overseas development institute · lei: 01-5^0 ;6&i ^research officer, overseas development...

Overseas Development Institute

10-11 Percy Street London W1P0JB Tel: 01-580 7683

ODI TJORICING PAPET?

No. 6

ITIF STABILISATION PROGPvAlUflZS

\ Tony K i l l i c k *

0V:J! iLA3 CLVFl-Of MENT iriSllTUTE,

lei: 0 1 - 5 ^ 0 ;6& i

^Research O f f i c e r , Overseas Development I n s t i t u t e

ODI Working Papers present i n p r e l i m i n a r y form work r e s u l t i n g from research undertaken under the auspices of the I n s t i t u t e . Views expressed are those of the authors and do not n e c e s s a r i l y r e f l e c t the viev's of ODI. Comments are welcomed and should be addressed d i r e c t l y to the authors.

September 1981

0 85003 079 X

nff STABILISATION PROGBAMMES

We begin where the l a s t chapter l e f t o f f , w i t h the c o n t r o v e r s i a l subject of BD? c o n d i t i o n a l i t y . The arguments and counter-arguments reviewed there remain unresolved, one reason f o r which i s a shortage of systematic' i n f o r m a t i o n on the content of the Fund's ap^proach to s t a b i l i s a t i o n . Thfe Fund i t s e l f has not chosen, or f e l t a b l e , to provide much p u b l i c i n f o r i a a t i o n on t h i s s u b j e c t , although i t i s beginning to adopt a moire open posture. In consequence, much of the argument has e i t h e r been very general or has been about s p e c i f i c cases which may or may not be r e p r e s e n t a t i v e of the general case. This chapter attempts to f i l l the f a c t u a l vacuum, so f a r as that i s p o s s i b l e s to describe and analyse the content of Fund s t a b i l i s a t i o n programmes; and to examine the i n t e l l e c t u a l underpinnings of these.

I t may be a u s e f u l p r e l i m i n a r y , however, to r e f r e s h our minds on some aspects of the general i n t r o d u c t i o n to IMF c o n d i t i o n a l i t y i n Chapter 5. F i r s t , ' c o n d i t i o n a l i t y ' , as we w i l l use t h i s term here, a r i s e s when a government requests f i n a n c i a l support from the IMF i n the form of an upper-tranche c r e d i t or a c r e d i t from the extended Fund f a c i l i t y (and a s s o c i a t e d uses of the supplementary f a c i l i t y ) . To secure Fund approval of such a request a government w i l l have to s p e c i f y the s t a b i l i s a t i o n programme i n support of which the c r e d i t s are r e q u i r e d ; ' c o n d i t i o n a l i t y ' can be s a i d to c o n s i s t of those p o l i c y measures which the Fund management r e q u i r e s to be included i n the programme before i t w i l l recommend the request f o r approval. There are, as was made c l e a r i n Chapter 5, a number of Fund f a c i l i t i e s t hat do not i n v o l v e c o n d i t i o n a l i t y of t h i s k i n d but we are not concerned w i t h them here.

One of two other p o i n t s are worth r e c a l l i n g from the d e s c r i p t i o n i n Chapter 5 of the m o d a l i t i e s i n v o l v e d . A government's s t a b i l i s a t i o n programme w i l l be f o r m a l l y presented to the Fund i n the form of a

' l e t t e r of i n t e n t ' from the government to the Managing D i r e c t o r . But although o s t e n s i b l y from the government, a f i r s t d r a f t of the l e t t e r of i n t e n t i s normally prepared by the Fund s t a f f s r e p r e s e n t i n g t h e i r views on what needs to be done to r e c t i f y the economic s i t u a t i o n . I f there are disagreements between the two p a r t i e s the n e g o t i a t i o n s are l a r g e l y about the cotmnitToents on f u t u r e p o l i c y measures to be w r i t t e n i n t o the l e t t e r . T his i s not completely the case, however, because the Fund sometimes r e q u i r e s c e r t a i n measures to be taken before a c r e d i t w i l l be approved. And among the measures to be c a r r i e d out a f t e r a c r e d i t has been approved there i s an important d i s t i n c t i o n between those which are designated as 'perfonjance c r i t e r i a ' and the remainder of the programme. I t i s a l s o worth r e c a l l i n g that c e r t a i n o f the standard i n g r e d i e n t s of c o n d i t i o n a l i t y may be regarded as f l o w i n g d i r e c t l y from the o v e r a l l o b j e c t i v e s of the IMF, as s p e c i f i e d i n i t s A r t i c l e s of Agreement.

In what f o l l o w s , p a r t I i s concerned w i t h the p o l i c y content of Fund c o n d i t i o n a l i t y j p a r t I I examines the degree of f l e x i b i l i t y and a d a p t a b i l i t y i n Fund s t a b i l i s a t i o n p o l i c i e s : p a r t I I I i s d i r e c t e d to the r a t i o n a l e u n d e r l y i n g the Fund's ei!?)hasis on c r e d i t r e s t r i c t i o n s ; and p a r t IV o f f e r s a summary and co n c l u s i o n .

I - THE CONTEIIT OF CGWDITIONALITY

The bases of c o n d i t i o n a l i t y

The Fund's c o n s t i t u t i o n does not e x p l i c i t l y r e q u i r e that access to i t s resources should be i n support of s t a b i l i s a t i o n programmes and t h i s has l e d some c r i t i c s to suggest t h a t the medicine i t p r e s c r i b e s i s a k i n d of punishment f o r past t r a n s g r e s s i o n s . On the other hand, the A r t i c l e s of Agreement do i n c l u d e p r o v i s i o n s which the Fund management has i n t e r p r e t e d as p r o v i d i n g a l e g a l b a s i s f o r the p r i n c i p l e of c o n d i t i o n a l i t y and, indeed, as o b l i g a t i n g them not to agree c r e d i t s (of the type r e l e v a n t to t h i s chapter) on an u n c o n d i t i o n a l b a s i s . Thus, A r t i c l e I ( v ) s t a t e s that one of the purposes of the IMF i s

To give confidence to members by making the general resources of the Fund temporarily a v a i l a b l e to them under adequate safeguards, thus p r o v i d i n g them w i t h an opportunity to c o r r e c t maladjustments i n t h e i r balance of payments without r e s o r t i n g to measures d e s t r u c t i v e of n a t i o n a l or i n t e r n a t i o n a l p r o s p e r i t y .

In e l a b o r a t i o n . A r t i c l e V3(a) s t a t e s t h a t

The Fund s h a l l adopt p o l i c i e s on the use of i t s general resources, i n c l u d i n g p o l i c i e s on stand-by or s i m i l a r arrangements, and may adopt s p e c i a l p o l i c i e s f o r s p e c i a l balance of payments problems, that w i l l a s s i s t members to solve t h e i r balance of payments problems i n a manner c o n s i s t e n t w i t h the p r o v i s i o n s of t h i s Agreement and t h a t w i l l e s t a b l i s h adequate safeguards f o r the temporary use of the general resources of the Fund.

