers instead to the purchase and sale of currencies. Notwithstanding the legal character of these transactions, in practice the member approaching the Fund for the use of its resources is regarded as requesting credit, except in one category of transactions in which a member is deemed to be encashing a reserve asset that the member holds in the IMF. The name attached to the IMF’s basic policy on the use of its resources - the “credit tranche policy” - is evidence of the economic view that is taken of its main transactions. This view made it easier for the IMF to develop its concept of conditionality before it was given explicit recognition by the First Amendment of the IMF’s Articles.’ Conditionality is the IMF’s practice of making its

*Formerly the General Counsel and Director of the Legal Department, and now Senior Consultant. of the IMF. The views expressed in this article are those of the author and not necessarily those of the IMF, unless expressly attributed to it.

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resources available to a member on terms related to policies the member is expected to observe or measures it is expected to take.s

Another feature of the bilateral stabilization agreements that became a precedent for the IMF was the principle that if a country was in difficulty because of a deficit in its balance of payments, the burden of recovery should not be borne ex- clusively by that country. True, the country in difficulty should follow policies that would bring about the adjustment of its balance of payments, but a country in surplus in its balance of payments should take part of the strain by supplying internationally useful resources for the reasonably limited period in which adjustment was to be achieved. This principle has been followed since the origin of the IMF. Each member of the IMF makes a subscription to the resources of the IMF equal to the member’s quota.’ A member is able to use the resources if it has a need because of its precarious balance of payments or reserve position.5 The currency resources the IMF makes available to the member are the currencies of members in a strong balance of payments and reserve position.

The pressure on the strong currency country because of the use of its currency in the IMF’s transactions ws not regarded as commensurate with the pressure on the weak currency country, because the latter country could not expect external financing indefinitely, and therefore a compulsion to adjust was inherent in its position. No similar compulsion existed to adjust a surplus balance of payments position. To create equity between the two kinds of countries, the “scarce currency clause” was included in the original Articles. Under that provision, if it became evident that the demand for a member’s currency seriously threatened the IMF’s ability to supply the currency, the IMF was to make a formal declaration of the scarcity of the currency. The effect of the declaration was that other members were authorized to impose limitations on the freedom of exchange operations in the scarce currency. That is to say, other members could discriminate through the exchange system against the member issuing the scarce currency, if its policies could be considered the cause of a per- sistent maladjustment in balances of payments among members.

The scarce currency provision remains in the Articles to this day,’ even though it has never been invoked. Critics point out that the absence of a realistic pressure on members in balance of payments surplus remains an asymmetry in the international monetary system. The asymmetry, however, is not exactly between members in deficit and members in surplus, but between

members that need to use the IMF’s resources and members that do not need balance of payments financing or, though needing it, can negotiate financial assistance without applying to the IMF.

Another early development in which Mexico was involved related to exchange rates. In July 1948. Mexico informed the IMF that because of an exchange crisis, as a result of which Mexico had suffered a serious loss of reserves, it could not maintain the par value for the peso that Mexico had established under the Articles unless Mexico could be assured of adequate financial support. Mexico sought such support from the IMF, and also from the United States under the stabilization agreement referred to earlier. together with additional amounts from the US Stabilization Fund beyond the maximum for which the bilateral agreement provided. The reaction of the United States was that, before it could decide whether to comply with such a request, the IMF would have to decide whether the par value of the peso was one that the IMF deemed appropriate in Mexico’s circumstances, so that the IMF could support the par value with its resources. In the Executive Board. doubts were expressed about whether the par value was appropriate; whether. in view of Mexico’s policies. the par value could be maintained; .nd whether the IMF’s resources could be made available because of the legal prohibition on the use of these resources to finance large or sustained capital outflow.’ It was doubted also that Mexico could impose capital controls that would be effective.

Faced with these reactions, the Bank of Mexico decided that it could not support the existing par value of the peso and would have to allow the currency to float in the exchange market until such time as Mexico could establish a new par value in consultation with the IMF at a level that could be maintained with the support of adequate dollar resources provided by the Fund and others. A fundamental question raised by this conclusion was whether the IMF could legally approve the tloating of a currency as a transitional measure pending the establishment of a new par value. The question was made even more difficult because Mexico wanted the IMF to approve intervention by the Mexican authorities in the exchange market from time to time, if they deemed it necessary to prevent excessive fluctuations in the exchange rate. This problem of floating was regarded as fundamental for the par value system, because the period of floating might be lengthy.

The Executive Board recognized on July 22, 1948 that floating the peso was unavoidable.

MEXICO AND THE DEVELOPMENT OF THE IMF 1129

Nevertheless, the Board decided that floating was a violation of Mexico’s obligations under the Articles. The Fund would take no action, however, provided that Mexico established a new par value for the peso with the concurrence of the IMF not later than August 15, 1948. The decision did not declare that the IMF had no power to approve a unitary fluctuating rate for a currency, but there was a widespread impression that this was the legal implication. Mexico could not meet the deadline, and a new par value was not established until June 17, 1949.

The legal issue raised by this episode continued to be troublesome for some years.’ In the Executive Board’s meeting of June 17, 1949, an Executive Director suggested that the 11 months of floating without disciplinary reaction by the IMF might imply that it was a useful procedure to allow a currency to find an appropriate level at which a change in par value could be made in accordance with the Articles. Much opposition was expressed to this interpretation of what had happened, but the opponents nevertheless offered a soft indictment by referring to the floating of the peso as “a technical violation” of the Articles.

The problem was resolved with finality by the IMF’s Annual Report for 1951.’ The IMF asserted in this report that a member allowing its currency to float after a par value had been established committed a violation of the member’s obligations and that the IMF could not eliminate the violation by granting approval of the member’s action. Notwithstanding this legal conclusion, the report expressed a policy of tolera- tion in “exceptional cases.““’ The circumstances that led a member to decide that it was unable to maintain the existing par value for its currency and immediately establish a new one could be examined. If the IMF found the member’s arguments persuasive, the IMF could say so, even though it could not give legal approval. The period of floating would have to be temporary. and it was essential that the member should remain in close consultation with the IMF for the purpose of the early establishment of a new par value acceptable to the IMF. If at any time the IMF concluded that floating was no longer justi- fiable, it would be the duty of the IMF to make this clear and to decide whether disciplinary action under the Articles would be necessary or desirable.

The IMF’s report on The Role of Exchange Rates in the Adjustment of International Pay- ments,” dated September 1970, came to much the same conclusions as were set forth in the Annual Report, 1951. Under the original Articles, a par value could not be abandoned

legally unless it was replaced by another par value, so that, for legal purposes, a par value did not cease to exist under the Articles during a period of floating even though the par value was not being made effective. The present Articles contain a par value system in Schedule C that the IMF could call into operation.12 Schedule C has eliminated the embarrassment of a par value that is ineffective but continues to exist in the eyes of the law if the par value system were in operation. A member would be able to terminate the par value of its currency without substituting a new par value in accordance with Schedule C,” in which event the member might decide legally to allow its currency to fluctuate in exchange value. Furthermore. if a member did not terminate a par value, the IMF would be able to take this action if the IMF found that the member did not maintain exchange rates for a substantial volume of exchange transactions in accordance with the provisions of Schedule C.‘”

In May 1949, Mexico discussed with the IMF the possibility of establishing a new and effective par value for the peso, and Mexico repeated that adequate financial assistance would be necessary. The IMF decided on May 27, 1949 that it was desirable that at an early date Mexico should stabilize the exchange rate for the peso at a level that could be maintained. If Mexico proposed a new par value acceptable to the IMF, and if Mexico instituted and maintained fiscal and credit policies that would prevent an expansion in the money supply that would put pressure on the new par value, and followed appropriate import and export policies, Mexico would be in a position to make purchases of exchange from the IMF in accordance with the Articles. The IMF would not object to purchases totaling the equivalent of 25% of Mexico’s quota in the 12 months following establishment of the par value, provided further that Mexico continued to pursue appropriate fiscal, credit, and trade policies and provided further that Mexico observed the provisions of the Articles. The decision declared also, that in the opinion of the IMF, it would be advisable tor Mexico to be able to call upon resources beyond its own reserves and those that normally could be made available by the IMF.

The decision is remarkable because it adum- brated, necessarily in a preliminary form, at least four major developments in the IMF’s policies. At the head of this list is the assurance Mexico received that it would be able to use the IMF’s resources up to a stated amount within a period of 12 months. This aspect of the decision contributed to the evolution of the IMF’s unique instrument for making the IMF’s resources available to members. The instrument is the stand-

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by arrangement, and its variant, the extended arrangement,15 which is used under one policy of the IMF. (Subsequent references to stand-by arrangements should be understood to apply to extended arrangements as well.)

The stand-by arrangement was not mentioned in the Articles before the Second Amendment. The instrument was developed bz means, of gen- era1 policy decisions of the IMF,’ begummg with a decision of February 13, 1952.” The Articles as modified by the Second Amendment now contains the following definition:

Stand-by arrangement means a decision of the Fund by which a member is assured that it will be able to make purchases from the General Resources Account in accordance with the terms of the decision during a specified period and up to a specified amount. Ix

A purpose of this definition is to clarify that legally a stand-by arrangement is a decision of the IMF taken in the administration of its resources and is not an agreement, and in particular is not a loan agreement, between the IMF and the member for the benefit of which the IMF takes the decision. Once again, the intention is to avoid the appearance of borrowing by the member, but, more important, to avoid the impression that the member violates contractual undertakings if it does not follow the policies on which its ability to use the IMF’s resources depends under the terms of the stand-by arrangement. The resources cease to be available, but not as the result of a breach of contract. It remains the sovereign right of the member to de- part from the adjustment program supported by the stand-by arrangement, without committing a breach of legal engagement, but at the cost of los- ing further use of the arrangement without the concurrence of the IMF.

The IMF’s decision of May 27, 1949 in the case of Mexico was also an early experiment in developing the doctrine of conditionality. The decision can be considered, in addition. as an early effort by the IMF to encourage other parties, in this case the United States, to lend resources to fill a financing gap in support of a member’s efforts to adjust its balance of payments. Finally, the decision contains the germ of the idea that the IMF’s willingness to approve a stand-by arrangement in support of a member’s economic program is a kind of certification that the program is designed to bring about a desirable adjustment of the member’s balance of payments. Official and private lenders can take this certification into account in assessing the risks they would undertake by lending to the member.‘”

2. SOME MODERN DEVELOPMENTS

(a) Relations with commercial banks

Until 1982 the IMF’s relations with commercial banks could best be described as distant. The IMF avoided a closer relationship even though normally the organization did not provide all the balance of payments financing a member needed while it was attempting to adjust its balance of payments. The IMF’s policy was dictated in part by the size of its resources, which, it was thought, were inadequate to meet the total amount of all the requests that might be made by members if the IMF sought to satisfy their needs in full. The agreements to borrow negotiated by the IMF over the years to augment the resources subscribed by members, so that the IMF could provide a reasonable proportion of the needed financing, is testimony to the inadequacy of subscribed resources. It is true that the IMF adopted policies in 1977*” and 1981” under which. with the aid of borrowing, the IMF provided larger amounts of financing in absolute amounts and in proportion to quotas, but it remained true that members had still to negotiate additional financing from other sources. The IMF recognized that unless it could provide larger amounts of financing to help meet the greater deficits in members’ balances of payments. members would be unwilling to accept the standards of the IMF’s conditionality. The consequences for the international monetary system could have been chaotic if no central authority could exercise influence in favor of balance of payments discipline.

The IMF’s policy of leaving a financing gap to be filled by others was not wholly inspired by the desire to husband the limited resources that the IMF had at its disposition even with the supplement of borrowed funds. The IMF did not want to see a hiatus in the relations of members with commercial banks. The maintenance of capital inflow was beneficial and would continue to be beneficial when balance of payments problems were resolved.

It followed that most members in need of balance of payments financing would find it necessary to negotiate loans by banks, coupled with the restructuring of existing debt, to take care of the gap left unfilled by the IMF and other official entities. It may seem illogical, therefore, that the IMF remained aloof from the banks, particularly in view of the indication wanted from a member, although not always in the form of a commitment already negotiated, that the financing gap would be closed before the IMF committed its own resources.

The IMF’s aloofness did not preclude technical


assistance by the IMF’s staff to a member, on its request, in support of the member’s efforts to negotiate loans to it by the banks. Usually, these efforts were conducted after the IMF had reached an understanding with a member on the adjustment program the member would follow in conjunction with a stand-by arrangement the IMF was willing to approve. The technical assistance was likely to be rendered by officials of the IMF’s staff who had participated in the discussions leading to the understanding on the member’s adjustment program. Although this technical assistance was well known, the IMF’s officials were circumspect. They were aware that the IMF’s posture was that each entity decided for itself whether it would provide its resources to a country, without interference or importuning by another entity. The IMF, in deciding whether to provide its own resources to a member, did not wish to interfere with the responsibility of the banks to decide whether or not they would lend. The IMF did not urge or advise banks to lend with the inducement that the IMF was likely to approve, or even that it had already approved, a stand-by arrangement for a member.

The Fund’s policy of limited contact with banks did not prevent the banks from enjoying the benefit of the IMF’s activities. The IMF’s approval of a stand-by arrangement in support of an adjustment program was in itself an indication that the member was taking satisfactory steps to deal with its balance of payments problem. The banks might conclude that the member would be able to repay on time such loans as the banks decided to make. Sometimes, the banks made the binding effect of their own loan agreements depend on the IMF’s approval of a stand-by arrangement if it had not yet been approved when the loan agreements were negotiated.