There are a number of key phrases i n these quotations. One i s the requirement that the Fund's resources are only to be made "te m p o r a r i l y " a v a i l a b l e . The o r i g i n a l conception was that the Fund's resources would be used as a r e v o l v i n g fund, w i t h the m a t u r i t y of c r e d i t s kept short to ensure that i n any given p e r i o d l e n d i n g to some members would be approximately o f f s e t by the i n f l o w of repayments from others. I t was t h i s r e v o l v i n g fund idea which was o r i g i n a l l y s t r e s s e d as p r o v i d i n g the e s s e n t i a l b a s i s f o r p o l i c y c o n d i t i o n s intended to r e s t o r e h e a l t h t o the balance of payments as q u i c k l y as p o s s i b l e , thus ensuring t h a t c r e d i t s would be r e p a i d i n good time. However, i t could reasonably be r e p l i e d that the stringency of c o n d i t i o n a l i t y has sometimes seemed d i s p r o p o r t i o n a t e to the need to safeguard the repajnnent of Fund c r e d i t s - c r e d i t s which i n the past have of t e n been small r e l a t i v e to a country's t o t a l f o r e i g n exchange o b l i g a t i o n s . The Fund has never, i n f a c t ^ s u f f e r e d a formal d e f a u l t of more than a t e c h n i c a l or t r a n s i t i o n a l nature, although

some accounting a c r o b a t i c s and some r o l l i n g - o v e r have been necessary i n a number of cases i n order to avoid a d e f a u l t . The World Bank has had a s i m i l a r l y good record i n a v o i d i n g d e f a u l t (hence i t s t r i p l e - A c r e d i t r a t i n g on world c a p i t a l markets) but i t has apparently achieved t h i s w i t h what has been regarded as l e s s s t r i n g e n t c o n d i t i o - ^ a l i t y than the Fund's. In any case, the r e v o l v i n g fund argumt-n: has l o s t a good deal of i t s f e me i n recent years as the interpret•^•îon c f "temporary" has been s t r e t c h e d to cover c r e d i t s of c^ziîic^'jr.-.bly longer d u r a t i o n and as the Fund has increaGinj;;ly become a cont:ir. rlrir; Source of net f i n a n c i a l flows to d e f i c i t raeribsrs.

The management noi'âdays places s t r e s s on the phracss i n A r t i c l e s about the use of Fund resources a s s i s t i n g ©embers to "co"-.ec<: Tnaladjust-tnents i n t h e i r balance of payments." Indeed, i t has goiie r u r t h a r to argue ( i n a document commenting on the BrandL Espori;) t'>'.ric c o n d i t i o n a l i t y i s one of the c o n t r i b u t i o n s that the Fund makes to zllr-jiHtiir-;, members' balance of payments proble ' - ' i s . On thin viaw,, access to the hiîher-c o n d i t i o n a l i t y f a c i l i t i e s i s twice blesfied: i t prorl'-lo-! tiifi; f o r e i g n exchange needed to crar=.te a b r e a t h i n g space i n which adinstn^ni. can be undertaken! and i t r e s u l t s i n domestic p o l i c i e s more l i k e l y to achieve

2 a payments e q u i l i b r i u m . Whether such an argument i s 2srjy»:ain-Tb'»e w i l l become cleiarer l a t e r . S u f f i c e i t to uo'ce ai: t h i s p o i n t that these clauses i n the A r t i c l e s only a u t h o r i s e c o n d i t i o n a l i t y w i t h respect to the balance of payments; they do not provide a b a s i s f o r a c t i o n , say, on the r a t e of i n f l a t i o n or on development s t r a t e g y except to the extent that the&e impinge upon the payments s i t u a t i o n . Note a l s o that the A r t i c l e s are q u i t e s i l e n t on such matters as the types of f i s c a l and monetary measures t h a t should be embodied i n the progranmes provided f o r i n A r t i c l e V3(a).

The p r i n c i p l e of c o n d i t i o n a l i t y has not, i n f a c t , been a matter of disp u t e between the Fund and most of i t s Idc c r i t i c s , who concede the Fund's r i g h t to safeguard i t s resources. Acceptance of the p r i n c i p l e i s , f o r example, c l e a r l y i m p l i e d i n the Group of 24's a s s e r t i o n of the n e c e s s i t y o f " s e t t i n g c o n d i t i o n a l i t y w i t h due regard to the causes

3 of the d e f i c i t s . . . " I t i s the content of c o n d i t i o n a l i t y which i s at i s s u e , not the p r i n c i p l e .

Objectives and diagnoses

As i s apparent from the trording of A r t i c l e I ( v ) , access to the resources of the Fund,is intended to.be confined to c o u n t r i e s experiencing - and t r y i n g to s o l v e - balance of payments d i f f i c u l t i e s . The IMF has never been perGeived by the c o u n t r i e s which created I t , nor by i t s management, as an agjency f o r the f i n a n c i n g of economic development, as i s shown i n Chapter 6. Countries requesting IMF c r e d i t s must demonstrate a balance of pajnnents need so i t i s not S u r p r i s i n g that most of those whose requests succeed are diagnosed by Fund s t a f f missions as s u f f e r i n g from s e r i o u s payments d i f f i c u l t i e s . Table 7-1 d e t a i l s economic problems i d e n t i f i e d by the IMF s t a f f as 'acute' f o r a t o t a l sample of 30 c o u n t r i e s which r e c e i v e d upper-tranche stand-by c r e d i t s d u r i ng 1964-79, c l a s s i f i e d i n t o three s u b - p e r i o d s . O u t of t o t a l samples of.10 f o r each sub-period, s i x each were regarded as s u f f e r i n g from acute payments d i f f i c u l t i e s i n 1964-69 and 1970-73 (s e v e r a l o t h e r s , not recorded i n the t a b l e , were adjudged to have 'moderate' payments problems); t h i s d e s c r i p t i o n was a p p l i e d to every one out of the ten i n the 1974-79 sample, r e f l e c t i n g the d e t e r i o r a t i o n i n the circumstances of o i l - i m p o r t i n g Idcs a f t e r 1973. With only one exception, the t a b l e shows that these d i f f i c u l t i e s were described as r e s u l t i n g wholly or p a r t l y from increased Import b i l l s , elthough d e c l i n e s i n export earnings and adverse developments on c a p i t a l account ( i n c l u d i n g debt s e r v i c i n g problems) were a l s o i d e n t i f i e d as c o n t r i b u t o r y f a c t o r s . The t a b l e a l s o r e v e a l s t h a t , as p r i c e increases a c c e l e r a t e d d u r i n g the 19708, a r a p i d l y i n c r e a s i n g p r o p o r t i o n "as i d e n t i f i e d as s u f f e r i n g from acute i n f l a t i o n a r y problems. A l l but one of the 1974-79 sub-sample were a l s o regarded by the IMF as a c h i e v i n g s e r i o u s l y Inadequate economic growth; and there Tras concern about the standard of management i n the p u b l i c s e c t o r .

The general o b j e c t i v e s of the same sample of programmes are recorded i n the upper p a r t of Table 7-2 and n a t u r a l l y r e f l e c t the IMF's perceptions of the nature of the problems. By the f i n a l sub-period almost a l l programmes included q u a n t i f i e d t a r g e t s f o r the balance of payments, as w e l l as f o r the r a t e s of i n f l a t i o n and grov/th. Host of the payments tar g e t s vrere expressed i n the form of maximum d e f i c i t s

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on current account and/or the o v e r a l l balance. In f a c t , as payraents d i s e q u i l i b r i a became more acute during the 1970s the Fund opted f o r a f l e x i b l e , perhaps r a t h e r vague, formul a t i o n i n which i t expressed i t s goal as to help members a t t a i n a "^viable" payments p o s i t i o n , to which i t gave the f o l l o w i n g meaning ( G u i t i a n , 1980, p. 24):

The concept of a v i a b l e 30P t y p i c a l l y means, e s p e c i a l l y f o r many developing c o u n t r i e s , a current account d e f i c i t t hat can be fi n a n c e d , on a su s t a i n a b l e b a s i s , by net c a p i t a l i n f l o w s on terms that are compatible w i t h the development and growth prospects of the country.

(There are echoes i n t h i s of the d i s c u s s i o n of the concept of a payments e q u i l i b r i u m i n Chapter 2.)

Table 7-1

Nature of problems i d e n t i f i e d as 'acute' by IMF stand-by m i s s i o n s ^

(ntunber of observations)

1964-69 1970-73 1974-79

1. Balance of payments d i f f i c u l t i e s 6 6 10

of which; (a) d e c l i n e i n exports 4 I 4 (b) increase i n imports 6 '6 9 (c) c a p i t a l account 2 - 3

2. I n f l a t i o n 2 5 7

3. Economic growth 5 2 9

of which; (a) temporary slowdown 3 1 5 (b) p e r s i s t e n t d i f f i c u l t i e s 2 1 4 (c) d e c l i n e i n investment - - 2

4. Management of the p u b l i c sector 6 6 3

5. Others 3 3 4

Source; IMF

Note: (a) For each e n t r y the maximtan number of observations i s 10.

Table 7-2

Objectives of IW stand-by arrangements'

(number of observations)

1964-69 1970-73 1974-79

A - GENEPAL

1. Balance of payments: (a) q u a n t i f i e d target (b) non-quantified o b j e c t i v e

7 3

8 2

10

I n f l a t i o n t arget

O u a n t i f i e d economic grov/th tavp.et

? - SPECIFIC (Salacted itemc?)

R a i s e / s u s t a i n l e v e l of investment R a i s e / s u s t a i n domestic savinr. Raise c a p a c i t y u t i l i z a t i o n Promote import s u b s t i t u t i o n Promote exports Redviced s u b s i d i e s / i n c r e a s e d t a x a t i o n on consumer floods

10. r e s t r a i n growth of inoney wapes 11. P r o t e c t poor against p o s s i M e adverse

e f f e c t s of progravnme 12. P r i c i n g p o l i c i e s 13. Reforra/iraprovement of tax system 14. I n t e r e s t r a t e p o l i c y

2 1 5 5 5

3 2

p. 1

8 3

5 9

4 7 3

4 6 5 2 7

7 4

6 4

Sources

Note; (a) For each entry the maximum number of observations i s 10.

The i n c l u s i o n i n Table 1-1 of o b j e c t i v e s f o r i n f l a t i o n and econoTnic growth i s apt to mislead because i t appears to place these on an equal footin;; w i t h the paytients o b j e c t i v e and to l e a v e open the question of what choice x'ould be nsde i n the face of a c o n f l i c t between these goals. In f a c t , the ' t a r g e t s ' f o r i n f l a t i o n and growth are best regarded as more i n the nature of f o r e c a s t s or p r o j e c t i o n s , e s p e c i a l l y vrith respect to the groxTth r a t e . There i s no doubt that '-alance of Da:;rments v i a b i l i t y would be regarded as the primary o b j e c t i v e i n a t r a d e - o f f s i t u a t i o n . T r a d i t i o n a l l y , the Fund has not concerned i t s e l f very e x p l i c i t l y w i t h the r a t e of economic grc^fth, preferrin,:; to r e l y on what i t perceives as a general connection bet-jeen the s t a t e of the balance of payments and the perforpsance of the domestic economy. There has i n recent years been sone raove-c^ent of o p i n i o n among the s t a f f i n favour of t a k i n g a more e x p l i c i t v i e " of the impact of Fund programmes on economic growth bxit there remainf, i n important body of opinion i n favour of the t r a d i t i o n a l view. This i s , perhaps, r e f l e c t e d i n the g e n e r a l l y secondary emphasis on measurer' to r a i s e or s u s t a i n the l e v e l of investment ( s e c l i n e 4 of Table 7-2).

That the Fund has not concerned i t s e l f s u f f i c i e n t l y w i t h the growth o b j e c t i v e i s , of course, a lon;i;-3tandino; c o r i n l a i n t . On the other hand, i t i s g e n e r a l l y regarded as t a k i n g a r a t h e r strong a n t i -i n f l a t i o n a r y p o s i t i o n but thir; also i s best rep.arded as being s u b s i d i a r y to the payments o b j e c t i v e . E s p e c i a l l y since the break-dovm of the system of f i x e d exchange rat e p a r i t i e s . , c ulminating i n the second ameiidi'^ent, the Fund has been w i l l i n g to agree c r e d i t s to countries w i t h i n f l a t i o n r a t e s exne.cted to remain high, always provided that these would not stand i n the way of restoring; a v i a b l e payments s i t u a t i o n . Tiie extent to which the Fund sbould concftm i t s e l f w i t h i n f l a t i o n per_ ;;e i s a t o p i c on uhicb there i s diaagreement among i t s s t a f f but those urging a s t r i c t e r l i n e have tended to l o s e out i n recent d i s c u s s i o n s of p o l i c y . Two q u a l i f i c a t i o n s are necessary, however. F i r s t , among the numerous Idcs that s t i l l adhere to a p o l i c y of m a i n t a i n i n g f i x e d exchange r a t e s for long periods there i s an o b v i o u s l y Ftrong connection between e f f e c t i v e balance of payments neasures and the c o n t r o l of i n f l a t i o n . Second, the hard core of the Fund's s t a b i l i s a t i o n programmes i n v a r i a b l y c o n s i s t s of c r e d i t c e i l i n g s ^'hich tend to have a n t i - i n f l a t i o n a r y e f f e c t s even though d i r e c t e d p r i m a r i l y at the balance of payments.

Among the other s p e c i f i c , or second-order, o b j e c t i v e s l i s t e d i n the lower p a r t of Table 7-2 there are two po i n t s of p a r t i c u l a r i n t e r e s t . The f i r s t i s the strong evident trend towards increased concern w i t h p r i c i n g p o l i c i e s , broadly i n t e r p r e t e d to i n c l u d e s u b s i d i s a t i o n and t a x a t i o n of consumer goods, wages and i n t e r e s t r a t e p o l i c i e s ( l i n e s 9, 10, 12 and 14). This could be viewed as an attempt by the Fund to move away from programmes concerned almost e x c l u s i v e l y w i t h the macroecononic c o n t r o l of aggregate demand, towards more mieroeconomic measures a f f e c t i n g supply and f a c t o r p r o p o r t i o n s . However, only r a r e l y are such measures included among programme performance c r i t e r i a .

The second p o i n t of s p e c i a l i n t e r e s t i s the almost zero r e t u r n i n l i n e 11 of the t a b l e . Although there are s t a f f members who are i n disagreement w i t h i t , i t i s against the t r a d i t i o n of the Ftind to get e x p l i c i t l y i n v o l v e d i n d i s t r i b u t i o n a l questions (although wages and p r i c e s p o l i c i e s cannot f a i l to have immediate d i s t r i b u t i o n a l consequences however much they nay be designed w i t h the balance of payments i n mind). There would^in any case, probably be strong governmental r e s i s t a n c e s to any attempt by the Fund to extend i t s i n f l u e n c e i n t o t h i s area o f policy-making.

Since strengthening the balance of payments i s c e n t r a l to the formulat i o n of stand-by programmes. Fund judgements about the causes of the d e f i c i t s are i n f l u e n t i a l i n the design of i t s s t a b i l i s a t i o n programmes. Table 7-3 summarises f o r our sample the f a c t o r s i d e n t i f i e d by s t a f f missions as being the ' p r i n c i p a l ' causes of d i f f i c u l t y . Expansionary demand p o l i c i e s are given prominence throughout, although i n a l l sub-periods there were a number of cou n t r i e s i n which t h i s was not i d e n t i f i e d as a p r i n c i p a l f a c t o r . The sharp r i s e i n the p r o p o r t i o n of c o u n t r i e s w i t h problems thought to be caused by cost and p r i c e d i s t o r t i o n s r e l a t e d to 'other p r i c e s and wages' ( l i n e 2(b)) i s p u z z l i n g because there are no a p r i o r i reasons f o r expecting such f a c t o r s to have become more serious over time. Oiven the Fund's growing d e s i r e to i n c l u d e p r o v i s i o n s about p r i c i n g and r e l a t e d p o l i c i e s i n i t s programmes, the more frequent mention of cost and p r i c e causes of payments d i f f i c u l t i e s may be best i n t e r p r e t e d as intended to j u s t i f y the Fund's p o l i c y pres c r i p t i o n s , r a t h e r than a r e f l e c t i o n of o b j e c t i v e developments w i t h i n n a t i o n a l economies.

Table 7-3

IliF m i ssion i d e n t i f i c a t i o n of ' p r i n c i p a l * causes of balance of payments problems

(number of observations) 1964-69 1970-73 1974-79

1. Expansionary demand p o l i c i e s 7 7 6 2. Cost and p r i c e d i s t o r t i o n s :

(a) r e l a t e d to exchange r a t e 4 2 5 (b) r e l a t e d to other p r i c e s and wages 2 3 9

3. Exogenous aspects: (a) d e c l i n e i n export volumes 2 - 2 (b) d e t e r i o r a t i o n i n terns of trade 3 1 5 (c) non-economic 3 3 5

4. E x t e r n a l debt s e r v i c i n g problems 2 4 5

Source: IMF

Note: (a) For each entrjf the maximum number of observations i s 10.