The banks did not simply rely on their confidence that there would be timely repayment of their loans. Banks wrote into their loan agreements terms that protected them against failures by the member to pursue the program the IMF was supporting with a stand-by arrangement. The terms might provide that if, for any reason, the member was unable to purchase exchange under the stand-by arrangement, the banks would not be bound to advance funds under their loan agreements. These terms would apply, in particular, if the member was not observing “performance criteria” established by the stand-by arrangement. They are the policies or measures regarded by the IMF as key elements in a member’s adjustment program that enable the IMF to determine whether the program is proceeding successfully.

In view of the necessity for bank loans in many

cases, the IMF’s interest in whether a financing gap would be closed by the banks, and the reliance of the banks on the IMF’s practice in making its resources available, it is natural to ask why the IMF held itself at arm’s length from the banks. It must be understood that for some years developing countries have been the chief recipients of financial assistance by the IMF, and in the most recent years the only recipients. It must also be understood that normally the decisions of the IMF are taken by consensus or at least widespread agreement. Only rarely are decisions taken by the exercise of voting and, therefore, by the preponderance of the weighted voting power of members. The preponderance of voting power means a majority of the votes cast. This majority suffices if the Articles do not re- quire a special majority.22 For a decision defining a policy on the relationship of the IMF with banks, the basic majority is sufficient. When this majority suffices, the voting power of developing countries’” does not give them a veto, but it is unlikely that decisions on policy would be taken against the opposition of a large number of members with a direct interest in the subject matter of a policy.

It may seem odd that the main opponents of closer relations of the IMF with banks on financing have been developing countries. These members have been particularly dependent on borrowing from banks to help finance both development and adjustment. Developing countries were fearful that the IMF, or its officials, might express unfavorable judgments on the policies of some developing countries, with the result that banks would be reluctant to lend to them.

Another fear of developing countries was that the IMF might be tempted to reduce the volume of its assistance to them while encouraging the banks to fill a larger financing gap. Members preferred maximum financing by the IMF because its financial terms, particularly the rate of charges as compared with the rate of interest payable to banks, were less onerous than the terms insisted on by banks.

The reactions of developing countries were not the only, or the most explicit, objections to a new policy that would authorize closer relations of the IMF with banks. Other objections were advanced that engaged the sympathy of all classes of members. Much was made, for example, of the risk that closer relations might arouse the suspicion that the IMF was favoring banks over members. For a time, the attitude of the United States did not encourage a change in policy on relations with banks, because the US Administration thought that a country with


opportunity to raise resources in the market to meet the whole of its need should follow that course. The US Congress was agitated by the possibility that the IMF’s resources might be used “to bail out the banks.” As late as Public Law 9% 181 of November 30. 1983,24 Congress provided that the Secretary of the Treasury should instruct the Executive Director appointed by the United States to the Executive Board of the IMF to oppose and vote against any member’s use of the IMF’s resources if. in his judgment, the resources would be used “principally for the purpose of repaying loans that had been imprudently made by” banks to the member.”

There was also the suspicion that the IMF might relax its conditionality for the benefit of a member if, for example, the IMF knew that a member’s inability to make purchases from the IMF under a stand-by arrangement because the member was not observing performance criteria would cut off further lending by the banks under their loan agreements. Normally, if a member’s failure to observe performance criteria implies that its program is not on course, the IMF insists on the negotiation of a new program, which could be a lengthy process. The 1MF might be tempted. it was thought, to waive the non- observance or to agree to modify the performance criteria that were not being observed so as to restore the member’s ability to make purchases forthwith under the stand-by arrangement and enable it to receive resources under the banks’ loan agreements.

Another objection was that members might become more reticent in their consultations with the IMF because of the danger that the confidentiality of information provided by the member to the IMF might be impaired. Members were concerned that closer relations with banks might mean that banks in the United States would have an advantage over banks in other countries. because the seat of the IMF IS in the United States, and also that the IMF might favor large banks over small banks.

The fears of developing countries continue to be apparent in their reactions to the closer collaboration of the IMF and the World Bank that has evolved in recent times.‘” The worry is that “cross-conditionality” might become a feature of the financial activities of the two organizations. This expression is not clear, and it can be defined in various ways, but however it is defined the anxiety about it is provoked by the possibility that greater collaboration might mean that the total resources made available by the two organizations would be less than the total if the two were not working together so closely. Furthermore, cross-conditionality has been re-

sisted because it might mean that a member would be unable to avail itself of the resources of either organization unless the member complied with the terms imposed by both for the use of their resources.

The concern of developing countries that greater collaboration should not result in cross- conditionality has not been mitigated by the motive that has inspired the drive for such collaboration. The motive has been the desire to promote adjustment and growth as complementary objectives. The effect in the IMF has been a more conscious effort to ensure that in the application of conditionality the IMF will not concern itself solely with adjustment and neglect growth, for example, by excessive concentration on the management of demand.

The banks were no less cool to the idea of a closer relationship with the IMF. Although they would have been willing to have the benefit of any judgments by the IMF on a member’s prospects and performance. if the IMF had been willing to go beyond the provision of information, the banks did not want any such relationship to imply an impairment of their independence.“’ They were unwilling, for example. to commit themselves to joint or paral- lel financing if the IMF decided to make its resources available. Similarly, the banks were unwilling to undertake a commitment to forbear from lending if the effect of further loans would be a member’s non-observance of a performance criterion in a stand-by arrangement that placed a limit on a member’s foreign borrowing.” The rationale offered by some bankers for preserving their independence was that the banks’ standards for lending were more austere than the IMF’s conditionality. Sometimes, the rationale was that among the factors the banks had to take into account were some that did not enter into the IMF’s decisions, such as competition with other banks, corporate strategy, and considerations of the bank’s liquidlty.-Y The first of these rationales might have been another way of expressing the suspicion that the IMF, as a multilateral organization controlled by its mem- bership, might relax its standards on occasion to come to the assistance of a member in distress.

In the second half of the 1970s. prominent national and international officials began to suggest that in the changing conditions of the time the lack of cooperation b,etween the IMF and the banks was an anachro’nism. Balance of payments deficits were larger than ever. The banks were going beyond their function of financing trade and specific projects to finance the balance of payments of countries, and were therefore performing the same sort of


function as the IMF. The first tremors of excessive international indebtedness were being felt. Mr. H. Johannes Witteveen, Managing Director of the IMF, urged that the banks should see their role as complementary to that of the IMF and should act with a similar sense of responsibility.“” Mr. Arthur F. Burns,” Chairman of the US Federal Reserve Board of Governors, and Mr. W. Michael Blumenthal,3’ Secretary of the US Treasury, called for order in international finance and for the avoidance of action by the banks and governments that would undermine the efforts of the IMF. All were cautious about making proposals for an expanded and for- malized collaboration between the IMF and banks, although Mr. Blumenthal was boldest in describing “several theoretical possibilities without endorsing any.” One of the possibilities he noted deserves quotation in view of subsequent events:

Among other suggestions, it has been proposed that the IMF might participate in the development of mixed financing packages, featuring a blend of official and private funds. Depending on the circumstances, the initiative might come from private lenders, the borrowers, or even the Fund itself. Arrangements in some cases might involve a “stretchout” of debts to correct excessive “lumpiness” in the earlier maturities.”