Given the impact of the 1973-74 o i l c r i s i s and the r e s u l t i n g laassive g l o b a l payments d i s e q u i l i b r i a , surveyed i n Chapter 2, i t i s not s u r p r i s i n g to f i n d ( i n l i n e 3(a) of the t a b l e ) a sharp i n c r e a s e i n the p r o p o r t i o n of cases i d e n t i f i e d as having d e f i c i t s caused by d e t e r i o r a t i n g terras of trade but even f o r 1974-79 t h i s was only regarded as a p r i n c i p a l cause i n h a l f the cases. Sincii item 3(b) i s the only causal f a c t o r unarabiguousljr e x t e r n a l to the n a t i o n a l economyj i t seems that even i n the l a t e r 1970s the Fund s t a f f continued to place primary emphasis on domestic causes of payments d e f i c i t s .

l-Jhat c o n s t i t u t e s a programme?

A Fund-supported s t a b i l i s a t i o n programme can be broken down i n t o three components: (a) p r e c o n d i t i o n s ; (b) performance c r i t e r i a ; (c) other measures, as w r i t t e n i n t o the l e t t e r of i n t e n t . There are.

however, some d i f f i c u l t i e s which make the n o t i o n of a stand-by programme l e s s c l e a r - c u t than t h i s might imply. F i r s t , not a l l , perhaps not most, programmes contain p r e c o n d i t i o n s . Second, i t i s q u i t e p o s s i b l e that a number of measures w r i t t e n i n t o a programme would have been undertaken by the government anyr/ay, w i t h or iirithout an agreement w i t h the ItIF, so i t i s by no means n e c e s s a r i l y the case that programmes c o n s i s t c h i e f l y of p o l i c i e s i n s i s t e d upon by the IMF. Indeed, i t w i l l sometimes be i m p r a c t i c a l to unravel those comoonents of a programme that owe t h e i r e x istence to the persuasion of Fund missions. There i s nowadays a f a i r l y continuous interchange of views between Fund S t a f f and member governments. There are annual c o n s u l t a t i o n missions. There are IMF r e s i d e n t r e p r e s e n t a t i v e s i n some of the more s u b s t a n t i a l users of i t s f a c i l i t i e s (as at there were r e s i d e n t r e p r e s e n t a t i v e s i n member countries) and these w i l l be i n d a i l y touch w i t h country o f f i c i a l s d e a l i n g vrith monetary and f i s c a l matters. I f a member requests use of any of the c r e d i t f a c i l i t i e s there w i l l be a m i s s i o n to evaluate the a p p l i c a t i o n . In the case of a request f o r a stand-by or EFF c r e d i t there may be t'-to or three v i s i t s by the m i s s i o n , perhaps spread out over s e v e r a l months. In the course of a l l these contacts the Fund s t a f f may give advice on aspects of p o l i c y but they w i l l a l s o gain i n s i g h t s i n t o l o c a l problems and p o s s i b i l i t i e s t h a t , i n t u r n , w i l l modify t h e i r oxm. views about what should be done.

The extent to which the Fund becomes i n v o l v e d i n d e t a i l e d p o l i c y advice i s i t s e l f somewhat indeterminate. I t s o f f i c i a l l i n e i s that i t i s f o r the government to put together a d e t a i l e d programme designed to strengthen the balance of pajnnents and that the Fund does not seek to become i.nvolved i n the d e t a i l s of proposals concerning t a x a t i o n , government expenditures and the l i k e . The r e a l i t y i s more complex, however. Much w i l l depend on the key p e r s o n a l i t i e s on both sides of the t a b l e , upon the past record of r e l a t i o n s between the IMF and the government, and upon the g r a v i t y of the economic s i t u a t i o n . B a s i c a l l y , a Fund m i s s i o n needs to r e t u r n to Washington w i t h a proprainrae which i t can ' s e l l ' to the Managing D i r e c t o r and h i s a d v i s e r s as being adequate and c o n s i s t e n t vrith Fund o b j e c t i v e s ; and the Fund management v r i l l i n turn be concerned about the l i k e l y r e a c t i o n s of key Executive D i r e c t o r s to the programme i n question. In some cases the t h i n k i n g of a government seeking a c r e d i t and the Fund mi s s i o n v r i l l be s u f f i c i e n t l y c l o s e that l i t t l e d i f f i c u l t y i s experienced i n p u t t i n g together a programme

regarded as s a t i s f a c t o r y , i n which case most of any argtraients that occur are l i k e l y to be about the s i z e of c r e d i t c e i l i n g s . In other cases a m i s s i o n w i l l be under pressure to become f a r more i n v o l v e d i n d e t a i l e d programme design i f i t i s t o be able to r e t u r n to 'Washington w i t h a ' s a l e a b l e ' product.

P r e c o n d i t i o n s

The p r a c t i c e o f l a y i n g doxra p r e c o n d i t i o n s ~ p o l i c y measures that must be executed before an agreement i s put up f o r approval by the Executive Board - makes i t p a r t i c u l a r l y d i f f i c u l t to d e s c r i b e the content of IMF programmes. Such measures w i l l not normally be vnritten i n t o a l e t t e r of i n t e n t , which i s l a r g e l y about measures to be taken i n the months ahead, and, f o r reasons already given, i t may be d i f f i c u l t to d i s t i n g u i s h a c t i o n s taken by the government at the i n s i s t e n c e of the IMF from a c t i o n s that would have been undertalcen anyr-ray. An i n t i m a t e knowledge of p a r t i c u l a r cases i s necessary i n order to c o n f i d e n t l y i d e n t i f y p r e c o n d i t i o n s (to be strengthened l a t e r i n the l i g h t of r e s u l t s of our case s t u d i e s ) . One case that has been documented i s the agreement a r r i v e d at i n October 1976 bett-reen the Fund and Mexico f o r an EFF c r e d i t , under which the p r e c o n d i t i o n s were s a i d to have i n c l u d e d : ^

... the i m p o s i t i o n of some export taxes to prevent v / i n d f a l l p r o f i t s from the peso devaluation and to augment government revenue, the suspension of many export i n c e n t i v e s ... and some d i s m a n t l i n g of import l i c e n s e requirements.

Presumably the l a r g e devaluation of September 1976 was also a prec o n d i t i o n .

I t i s thus d i f f i c u l t to g e n e r a l i s e about the frequency and substance of IMF p r e c o n d i t i o n s . I t i s s a i d that there x<rere such requirements i n four of the f i v e upper-tranche c r e d i t s approved i n 1976 and i n an important number of the eleven c r e d i t s approved i n 1977, but vre do not know the s i g n i f i c a n c e of the measures r e q u i r e d and there i s a f e e l i n g among those c l o s e l y i n v o l v e d i n IMF operations t h a t there has been some re d u c t i o n i n i n s i s t e n c e upon a c t i o n before a c r e d i t can be approved i n recent years. Item 1(d) of Table 7-6 (page 19 ) shows 53 per cent of l e t t e r s of i n t e n t i n 1969-78 to have contained s p e c i f i c statements on tax measures taken before the s t a r t of the programmes

but many of these references were presumably to measures taken independently by the government, r a t h e r than being p r e c o n d i t i o n s as such. Devaluation i s the most corranonly c i t e d exatTple of a p r e c o n d i t i o n but evidence w i l l be presented s h o r t l y suggesting that devaluations have been l e s s common elements of Fund-supported programmes than i s o f t e n b e l i e v e d .