The mounting pressure of the problem of external indebtedness in the early 1980s forced a radical and surprising change in the IMF’s attitude to relations with commercial banks. The difficulties faced by members in servicing debts that now were clearly excessive were deterrents to new loans by the banks and the restructuring of existing debt. Members faced balance of payments deficits of such a magnitude that they were forced to consider defaulting on their financial obligations. The alternative would have been adjustment so rapid and so rigorous that countries would have faced the likelihood of economic distress and social upheaval. The international monetary and financial systems as a whole were threatened, and not the indebted countries alone. The IMF would have been unable to satisfy the total needs of members from its resources. including such resources as it would have been able to borrow. By the summer of 1982 it seemed that Mexico might be the first case in which the threat would become reality, because default by it would probably be followed as a precedent by other heavily indebted countries.

In these circumstances, in late 1982, Mr. Jacques de Larosiere, Managing Director of the IMF, took an initiative that changed the practice of the IMF and creditor banks, probably for all

time. Mexico had negotiated with him and the staff of the IMF an extended arrangement, under which an amount equivalent to SDR 3,410.625 million would be available for a period of three years from January 1, 1983. Attached to the arrangement was a letter of intent, dated November 10, 1982, from Mexico’s Secretary of Finance and Public Credit and the Director General of the Bank of Mexico setting forth the objectives and policies that the authorities of Mexico intended to pursue during the period of the extended arrangement, as well as detailed information on the policies to be pursued and measures to be applied during the first year. The Executive Board of the IMF approved the arrangement on December 23, 1982.

What is of particular interest for the present purpose is the events that occurred between the conclusion of the negotiations between Mexico and IMF officials and December 23, 1982. One author34 has given much credit to two central bankers who saw the imminence of crisis and who took steps to head it off in early September 1982 during the annual meeting of the IMF’s Board of Governors in Toronto, and who remained active in support of a solution during the succeeding period. The two central bankers were Mr. Paul Volcker, then the Chairman of the Federal Reserve Board of Governors, and Mr. Gordon (now Lord) Richardson, then the Governor of the Bank of England. According to the author cited here, “The two men shared a conviction that it is the duty of central bankers to save governments and markets from the worst of their mistakes , .“.35 The past mistakes were excessive lending and excessive borrowing, and the impending mistakes would be default by Mexico, unwillingness by the banks to make new loans and to restructure existing debt, and the institution of legal proceedings by the banks to force repayment.

A more detailed, indeed a step by step, account, entitled “The Mexican Rescue” has appeared under the auspices of the non-official body known as the Group of Thirty.“’ This account describes how, after Mexico sent its letter of intent to the IMF, the Managing Director took the initiative of inviting the top executives of the banks on the advisory committee of the creditor banks to a meeting at the Federal Reserve Bank of New York on November 16, 1982.” At the meeting, he announced that if the banks did not agree by December 5, 1982 to contribute US $5 billion to the financing Mexico needed, he would not recommend to the Executive Board approval of the extended arrangement requested by Mexico. His justification for this demarche was that the IMF.


other international organizations, governments, and the banks had to share responsibility for the soundness of the international system in which all were involved. All would benefit from the pre- servation of a sound system, and so they had to collaborate to provide the resources needed to maintain such a system. If all did not participate in a joint effort. the resources contributed by those that did participate might be wasted. For this reason, the Managing Director could not recommend that the IMF should make its resources available unless the banks made their contribution. The IMF’s purposes directed that its resources were to be made available “under adequate safeguards. “sx It was obvious to all that the effect of the IMF’s refusal to support a program with its resources might be to jeopardize the existing claims of the banks against Mexico.

The initiative suceeded. The initiative pro- moted acceptance of the idea - subsequently endorsed by the Executive Board-that the IMF and the banks had common interests, and that cooperation between them was essential to de- fend those interests. The attitude that an arm’s length relationship was the proper posture had to be abandoned.

The Mexican case became the precedent for a new practice of the IMF. In similar cases, the IMF awaits a commitment by banks to lend a specified amount of new resources and to restructure existing debt before the Executive Board of the IMF takes a final decision to approve a stand- by arrangement. The banks establish advisory committees to negotiate the terms for new lending and the restructuring of existing debt. The Managing Director and staff of the IMF com- municate with the advisory committee in matters related to a member’s negotiation with the banks in which the IMF can play a useful role. The staff. acting on a debtor member’s request, pro- vides information to the advisory committee about the member’s situation and policies. The staff explains, in particular, the expected economic effects of the policies the member will follow under the program negotiated with the IMF, the member’s need for resources in support of the program, and the need for restructuring existing debt. The procedure has become so standardized and welcome that lending by the banks in accordance with the procedures, which was at first called “involuntary,” is now called “concerted.” The earlier adjective conveys an impression of the shock and resentment that were the first reactions of the banks to the Managing Director’s strategy in the Mexican case.

According to the IMF’s Annuul Report, 1987,” the IMF has been flexible in accepting assurances of lending by the banks, because of

the increased difficulties of assembling a package of concerted lending. Usually, the IMF has approved a stand-by arrangement after a “critical mass” of commitments is obtained, which means the assurance of an amount less than 100%. The IMF took this action in the case of Mexico. Normally, the critical mass is 00% of the full amount that is sought. Another practice, although exceptional, that the IMF has developed has been the approval of an arrangement “in principle,” with the arrangement becoming effective when the critical mass is achieved.

The Mexican case and the cases that have followed it as a precedent have had another consequence. The IMF has acquired the reputation of a more flexible and a more dynamic organization than in the past.

(b) Edlanced surveillance

In 1984 the IMF undertook for the benefit of Mexico an adaptation of its policy on surveillance that has led to the development of a new form of surveillance and important modifications of long- standing practices of the IMF. The modifications make it more appropriate to consider the development a new policy rather than an adaptation of existing policy, although the legal basis for the new policy has been found in the function of “firm surveillance” that the IMF is required to perform by its Articles. The new policy is called “enhanced surveillance.”

The Second Amendment of the IMF’s Articles was designed, among other purposes. to enable the IMF to go on acting as the central organization of the international monetary system notwithstanding abrogation of the par value system that had been an outstanding, and even the outstanding, innovation of the original Articles. In present conditions, each member may validly choose whatever exchange arrangement for its currency it wishes and may determine the exchange value of the currency.J” The approval of the IMF is not necessary for either purpose. In such conditions, the danger of disorder is obvious. To deal with that risk, the negotiators of the Second Amendment agreed to include certain safeguards in the Articles. Prominent among these safeguards is the duty of the IMF to exercise “firm surveillance” over the exchange rate policies of members, and to adopt specific principles for the guidance of all members with respect to those pohcies.J’

The procedure of surveillance is fundamentally dependent on consultation between a member and the IMF. Consultation involves visits to each member country by a team of IMF officials at

MEXICO AND THE DEVELOPMENT OF THE IMF 113s

intervals of 12 months for most members and at longer intervals for the rest. The team writes a report that examines all the member’s policies, including domestic policies, that have a direct or indirect international impact. The Executive Board discusses the report, and the Managing Director, as Chairman, completes the discussion with a summing up that evaluates the member’s position and policies and sets forth any criticism and recommendations that Executive Directors may have made. The Executive Board’s discussion and the Managing Director’s summing up are heavily influenced by the views included in the staff’s report. The Executive Board endorses the summing up, with amendments if necessary, as its own conclusions.