Performance c r i t e r i a

Leaving p r e c o n d i t i o n s to one side and t u r n i n g now to the remainder of a stand-by programme, a sharp d i s t i n c t i o n should be dra^m betxreen performance c r i t e r i a and the remainder of the prograrasce. ks already explained i n Chapter 5. i t i s a country's a b i l i t y to abide by the performance c r i t e r i a t hat determines i t s c o n t i n u i n g access to successive instalments of an agreed c r e d i t , unless new understandings can be a r r i v e d at^ whereas f a i l u r e s to carry out other elements of the prorrarame c a r r y no s i m i l a r s a n c t i o n . According to the p r a c t i c e s of the Fund, performance c r i t e r i a are to be as few as p o s s i b l e and are intended to help evaluate implementation of the programme and, t h e r e f o r e , to judge whether the Fund's resources are being a p p r o p r i a t e l y used and the o b j e c t i v e s of the pros^rarme are being achieved. There are c e r t a i n c l e a r l y defined q u a l i t i e s which the Fund looks f o r i n the s e l e c t i o n of performance c r i t e r i a ; ^

The p o l i c y v a r i a b l e s s p e c i f i e d as performance c r i t e r i a must be capable of being expressed i n q u a n t i t a t i v e or o b j e c t i v e terms, must be a v a i l a b l e w i t h only a short time l a g , must be s i g n i f i c a n t enough to m i r r o r and/or i n f l u e n c e developments i n the economy at larges and must be w i t h i n the c o n t r o l of the a u t h o r i t i e s .

In other than e x c e p t i o n a l c i r c u t s t a n c e s , they must a l s o be macroeconomic i n c h a r a c t e r .

Table 7-4 below puiTsriarises the performance c r i t e r i a employed i n the same sample of 30 stand-bys to r'hich the e a r l i e r t a b l e s r e f e r r e d , w i t h one major exception, 'e have not inc l u d e d i n the t a b l e the v i r t u a l l y standard c l a u s e s , described i n Chapter 5, i n which the member promises not to introduce new m u l t i p l e currency arrangements, r e s t r i c t i o n s on current payments and on imports, and other measures that would impede m u l t i l a t e r a l trade. As can be seen from the t a b l e , by f a r the most

connnon performance c r i t e r i a r e l a t e to v a r i o u s c r e d i t c e i l i n g s . That such c e i l i n g s are an almost i n v a r i a b l e component of s t a b i l i s a t i o n programmes i s confirmed by published Fund sources. Reichmann (1978, page 40) has recorded that a l l 21 of the stand-by programmes i n 1973-75 contained c r e d i t c e i l i n g s , 15 of which c a l l e d f o r a d e c e l e r a t i o n i n the growth of c r e d i t . Note ' d e c e l e r a t i o n ' , however. 'Jhat i s u s u a l l y at i s s u e i s the speed at which c r e d i t should expand, r a t h e r than an absolute r e d u c t i o n i n the volume of c r e d i t . Information on e a r l i e r programmes a l s o confirms the u b i q u i t y o f c r e d i t c e i l i n g s as performance c r i t e r i a .

Table 7-4

Performance c r i t e r i a i n upper-tranche stand-by arrangements

(number of o b s e r v a t i o n s ) ^

1964-69 1970-73 1974-79 1. C r e d i t c e i l i n g s :

(a) t o t a l domestic c r e d i t 3 10 9 (b) c r e d i t to government/public s e c t o r 7 5 7 (c) c r e d i t to p r i v a t e s e c t o r 5 - 1

2. Devaluation 3 .- _ 3. Reduction i n current na3rmGnts a r r e a r s - 1 2

4. Minimum l e v e l s f o r f o r e i g n exchange reserves 1 1 4

5. R e s t r i c t i o n s on new e x t e r n a l debt 3 7 5

Source: KO?

Notes; (a) In a d d i t i o n to the c r i t e r i a l i s t e d there are standard p r o v i s i o n s that borrowing c o u n t r i e s w i l l not introduce new m u l t i p l e - c u r r e n c y p r a c t i c e s ; b i l a t e r a l pajroients agreements w i t h Fund raembers; r e s t r i c t i o n s on current payments and on ira-iiorts. See Chapter 5 page 16 f o r an example. There were a number of other s i g n i f i c a n t items which are not set out i n the t a b l e because there were no occasions on which they were used as performance c r i t e r i a . These included i n t e r e s t r a t e , p r i c i n g and wages p o l i c i e s .

(b) For each e n t r y the ma:i:imum number of observations i s 10.

As regards other c r i t e r i a . Table 7-4 .shows that i t i s a l s o q u i t e common to i n c l u d e r e s t r i c t i o n s on the amount (and sometimes the maturity) of e x t e r n a l debt. Four of the ten agreements i n 1974-79 a l s o l a i d dotra a balance of payments t e s t as a c r i t e r i o n , i n the form of minimum l e v e l s o f f o r e i g n exchange reserves. On the other hand, a currency devaluatio^" only appears i n t h e ' I f i r s t sub-period and i s absent from our sample throughout the 1970s. Some items that might have been expected to feature are absent a l t o g e t h e r , i n c l u d i n g measures r e l a t i n g to p r i c e s , \/ages and i n t e r e s t r a t e p o l i c i e s . I t i s a l s o r a t h e r r a r e to i n c l u d e c r i t e r i a r e l a t i n g to f i s c a l p o l i c y , other than r e s t r i c t i o n s on bank c r e d i t to government.^

The absence during the 1970s of devaluation as a performance c r i t e r i o n , at l e a s t f o r the 20 programmes i n our sample f o r those years, may come as a s u r p r i s e , f o r the Fund i s g e n e r a l l y a s s o c i a t e d i n the p u b l i c mind w i t h a p o l i c y package which inc l u d e s d e v a l u a t i o n . T h i s i s p a r t l y because devaluations are sometimes p r e c o n d i t i o n s of Fund c r e d i t , a f a c t which would not be recorded i n our q u e s t i o n n a i r e r e s u l t s . Hox<rever, informa t i o n on the c o u n t r i e s which r e c e i v e upper-tranche or EPF c r e d i t s are a matter f o r the p u b l i c record so i t i s p o s s i b l e t o make up a l i s t of a l l such c o u n t r i e s . Exchange r a t e s are a l s o published so i t i s p o s s i b l e from p u b l i c sources to examine the extent to which devaluations have co i n c i d e d w i t h stand-by programmes.

g The r e s u l t s , f o r 1973-80, are set out i n Table 7-5. There were a t o t a l of-118 programmes i n t h i s p e r i o d , although i n 20 of these cases the programmes were u n u t i l i s e d , because of c a n c e l l a t i o n or other reasons.

We have sought to t e s t f o r the frequency of devaluations e i t h e r as p r e c o n d i t i o n s or as some other p a r t of the programmes by r e c o r d i n g f o r the c o u n t r i e s i n question the number of devaluations w i t h i n s i x rjonths on e i t h e r s i d e of the date of the c r e d i t i n q u e s t i o n . For the p e r i o d as a whole there were 17 devaluations v ; i t h i n s i x months p r i o r to the agreement (most of these probably being p r e c o n d i t i o n s ) and there were another 5 w i t h i n s i x months a f t e r the agreement date. A f u r t h e r 27 c o u n t r i e s were ma i n t a i n i n g exchange r a t e f l e x i b i l i t y , u s u a l l y by a 'crawling peg' p o l i c y , and f o r these cases the question of d e v a l u a t i o n d i d not a r i s e . I f we t h e r e f o r e r e l a t e the t o t a l number of d e v a l u a t i o n s , recorded i n l i n e s 5 and 6 of the t a b l e , to the t o t a l number of c o u n t r i e s other than those w i t h f l e x i b l e r a t e s , we come to the c o n c l u s i o n ( l i n e 7)

- 16 -

Table 7-5

Upper-tranche Stand-bys and EFF C r e d i t s and the Frequency of P e v a l u a t i o n , 1973-80

(nunfljcr of observations)

1973 1974 1975 1976 1977 1978 1979 1930*^ TOTAL 1973-&

1. T o t a l number o f c r e d i t s

o f which:-

7 6 8 9 23 15 25 24 118

2. C r e d i t s u n u t i l i s e d o r c a n c e l l e d 2 0 2 3 3 5 3 ^ 2 20 3. C o u n t r i e s w i t h f l e x i b l e exchange r a t e s 1 2 2 3 6 4 7 2 27 4. D e v a l u a t i o n w i t h i n 6 months p r i o r to

c r e d i t agreement 2 0 1 1 4 2 4 3 17 5. D e v a l u a t i o n w i t h i n 6 months a f t e r

c r e d i t agreement 0 0 1 1 0 0 1 2 5 6. No change i n f i x e d exchange r a t e 4 4 4 13 9 14 17 69 7. (4) + (5) as % of (1) - (3) 29% 0% 33% 33% 24% 13% 26%. 23% 8. (4) + (5) as % of (1) - (2 -i- 3 ) ^ 40% 0% 40% 50% 29% 33% 31% 24% 2^%

Sources: C a l c u l a t e d from v a r i o u s IlIF p u b l i c a t i o n s .