Before 1984, the banks had engaged in the reschedulingJ2 of a country’s external indebtedness falling due for payment within a brief period ahead, such as 12 months. It became evident by 1984 that adjustment of a member’s balance of payments and increased ability to repay indebtedness would be facilitated if agreement could be reached between a country and its creditor banks on rescheduling indebtedness becoming due for repayment over longer periods. The need became apparent because Mexico and other countries were faced with an accumulation of amortization obligations that had to be discharged within a brief period, partly under original contractual terms and partly as the result of earlier agreements on rescheduling. One consequence of this problem might be prejudice to a member’s current program of adjustment even though the member had already made substantial progress. Another consequence might be the reluctance of banks to resume normal commercial lending to the country because of the banks’ judgment that the member would be facing re- newed or increased balance of payments difficulty as a result of the bunching of repayment obligations.

When banks engage in concerted lending as part of the financing needed by a member, they have the assurance that the IMF has negotiated and takes a favorable view of a member’s adjustment program. The IMF is making its own resources available in accordance with a monitoring procedure to ensure that the member is abid- ing by the performance criteria and other terms in the stand-by arrangement. The IMF hopes that such a program will succeed and will obviate the need for further concerted lending. The member can then return to its normal relations with banks and have the benefit of spontaneous lending by them. In 1984, the Managing Director took another initiative in the case of Mexico that led to the evolution of the practice later called en-

hanced surveillance. He convened a meeting of the banks’ advisory committee to discuss the feasibility of what has come to be called multiyear rescheduling agreements (MYRAS). Mexico had made progress under its IMF- supported program, an early return to normal bank financing could be contemplated, and a MYRA could facilitate the process.

If it can be assumed that a member will have no further need to draw on the IMF’s resources, and that a MYRA is feasible, the banks would lose the safeguards they had enjoyed because of the IMF’s monitoring of the member’s program under a stand-by arrangement and because of the banks’ undertaking to lend new money and abide by a rescheduling agreement only if the member was in a position to draw under the arrangement. To provide a comparable safeguard in the absence of a stand-by arrangement, the IMF was willing to engage in a practice of so-called enhanced surveillance.

The practice has been applied in two categories of cases. In one, a member has not used the IMF’s resources, probably because the member has not wanted to accept the IMF’s conditionality as a matter of national pride or political convenience, even though the member’s program was compatible with that conditionality. This kind of case is unlikely to be common, because the IMF will not wish to give the impression that enhanced surveillance is a softer option for members than conditionality, which might deter members from undertaking the discipline of conditionality.

The major category of cases in which enhanced surveillance may be available will be those in which a member has used the IMF’s resources but foresees no further need for new resources from the IMF because of the progress the member has made. There will be no condition in these cases, however, that the member will not request use of the IMF’s resources again if the need should arise during some period deemed relevant in the negotiations between the member and the rescheduling banks. Such a condition would not be advantageous for any party.

The principles of enhanced surveillance were developed in the expectation that the problem of external indebtedness might be overcome by a number of countries in the near future. This expectation has not been realized. The possibility remains that the practice might become a little more common in the longer term, although the practice is related to the disturbances created by external indebtedness and is not conceived to be a permanent or broader form of surveillance. In any event, the practice represents further important departures from the narrowness of the IMF’s


former attitude to its relationship with commercial banks. The main principles of enhanced surveillance, as developed so far, can be sum- marized as follows.

Enhanced surveillance is associated with multiyear rescheduling and the restoration of normal relations between a debtor country and banks. Normal in this context means the bilateral negotiation between a country and a bank or syn- dicate of banks of lending by them, in lieu of concerted lending. It is assumed that a member will not need further resources from the IMF, but a member and the banks are not precluded from making a MYRA contingent on the IMF’s approval of a stand-by arrangement. Nothing prevents the parties from entering into a MYRA without enhanced surveillance.

The IMF conducts enhanced surveillance in the case of a member only on the request of the member. In deciding whether to accede to a request, the IMF may be influenced by the fact that a program of substantial adjustment has been in place for some time and has produced reasonable improvement. If. however, the IMF concludes that support for a program by means of the normal procedure of a stand-by arrangement would be more suitable in a member’s circun- stances, the IMF will not comply with a request. If the IMF does comply, it exercises enhanced surveillance in a member’s case for a period not unduly prolonged. Prolongation might make the banks doubtful about the member’s program and the wisdom of resuming normal relations.

A program monitored by the IMF under enhanced surveillance includes a comprehensive description of the member’s major macroecono- mic objectives and policies, some of which are quantified. The IMF’s staff does not negotiate the program, as the staff does when a stand-by arrangement is contemplated, and a letter of intent is not presented to the IMF. The staff’s technical evaluation of the program carries no assurance that the program would meet the standards of the IMF’s conditionality.

Enhanced surveillance involves more frequent visits by the staff to a member country than are normal under ordinary surveillance. Two visits a year are the standard procedure under enhanced surveillance. The staff prepares reports after each visit. The treatment of these reports is one of the most radical departures from the past practice of the IMF. In the past, the staff’s reports were subject to the standard prohibition against any public use of IMF documents, including the transmission of them to banks. The IMF has decided that under enhanced surveillance the staff’s reports prepared after both the normal annual consultation and the supplemental con-

sultation with a member may be transmitted by the member to creditor banks and other creditor financial institutions that are parties to the arrangements that gave rise to the member’s request for enhanced surveillance. This standing permission is granted on the understanding that the creditors receiving the reports have assured the member that the reports will be used only for the purposes of the arrangements specified in the member’s request for enhanced surveillance and that the reports will be kept confidential.

Another condition on which enhanced surveillance is provided is that the member will not transmit the reports to creditors earlier than two weeks before the circulation of them to the Executive Board. Release of the reports does not await the evaluation of them bv the Executive Board, so that no representation*is made that the Executive Board concurs in the staff’s judgment of the adequacy of the member’s program. even though the delay in transmitting the reports gives Executive Directors the opportunity to consider them first. Enhanced surveillance represents a notable development not only in authorizing the release of IMF documents but also in recognizing an independent role for the IMF’s staff. This recognition was conceded so that the Execu- tive Board can distance itself from judgments reached in the reports.

Other evidences of caution are apparent. It has been made clear that banks must take full responsibility for their own analyses, including their assessments of risk. The reports must avoid spy impression of advising the lenders on the de- clslons they should take under their arrangements with a member. In particular, the lenders must decide for themselves what acts or omis- sions are to be regarded as defaults under their arrangements and whether defaults have occurred.