Notes; (a) Includes c o u n t r i e s vrhich make frequent adjustments to an o f f i c i a l r a t e and xv'hich a l l o w t h e i r c u r r e n c i e s to f l o a t .

(b) I n t h i s year the numerator was reduced by one because Tanzania devalued a f t e r agreement on a stand-by which i t never u t i l i s e d .

( c ) P r e l i m i n a r y . (d) The c a l c u l a t i o n s have been adjusted to prevent the double-covmting of c o u n t r i e s

recorded i n b o t h l i n e s (2) and ( 3 ) .

that devaluation wns a s s o c i a t e d w i t h a Fund-supported s t a b i l i s a t i o n programme i n only about a quarter of the cases, w i t h no c l e a r trend over time. This suggests that devaluation i s a much l e s s common component of Fund programmes than i s g e n e r a l l y b e l i e v e d .

The i n t e r p r e t a t i o n of Table 7-5 i s not s t r a i g h t f o r w a r d , however. F i r s t , i t might be objected that c o u n t r i e s which d i d not u t i l i s e t h e i r c r e d i t s should not be included i n the denominator since the programme d i d not become operative i n these cases. There i s c l e a r l y something i n t h i s and the adjustment i s made i n l i n e 8. For the period as a whole t h i s s t i l l shows devaluations i n only 28 per cent of the remaining cases, again w i t h no c l e a r trend. I t i s not obvious^ however, that a l l the u n u t i l i s e d c r e d i t cases should be excluded i n t h i s way because devaluations could have been r e q u i r e d as p r e c o n d i t i o n s which were observed, w i t h the c r e d i t s remaining u n u t i l i s e d f o r reasons u n r e l a t e d to the exchange r a t e (devaluations occurred i n the cases of 2 of the 20 u n u t i l i s e d c r e d i t s ) .

I t might secondly be objected t h a t we should have extended the p e r i o d examined, say to 12 months on e i t h e r side of the agreement date, and that t h i s would have recorded a l a r g e r number of devaluations. However, t h i s suggestion creates complications f o r countries n e g o t i a t i n g a succession of 12 month stand-bys, because there would then be an overlap i n time. A more s u b s t a n t i a l d i f f i c u l t y i s that the wider the time band chosen the more l i k e l y i t i s that our observations w i l l include devaluations that would have occurred anyway and were not d i r e c t l y connected w i t h the Fund c r e d i t . Even as i t i s , Table 7-5 presumably i n c l u d e s some such devaluations and to t h i s extent over-states the frequency of devaluation as a p o l i c y c o n d i t i o n .

There i s a l s o the f u r t h e r p o i n t that nine of the c r e d i t s were to Francophone A f r i c a n members of the CFA zone. Since the c u r r e n c i e s of these c o u n t r i e s exchange at par w i t h one another and are permanently f i x e d i n terms of the French f r a n c , i t might be argued that the question of devaluation could not a r i s e i n these cases, which should therefore be excluded. I f that were done, the bottom right-hand f i g u r e i n Table 7-5 would r i s e to 31 per cent. But w h i l e the CFA zone c o u n t r i e s are something of a s p e c i a l case, the f a c t remains t h a t i n these nine c o u n t r i e s the Fund x^as w i l l i n g to agree c r e d i t s to c o u n t r i e s w i t h f i x e d (and i n some cases s u r e l y over-valued) exchange r a t e s .

There are other vrays i n which the t a b l e may give a m i s l e a d i n g l y understated iBipression of the importance of the exchange r a t e i n the Fund's approach to s t a b i l i s a t i o n . The exchange r a t e i s , i n f a c t , f r e q u e n t l y a v a r i a b l e i n stand-by n e g o t i a t i o n s but may ( i n c r e a s i n g l y i n the most recent years) be s u b s t i t u t e d by f i s c a l measures (export taxes, import surcharges, etc) v/hich s i n u l a t e a devaluation w h i l e l e a v i n g the nominal exchange r a t e untouched.

Moreover, Table 7-5 n e c e s s a r i l y excludes those cases i n which c o u n t r i e s sought a stand-by from the Fund but where n e g o t i a t i o n s broke down because of government u n w i l l i n g n e s s to undertake a dev a l u a t i o n i n s i s t e d upon by the Fund's r e p r e s e n t a t i v e s .

Nevertheless, d e s p i t e the q u a l i f i c a t i o n s and problems of i n t e r p r e t a t i o n , and bearuigj i n mind that the t a b l e must be presumed to in c l u d e some devaluations that would have occurred anyway, the conc l u s i o n stands that use of the exchange rate^ i s a l e s s common i n g r e d i e n t of Fund programmes than i s ^ g e n e r a l l y b e l i e v e d . We r e v e r t to the i s s u e of the IMF's p o l i c i e s on t b i s question l a t e r (pp. 36-7).

The above evidence a l s o bears upon the broader question of the extent to which c o n d i t i o n a l i t y r e q u i r e s a l i b e r a l i s a t i o n of trade and payments, sin c e d e v a l u a t i o n i s o f t e n l i n k e d to -- and a p r e r e q u i s t e f o r - a r e d u c t i o n i n exchange c o n t r o l s . As noted e a r l i e r , there i s a standard performance c r i t e r i o n r e q u i r i n g the member not to introduce new nor i n t e n s i f y e x i s t i n g c o n t r o l s but t h i s accepts whatever r e g u l a t i o n s may be i n exi s t e n c e a t the time of the agreement and does not commit the government to l i b e r a l i s a t i o n . Some programmes do go f u r t h e r and s p e c i f y l i b e r a l i s a t i o n but t h i s appears to be so i n only a m i n o r i t y of cases. Thus, Reichmann and S t i l l s o n (1978, Table 10) record that " l i b e r a l i s a t i o n of the exchange system or exchange r a t e m o d i f i c a t i o n " was inc l u d e d i n 13 of the 79 upper-tranche programmes agreed i n 1963-72. Of the 21 programmes i n 1973-75 ten provided f o r l i b e r a l i s a t i o n (Reichmann, 1978, page 40). In both cases, however, i t i s not c l e a r how many of these requirements were set as performance c r i t e r i a . More recent evidence of a comparable nature i s not a v a i l a b l e but i t i s on rec o r d t h a t i n 1970-80 the IMF agreed stand-by or EFF c r e d i t s to 38 cou n t r i e s which were mai n t a i n i n g m u l t i p l e - c u r r e n c y arrangements ( p f f Survey, 6 J u l y 1981, p. 209). I t does appear, t h e r e f o r e , that l i b e r a l i s a t i o n i s f a r from being a standard i t e m i n the U-IF package. Moreover, there i s nothing to stop a member from i n t e n s i f y i n g exchange c o n t r o l s when i t i s not i n r e c e i p t of a stand-by o r EFF and i n such events the Fund has l i t t l e o p t i o n other than to r e l u c t a n t l y accept such measures. Moreover, we have no evidence of a member having been refused a c r e d i t because of some p r i o r i n t e n s i f i c a t i o n of c o n t r o l s .

Other programme elements

We tu r n now to consider those programme components which are pei'ther p r e c o n d i t i o n s nor performance c r i t e r i a . As may be judged from the Jamaican l e t t e r of i n t e n t reproduced as an appendix of Chapter 5, these arc l i a b l e to be numerous and wide-ranging. Some f l a v o u r of the degree of d e t a i l

i n the programmes can be obtained.frtwa Table 7~6, Th i s i s confined to the f i s c a l content only of 105 -proer«nB»es negotiated i n 1969-78 but serves to i l l u s t r a t e the considerable number of commitments commonly inc l u d e d i n a l e t t e r of i n t e n t .