(c) Contingency mechunisms

On November 19, 1986 the IMF announcedJ3 that it had approved a stand-by arrangement for the benefit of Mexico authorizing purchases up to the equivalent of SDR 1.4 billion over the period ending April 1, 1988. The US dollar equivalent, net of repurchases (repayments) by Mexico during the period in respect of part of the outstanding purchases (totaling the equivalent of more than SDR 2.9 billion), would be about $1.3 billion. The basic US dollar amounts to be made available by others for financing the official sector in accordance with Mexico’s program would be: $6 billion by commercial banks, $2.3 billion by the World Bank (including guarantees),

MEXICO AND THE DEVELOPMENT OF TI1E IMF 1137

$0.4 billion by the Inter-American Development Bank, $2.5 billion by official bilateral lenders. The package was intended to achieve a reasonable balance between financing and adjustment in accordance with a program designed to meet balance of payments needs and reestablish sustained growth of the economy.

Mexico had made progress m pursuing these objectives during 1982-84 under programs supported by the IMF, but economic performance began to falter in late 1984 and deteriorated further in 198.5. Among the causes were the weakening of the petroleum market, the earthquakes of September 1985, and shortcomings in the pursuit of domestic policies. Some of the consequences were a reduced rate of growth and a balance of payments deficit. The steep fall of petroleum prices since early 19% produced further detrimental effects on the balance of payments and on the receipts of the public sector. The Mexican authorities negotiated a program of financing and adjustment that would apply during a medium term, because, in their view, with the economy already in recession, the attempt to compensate immediately and fully for the loss of export earnings through adjustment alone could not be sustained.

For the present purpose, the special interest of the stand-by arrangement approved by the IMF on this occasion was another bold innovation, this time in the terms of the stand-by arrangement. The feature of the terms that falls within the scope of this paper was the inclusion of a special mechanism to insulate the program against certain external shocks and uncertainties. In view of the unsettled conditions in the international petroleum market and the vulnerability of Mexico’s economy and investment programs to fluctuations in receipts from exports of petroleum, the stand-by arrangement provided for two kinds of automatic modifications if the assumptions on which the program was based were not realized. The modifications would be made in certain of the performance criteria included in the terms of the stand-by arrangement and in the amount of resources made available by the arrangement. The modifications in performance criteria were related to price and growth contingencies: decreases below or increases above projected revenues earned by exports of petroleum, and shortfalls in the projected rate of

The objective of the contingency mechanisms was to avoid the need for abrupt changes in Mexico’s policies if unforeseen external developments were unfavorable and to avoid too strong an impact on growth in the economy while efforts to adjust the balance of payments were being followed. The provision for automatic additional

financing was a new feature of financing by the IMF and lenders. The purpose was to avoid the slowdown in adjustment and growth that would be the probable consequence of the delays normally associated with the negotiation of new concerted lending. The provision was intended also to overcome the doubt that lenders might have about making additional resources available if adjustment or growth lagged during a program period, even if the slowdown was the result of external forces.

The contingent financing mechanism under the stand-by arrangement can be described in the following broad terms. The amount of resources available under the stand-by arrangement would be increased according to a formula. by amounts totaling SDR 600, if the export price of Mexican petroleum should fall below US $9 per barrel. If the export price should rise above US $14 per barrel, there would be a reduction of foreign financing. The program provided for other contingent increases. The banks would make available up to US $1.2 billion if a decline occurred in the external receipts of the public sector; and a further amount up to US $500 million. with World Bank participation in the form of guarantees up to SO’% 0 f disbursements, for increased capital expenditure in selected projects if there should bc insufficient recovery from recession notwithstanding Mexico’s pursuit of proper policies. The IMF and banks would provide the additional financing under the price contingency mechanism, while the banks and the World Bank would act under the growth contingency mechanism.

Before the Mexican case. automatic adjustments to performance triter-ia as terms of stand- by arrangements in response to changes in the prices of commodities or other external dcvelop- ments were rare.J’ Such adjustments as were made were usually minor or technical, in the sense that they did not involve adjustments in basic policies, were reasonably foreseeable, and probably reversible within a short period. There had been no case in which provision was made for contingent augmentation of the amount made available by a stand-by arrangement because of new developments of any kind. (The IMF might make further resources available under a new stand-by arrangement, but only after the negotiation of a new program.)JS

There were certain antecedents in the IMF’s policies, that had some relationship to the novel features of the Mexican case. For example, early in the history of stand-by arrangements, it was understood that they could be useful as a pre- cautionary instrument. That is to say, they would demonstrate the IMF’s confidence in a member’s


program when the member had no present need to use the IMF’s resources, so that the member would use the stand-by arrangement to obtain resources only if an unlikely emergency were to arise.46 This concept of the stand-by arrangement became submerged over time, because of the emphasis placed on the present or foreseeable need to use the IMF’s resources as the proper justification for the IMF’s decision to make its resources available.

Another antecedent is the IMF’s policy, which has been in force for many years. on the compensatory financing of deficits in the balance of payments arisin? from shortfalls in the proceeds of exports.’ It was expected that ordi- narily the shortfall would be the result of a decline in the prices of commodities. The rationale of the policy is that such financing helps members to continue their efforts to adopt adequate measures to help solve their balance of payments difficulties without restoring to trade or exchange restrictions. The IMF’s decision establishing the policy notes also that this help enables members to pursue their programs of economic development with greater effective- ness. A member can have access to the IMF’s resources under the policy if the shortfall in the proceeds of its exports is expected to be temporary and if it is largely attributable to circumstances beyond the control of the member. Indeed, the contingent increase in the amount of Mexico’s stand-by arrangement was deemed to be a substitute for access to the compensatory financing facility. Any use of that facility would be debited against the contingent amount of $600 million and any use of the contingent resources would be debited against any amount available under the facility.

There are, however, some striking differences between the Mexican model and the compensatory financing facility. The facility relates to a shortfall in total receipts from exports: the Mexican case relates to a shortfall in the proceeds of exports of a single commodity. The facility applies to shortfalls that are deemed to be temporary; the temporary character of a decline in the export price of the commodity (petroleum) is not part of the rationalization in the Mexican case. The facility deals only with shortfalls: the Mexican model is symmetrical in dealing with both decreases and increases in the price of the chosen export commodity. The facility relates only to financing by the IMF; the Mexican contingency mechanisms provide for both IMF and non-IMF financing. The attitude of banks to participation in contingency mechanisms, therefore. might limit the extent to which they become a feature of international financing.

It is not yet clear, therefore, whether automatic adjustments in performance criteria and in the augmentation of the amount of a stand-by arrangement on the model of the Mexican case, or according to some adaptation of it, will become common practice. The Mexican case could be considered sui generis or it could be the precedent for a few cases, all of which would be considered exceptional. It is not yet clear whether a comparable practice will become widespread. In the past, the IMF has been in favor of a close control of the use of its resources, and therefore in favor of decisions taken in relation to developments as they occur. It will have to be decided whether contingency mechanisms will weaken the IMF’s judgmental approach to financing.JX Hitherto, periodic reviews of a member’s progress have been preferred to contingency clauses because reviews give the IMF the opportunity to determine the nature and clauses of a development and to decide whether the terms of a stand-by arrangement should be adapted in the light of this determination.