Table 7-6

F i s c a l content of stand-by programmes, 1969-78

(% of t o t a l no. of programnAs)

I GOVEHHIffiNT REVENUE (a) Revenue p r o j e c t i o n i n d i c a t e d as t a r g e t 21 (b) Program incorporated increase i n revenue:

GNP r a t i o > 1 percentage p o i n t compared w i t h preceding year 52

(c) L e t t e r of i n t e n t contained s p e c i f i c statements on tax measures to be taken during p e r i o d of program 50

(d) L e t t e r of i n t e n t contained s p e c i f i c statements on tax measures taken before s t a r t of program 53

(e) L e t t e r o f i n t e n t contained general statements regarding e f f o r t s to strengthen tax a d m i n i s t r a t i o n 59

( f ) L e t t e r of i n t e n t contained d e s c r i p t i o n of p a r t i c u l a r p o l i c i e s regarding e f f o r t s to strengthen tax a d m i n i s t r a t i o n 32

(g) S p e c i f i c e f f o r t s taken to " i n f l a t i o n p roof" tax system 7

XI GOVERNIENT EXPEtlDITURE (a) Expenditure p r o j e c t i o n i n d i c a t e d as t a r g e t 19 (b) Program incorporated decrease i n expenditure:

GOT r a t i o ^ 1 percentage p o i n t compared w i t h preceding year 29

(c) Statements incorporated on current and c a p i t a l expenditures 52

(d) Programs as i n (c) where s p e c i f i c p o l i c y statements on aspects of c o n t r o l of current expenditures were i n c l u d e d 31

(e) Programs i n c o r p o r a t i n g substantive statements on expenditure 62

( f ) Programs i n c o r p o r a t i n g s p e c i f i c p o l i c i e s on wage p o l i c y f o r government employees 32

(g) Programs i n c o r p o r a t i n g s p e c i f i c p o l i c i e s on employment i n government s e c t o r 9

/ ( h ) . . .

II Government expenditure, eont'd... (% of t o t a l number of programmes)

(h) Programs i n c o r p o r a t i n g s p e c i f i c p o l i c i e s on consumer s u b s i d i e s 20

( i ) Programs i n c o r p o r a t i n g s p e c i f i c p o l i c i e s on t r a n s f e r s to p u b l i c e n t e r p r i s e s 21

( j ) Programs i n c o r p o r a t i n g s p e c i f i c p o l i c i e s on repayment of governxnent a r r e a r s 11

I I I KONFI^JMCIAL PUPLIC ENTERPRISES (a) F i s c a l s u b c e i l i n g encompassed r-orae n o n f i n a n c i a l

p u b l i c e n t e r p r i s e s 37 (b) F i s c a l s u b c e i l i n g encompassed a l l n o n f i n a n c i a l

p u b l i c e n t e r p r i s e s 23 (c) Programs incorporated statements regarding

c o n t r i b u t i o n by n o n f i n a n c i a l p u b l i c e n t e r p r i s e s to s t a b i l i z a t i o n e f f o r t 55

(d) Programs incorporated s p e c i f i c statements on p r i c e p o l i c i e s of n o n f i n a n c i a l p u b l i c e n t e r p r i s e s 30

(e) Programs incorporated s p e c i f i c statements on employment p o l i c i e s 1

( f ) Programs incorporated s p e c i f i c statements on other p o l i c i e s 16

IV OVERALL BUBGST BAlAtlCE (a) O v e r a l l budget d e f i c i t i n d i c a t e d as t a r g e t 44 (b) Program incorporated decrease i n o v e r a l l budget

d e f i c i t ; GIIP r a t i o 'y 1 percentage p o i n t compared w i t h preceding year 40

Source! ^-everidge and ICelly, 19B0, Tables 4, 6, 7 and S ( s e l e c t e d items)

L e t t e r s of i n t e n t are not; of course, confined to f i s c a l t o p i c s . They can i n c l u d e statements about monetary p o l i c y ; p r i v a t e s e c t o r p r i c i n g ' and wage p o l i c i e s * measures a f f e c t i n g imports, exports and c a p i t a l movements; improvements i n the e f f i c a c y of the p u b l i c administ r a t i o n and p a r a s t a t a l o r g a n i s a t i o n s ; and so on. In the t y p i c a l case, i t adds up to a formidably l a r g e number of i n t e r r e l a t e d measures.

But s i n c e f a i l u r e to honour any of these commitments does not r e s u l t i n any f i n a n c i a l s a n c t i o n by the Fund, what i s the s i g n i f i c a n c e of such programmes? Ilhat i s to prevent a government from w r i t i n g down a s p l e n d i d programme intended to impress the 1*2? w i t h no se r i o u s i n t e n t i o n of p u t t i n g i t i n t o e f f e c t ? There are c e r t a i n l y cases i n which that has happened

but there are a number of r e s t r a i n t s on such a c t i o n s . F i r s t , the object of the e x e r c i s e i s to put together a programne Avfrriacing to the II-JF m i s s i o n , the management and the Executive Board but i n a r r i v i n g at a d e c i s i o n a l l these bodies w i l l make a judgement about the l i k e l i h o o d that the programme w i l l be c a r r i e d out, about the seriousness of the government. Second, reraeoiber that a government requesting a stand-by i s l i k e l y to be f a c i n g an acute balance of payments problem. This w i l l have to be d e a l t w i t h somehow; a p o l i c y of i n a c t i o n w i l l not long be a v i a b l e p o s s i b i l i t y . T h i r d , the d e t a i l e d measures should p a r t l y be seen as those programme components necessary i n order f o r the government to be able to conform to the performance c r i t e r i a . To keep w i t h i n a c e i l i n g f o r bank l e n d i n g to the government, f o r i n s t a n c e , measures w i l l be needed to increase revenues, reduce spending, improve the f i n a n c i a l performance of the p a r a - s t a t a l s and so on. I f none of these things are done the c e i l i n g w i l l be exceeded and the outstanding balance of the c r e d i t w i l l become u n a v a i l a b l e . There are thus f a i r l y s u b s t a n t i a l pressures on governments to implement a reasonable p r o p o r t i o n of the programme s p e c i f i c s .

A l a s t p o i n t about programne content. 'Thile i t i s n a t u r a l and c o r r e c t t o t h i n k of most programmes as c o n t a i n i n g measures which were inc l u d e d only r e l u c t a n t l y by the government at the prompting of the IlIF, t h i s i s not i n v a r i a b l y so. There are c o u n t r i e s i n which the head of government or the M i n i s t e r of Finance have negotiated programmes w i t h the Fund as a means of e x e r t i n g f i n a n c i a l d i s c i p l i n e on the expansionist i n s t i n c t s of the spending departments, without any a c t u a l need f o r payraents support. Panama and Uruguay are among the c o u n t r i e s which i n the past have negotiated a number of stand-by c r e d i t s which x-ere never u t i l i s e d (question? i f there was no balance of payments need how could the c r e d i t s be j u s t i f i e d w i t h i n the Fund's A r t i c l e s ? ) .

T h i s i n t e r e s t i n g v a r i a t i o n on the conventional s i t u a t i o n , i n which the Prime M i n i s t e r or Finance M i n i s t e r use the BIF as an instrument of p o l i t i c a l poT-rer-play w i t h i n the government, i l l u s t r a t e s a more general p o i n t . By i t s d e c i s i o n whether or not to agree t o a c r e d i t ^ and on what terms, the IIW i s unavoidably p l a y i n g a r o l e w i t h i n the domestic p o l i t y . Implementation of i t s c o n d i t i o n s may strengthen or weaken the power base of the government and of i n d i v i d u a l s w i t h i n i t . The measures involved w i l l a f f e c t the i n t e r e s t s of d i f f e r e n t groups i n v a r y i n g ways.