The contingency mechanisms in the Mexican case are not of the same character. While activa- tion of the mechanism related to the price of the commodity is determined by external forces, this is not necessarily true of the growth mechanism. There might be reservations about the growth mechanism that are not directed against the price mechanism. For example. the growth mechanism would lead to an increase in external debt without necessarily providing for a strengthening of policies of external adjustment. Again, a particular rate of economic growth cannot be guaranteed, or ensured by increases in public expenditures.

The Mexican case, however, probably inspired Mr. James A. Baker, Secretary of the Treasury and Governor of the IMF for the United States, to make a proposal at the Annual Meetings of the Board of Governors of the IMF and the World Bank in September 19X7. A similar idea, based on natural disasters in general, had been advanced by an Executive Director in the Executive Board in the late 1960s when the compensatory financing facility was being discussed, but the idea made no headway then.

Mr. Baker’s proposal is best recalled in his own words:

The Fund has played a central role in the debt strategy, and we must ensure that it will be able to continue this role as long as debt problems persist. In fulfilling this role. the Fund must remain laithful to its mandate as a monetary institution providing sound policy advice and temporary balance of payments financing. To do this, the Fund will need to


adapt its policies to the changing circumstances and needs of its members.

In particular, the Fund must give greater atten- tion in its programs to measures needed to promote long-run growth, as well as to correct short-run imbalances. And the Fund should work to see that comprehensive, growth-oriented programs are not blown off course by unforeseen developments beyond a country’s control. Toward these ends. I propose the following package of changes in Fund facilities and policies.

First, I propose the creation of a new external contingency facility. It would help cushion the adverse effects on stand-by programs of external, unforeseen developments such as weaker commodity prices, lower export volumes, natural disasters, and sustained higher interest rates. Modi- fication in economic policies will also often be required, but we hope this facility will catalyze additional lending by other creditors as well. Since such a new facility would compensate. among other things. for shortfalls in export earnings, it would of course replace the existing compensatory financing facility (CFF). Like the CFF, it would be funded out of existing resources.”

The proposal is under consideration, but as of April 1988 had not yet led to a decision of the IMF. The Interim Committee on the Interna- tional Monetary System of the IMF’s Board of Governors issued a communique on April 15, 1988,“’ however, in which it recorded the progress that had been made up to that time in response to Mr. Baker’s proposal. The essential features of the compensatory financing facility, the Committee declared, should be preserved but should be combined with financial assistance to deal with external contingencies. The combined policy should provide for a maximum equivalent to 105% of quota. Within that total, each element should be equivalent to an amount up to 40% of quota, with an optional amount equivalent to 25% of quota to supplement an element chosen by the member. The contingency element would be available in connection with an adjustment program supported by the 1MF.s’

Mr. Baker referred to natural disasters, and it is appropriate to recall, therefore, that the IMF has provided emergency assistance to members to take care of balance of payments problems resulting from such sudden and unforeseeable natural disasters as earthquakes, cyclones, hurri- canes, drought. and the invasion of pests. The IMF has preserved flexibility by not formulating a systematic decision to cover this form of assistance. As a result, assistance rendered in this way to a member is taken into account when a member seeks to make subsequent use of the IMF’s resources under the IMF’s basic policy (the credit tranche policy). In short, emergency assistance is not additional to the total use that a member can

make of the IMF’s resources, but the assistance is particularly valuable because of the circumstances in which it is made available.

Within the context of this paper, it is interest- ing to recall that Mexico made a purchase in January 1986 equivalent to SDR 291.4 million to assist the country to meet part of the balance of payments need for foreign exchange that resulted from the earthquakes that struck Mexico City and other parts of the country in September 1986. An unusual aspect of this transaction is that the Managing Director took the initiative in October 1985 to offer this assistance to the Presi- dent of Mexico.

4. SOME REFLECTIONS

A number of generalizations can be drawn from the subject matter of this paper. The ruison d’Ctre of the IMF and of other international organizations is that they provide the machinery for collective action when action would be beyond the capacity of countries acting individually, however powerful they may be. The IMF de- velops its policies with much flexibility and often in unexpected ways. It is normal for international organizations to develop their policies step by step, with each step following logically and not surprisingly from the progress already made. Much of the IMF’s practice has conformed to this pattern. The experiences discussed in this paper, however, show a propensity of the IMF to make sharp departures in policy, in a direction that was not foreseeable and sometimes even contrary to settled policy. A combination of con- tinuity and change in doctrine and practice has been a characteristic of the history of the IMF.S’

Another generalization that can be made is that in the development of policy much depends on the initiative of the Managing Direc- tor. He may be prompted to take an initiative by one or more national officials, but it is his ultimate decision to respond. Furthermore, to ensure the success of his initiative, he must take certain soundings inside or outside the structure of the IMF before making his move, although sometimes the boldness and unexpectedness of his move may contribute to its success. The use- fulness of activism by the Managing Director and of a broader role for the staff has been recognized in recent years because of the greater vulnerability of the international monetary system.

It remains true, however, that the ultimate determination of the policies of the IMF is the function of the Executive Board. It may endorse an initiative of the Managing Director and give it the systematic effect of policy or the

I I40 WORLD DEVELOPMENT

Executive Board may apply the brakes and make it clear that a particular initiative, though acceptable in the circumstances in which it was taken, is to be regarded as sui grneris or to be limited to exceptional cases.

Whatever initiative is taken, and however it is regarded as guidance for the future, the initiative must be consistent with the Articles. The justification for an initiative and for action pursuant to it. however bold, is never simply the force of circumstances without regard to the law of the IMF.

Delicate questions can arise with respect to the IMF’s cherished doctrine of uniformity.‘” The doctrine proclaims that the rights and duties of all members are the same under the Articles, subject to such distinctions as are expressed in the Articles. and that the benefits and burdens of the IMF’s policies established in accordance with the Articles are the same for all members that meet the standards of the policy. The doctrine cannot be applied blindly, however, because it is an in- controvertible fact that differences exist among members, the recognition of which cannot be considered discriminatory or arbitrary.

In these days, it is recognized. for example, that the well-being of the international monetary

system depends on the policies of a few indus- trialized countries and that this fact places a special responsibility on them. The history of Mexico in the IMF illustrates the necessity of awareness that the fortunes of other countries. whether individually or as representatives of a class, can, in certain circumstances, affect the character and resiliency of the international monetary system as a whole. The IMF must pro- tect these countries from misfortune that might undermine the system, but at the price of adjustment by these countries in accordance with the IMF’s conditionality.

It must not be assumed, however, that the policies of the IMF that emerge from its dealings with individual countries are dictated unyieldingly by the IMF. In the negotiations that precede these dealings. the IMF may be aware that a solution must be found if harm to a member. and particularly to broader interests. is to be avoided. There is pressure. therefore, on the IMF and not solely on the member because of its predicament. The inspiration for a new development in the policy of the “IMF may come from a member’s insistence on the position it is taking in the negotiations or at least from a reasonable compromise with that position.

NOTES

1. Article V, Section 2(u). (All references to provi- 9. Pp. 3941. sions are to the Articles of Agreement of the IMF.) The IMF may also sell to a member the reserve assets called 10. P. 40. SDRs in return for the member’s currency. The description of transactions in the text and in the preced- 11. Reproduced in de Vries (1976), pp. 273-330. ing sentence of this footnote as sales in return for currency applies to transactions conducted through the 12. Article IV, Section 4. IMF’s General Resources Account. Transactions conducted through the IMF’s Special Disbursement 13. Schedule C, paragraph 8. Account need not take this form. They can be loans and not involve an immediate quid pro quo. 14. Ibid.

2. The original Articles took effect on December 27, 15. IMF (1987), pp. 33-39, 68-75. 1945, the First Amendment on July 28. 1969, and the Second Amendment on April 1, 1978. 16. Gold (1970).

3. Article V, Section 3(a). (c). Gold (1979), pp. 41Ob 17. Ibid., pp. 230-232. 445.

18. Article XXX (b). 4. Article III, Section 1.

19. Following a decision of the IMF on June 17. 1949 5. Article V, Section 3(b). to concur in Mexico’s proposal of a change in par value,

the IMF confirmed the assurance of May 27, 1949 that 6. Article VII, Section 3. Mexico could use the IMF’s resources, but no pur-

chases were requested under the assurance. 7. The reference is to Article VI, Section l(u) of the

original Articles, which remains in the present Articles. 20. IMF (1987). pp. 39-45.

8. Gold (1979), pp. 366-374, 541-542. 21. Ibid., pp. 47-72.


22. Article XII, Section S(c).

23. Developing countries cannot have the equivalent of the total number of votes allotted to them cast as a block in the Executive Board. The reason is that each Executive Director casts as a block the number of votes allotted to the member that appointed him or the mcm- bcrs that elected him (Article XII, Section 3(i)). Some Executive Directors have been elected by both developed and developing members, and nothing requires such as Executive Director to vote in a way favored by the developing members in his constituency.

24. 97 Stat. 1267.

25. Sec. 807. 97 Stat. 1273.

26. Gold (198-l), pp. 45.3-477.

27. Gold (1982). p. 12.

28. Ibid.

29. Ibid.

30. ZMF Survey, Vol. 5 (1976). pp. 138-140.

31. Burns (1978), pp. 455-467.

32. Blumenthal (1978). pp. 436-437.

33. Ibid., p. 437.

34. Fay (1987), pp. 13>134.

35. Ibid., p. 133.

36. Kraft (1984).

37. This fact alone implies that he was acting with the knowledge and approval of US monetary authorities. Perhaps the Governor of the Bank of England also had urged or supported the initiative.

38. Article I(v).

39. Pp. 4(&41.

40. With the exception that a member may not maintain the value of its currency in terms of gold (Article IV, Section 2(b)).

41. Article IV, Section 3(b).

42. For convenience, the term “rescheduling” is used for all modifications of the due date for discharging indebtedness, including restructuring.

43. IMF Press Release No. 86/43.

44. Automatic adjustments of performance criteria differ from waivers approved by the IMF when performance criteria arc not observed in that the adjustments are built into the terms of a stand-by arrangement in advance, while waivers are approved by the IMF ad hoc. Furthermore, a waiver does not modify a performance criterion. while an automatic adjustment does have this effect. The two techniques are comparable, however. in that they are not applicable if new’ developments would throw, or have thrown. a program off course.

45. For a time. stand-by arrangements provided for the automatic augmentation of the available amount if the member discharged repurchase obligations whethet the discharge was foreseen or not (Gold, 1970, pp. X6- 95). This practice has been discontinued (Selected Deci- sions, p. 72). But under one policy of the IMF. the maximum amounts are defined as net of scheduled repurchases, which means. in effect, that possible new assistance can compensate a member for the scheduled termination of former and still outstanding assistance that it has received (IMF, 1987. pp. 51-52).

46. Gold (1970). p. 36.

47. IMF (1987), pp. 8.%94.

48. Since the First Amendment, the Articles have prevented the IMF from creating new unconditional policies for the use of its resources, on the principle that any global need for such resources could be met by allo- cations of SDRs. Contingency mechanisms on the Mex- ican model are not subject to the objection that they are unconditional, because they are part of a program that meets the IMF’s standards of conditionality. Furthermore. the argument might be made in favor of contingency mechanisms that they strengthen the assurance of support for a member’s program that stand-by arrangements are intended to give.

49. Boards of Governors, 1987 Annual Meetings, Washington, DC, Press Release No. 50 (30 September 1987), p. 6.

50. IMF Press Release No. 88/10.

51. An IMF official has said that the contingencies would “include sharp rises in world interest rates, natural disasters and unexpected surges in import prices.” He said also that the new contingency policy would be financed with existing resources, by which he meant without special borrowing by the IMF (Wall Street Jour- nal, 8 April 1988, p. 14.)

52. Gold (1984), pp. 381-452.

53. Gold (1979), pp. 469-519; see also Gold (1984), pp. 255-307.

REFERENCES

Blumenthal, W. Michael, Annual Report of the Secre- cal Year 2977 (Washington, DC: 1978). tary of lhe Treasury on the State of the Finances, Fis- Burns, Arthur F., Reflections of an Economic Policy


Maker (Washington, DC: 1978) de Vries, Margaret Garritsen (Ed.), The fnternational

Monelarv Fund 1966-1971: The Svslem Under Srress. Vol. II: ‘Documents (Washington, DC: IMF, 1976).

Fay, Stephen, Portrait of an Old Lady: Turmoil at the Rank of England (1987).

Gold, Joseph, The Stand-by Arrangemenrs of fhe In- ternational Monelary Fund: A Commentary on their Formal, Legal, and Financial Aspects (Washington. DC: IMF, 1970).

Gold, Joseph, Legal and Ituriluriorlal Aspeus of the International Monetary .Sysicm: Selected Essays. Vol. I (Washington. DC: IMF. 197’)).

Gold, Joseph, Order in International Finance, the Promotion of IMF Stand-by Arrangements, and the Drafting of Private Loan Agreements, IMF Pamphlet Series No. 39 (Washington. DC: IMF, 1982).

Gold. Joseph, Legal and Institutional A.spec:s of the Itl- Iernationai Monetary System: Selecled Essays, Vol. II (Washington, DC: IMF. 1984).

International Monetary Fund. Selected Decisions of the International Monelary Fund and Selected Docu- ments, 13th issue (Washington, DC: IMF. 1987).

Kraft, Joseph, The Mexican Rescue (New York: Group of Thirty, 19X4).