- I l

ia, the m i n o r i t y of c o u n t r i e s i n which there are f r e e competitive «lections, votes w i l l be won or l o s t because of Fund d e c i s i o n s . IJhere there are no genuine e l e c t i o n s the government's perceived l e g i t i m a c y i s s t i l l l i k e l y to be a f f e c t e d . And i t i s not j u s t a matter of the measures which the Fund i n s i s t s should be included i n a programme; i t s s i l e n c e s a l s o have i n f l u e n c e . TTe have already noted that the Fund has not sought to become e x p l i c i t l y i n v o l v e d i n p o l i c i e s d i r e c t e d at changing the d i s t r i b u t i o n of income. I t s response t o suggestions that i t should take a more p o s i t i v e view of the d i s t r i b u t i o n a l consequences o f i t s own programmes i s that t h i s x7ould i n v o l v e i t i n d e t a i l e d microeconomic measures and th a t most governments would strenuously r e s i s t attempts by the Fund t o become inv o l v e d i n such i s s u e s . Despite the obvious f o r c e of such arguments the f a c t remains, however, th a t by remaining a l o o f from such questions the Fund t a c i t l y supports the d i s t r i b u t i o n a l p o l i c i e s of the government i n power. T h i s , more o f t e n than not, i m p l i e s a t a c i t alignment w i t h forces opposed to reduced i n e q u a l i t i e s . As i n the Fund's judgements about the v i a b i l i t y of the programmes i t n e g o t i a t e s , the p o l i t i c s are inescapable. TJhen l a r g e f i n a n c i a l resources are i n v o l v e d , there i s no separating the p o l i t i c a l from the economic.

I I - FLEXIBILITY AHD ADAPTATION

F l e x i b i l i t y and u n i f o r m i t y

Tlie Fund claims to r i d e the twin t i g e r s of f l e x i b i l i t y and u n i f o r m i t y of treatment betv?een c o u n t r i e s j i t s c r i t i c s a l l e g e t h a t i t has long s i n c e f a l l e n between these dangerous beasts. F i r s t , a Fund view ( G u i t i a n , 1980, p. 25)s

S t r a t e g i e s of adjustment w i l l vary according to the p a r t i c u l a r s i t u a t i o n of the country requesting support> but there are two p r i n c i p l e s t h a t the Fund seeks to uphold i n a l l i t s c o n d i t i o n a l i t y programs: the p r i n c i p l e of u n i f o r m i t y of treatment among members and the n e c e s s i t y that the Fund's p o l i c i e s on c o n d i t i o n a l i t y take i n t o account the i n s t i t u t i o n a l c h a r a c t e r i s t i c s and the p a r t i c u l a r circumstances of d i f f e r e n t c o u n t r i e s . I t i s , t h e r e f o r e , necessary to s t r i k e a d e l i c a t e balance between u n i f o r m i t y and f l e x i b i l i t y . . . . U n i f o r m i t y of treatment, when p r o p e r l y defined, r e q u i r e s t h a t f o r any given degree of need the e f f o r t of economic adjustment sought i n programs be broadly equivalent among members.

The i n t e r n a l o r g a n i s a t i o n of the Brmd pax«t.y ro£l«ct:s tlMsee twin o b j e c t i v e s . The powerful Exchange and Trade R e l a t i o n s Department i s charged w i t h the task of maintaining consistency and u n i f o r m i t y of treatment betTo-een the v a r i o u s country prograimnes. I t t h e r e f o r e plays an a c t i v e r o l e i n the f i n a l i s a t i o n of the b r i e f i n g papers prepared before the departure of a stand-by or EFF mission - a mission that w i l l commonly contain a member of i t s own s t a f f . The v a r i o u s geographical departments5 w i t h t h e i r more i n t i m a t e knowledge of country circumstances, may be regarded as r e s p o n s i b l e f o r ensuring that progrananes are adapted to country needs. The tension between the two p r i n c i p l e s i n v o l v e d i s mirrored by o c c a s i o n a l disputes betr^een the ETR and geographical departments.

Nox7 f o r the views of some of the Fund's more r a d i c a l c r i t i c s , as represented by the authors of the s e m i - o f f i c i a l 'Arusha I n i t i a t i v e ' . They describe a standard IKF "package of ' s t a b i l i s a t i o n ' measures" w i t h the f o l l o w i n g components (p. 13);

... a c r e d i t squeeze t o reduce the money supply, reduced p u b l i c spending p a r t i c u l a r l y on tirelfare s e r v i c e s , reduced r e a l wages, l i b e r a l i s e d p r i c e c o n t r o l s , the encouragement of f o r e i g n p r i v a t e investment, and the s u b s t i t u t i o n of d e v a l u a t i o n f o r t a r i f f s and d i r e c t c o n t r o l s over trade.

But even though there i s a standard package there i s not u n i f o r m i t y of treatment (p. 14);

Rouble standards have been a p p l i e d to s i m i l a r s i t u a t i o n s . Examples show that c e r t a i n c o u n t r i e s , because of t h e i r g e o - p o l i t i c a l s i t u a t i o n , i n t e r n a t i o n a l weight or p o l i t i c a l o r i e n t a t i o n , r e c e i v e more l e n i e n t treatment than, others, whose development s t r a t e g i e s do not gain the sympathies of the Fund and who are thus subjected to extremely harsh c o n d i t i o n s .

Jamaica and Tanzania are invoked as examples of the l a t t e r type of case, and readers may form t h e i r own opinion on the Jamaican case from Chapter

Let us look f i r s t at the extent of f l e x i b i l i t y i n Fund programmes. I t would be easy to p i c k holes i n the r a t h e r crude a l l e g a t i o n s i n the f i r s t quote from ths Arusha I n i t i a t i v e . I t f a i l s to make the important d i s t i n c t i o n between p r e c o n d i t i o n s , performance c r i t e r i a and the r e s t of the progransnes; we have seen that fev; of the p o l i c y s p e c i f i c s itemised there are used as performance c r i t e r i a . I'lhile c r e d i t c e i l i n g s are a v i r t u a l l y u n i v e r s a l component of the programmes.

these are not d i r e c t e d at any t a r g e t l e v e l s of money supply, as i s suggested, nor do they t j n p i c a l l y i n v o l v e an a c t u a l r e d u c t i o n i n the stock of money or c r e d i t . Rather, they are d i r e c t e d a t s e t t i n g l i m i t s on the f u t u r e expansion of domestic c r e d i t . But even though the a l l e g a t i o n i s wrong on d e t a i l s i t nevertheless gives expression to a more vfidespread s u s p i c i o n t h a t theFund i s not s u f f i c i e n t l y f l e x i b l e i n the a p p l i c a t i o n of i t s approach s t a b i l i s a t i o n p o l i c y .

I t i s evident from Table 7-4 that performance c r i t e r i a r e l a t e only t o a very l i m i t e d range of economic v a r i a b l e s . I n e v i t a b l y , t h e r e f o r e , there i s a good deal of s i m i l a r i t y between stand-bys, both over time and across c o u n t r i e s , and t h i s cannot f a i l to add to the impression that there i s a stereot3rped Fund programme. I t should be noted» though, that a s u b s t a n t i a l degree of u n i f o r m i t y has been imposed on the Fund management by the c o n d i t i o n a l i t y g u i d e l i n e s approved by the Executive Board, as r e v i s e d i n 1979. Paragraph 9 of these s t a t e s t h a t , ^ ^

The number and content of performance c r i t e r i a may vary because of the d i v e r s i t y of problems and i n s t i t u t i o n a l arrangements of meinbers. Performance c r i t e r i a w i l l be l i m i t e d to those that are necessary to evaluate implementation of the program w i t h a vievT to ensuring the achievement of i t s o b j e c t i v e s . Performance c r i t e r i a w i l l noirmally be confined to ( i ) macroeconomic v a r i a b l e s , and ( i i ) those necessary to isiplement s p e c i f i c p r o v i s i o n s of the A r t i c l e s or p o l i c i e s adopted under them. Performance c r i t e r i a may r e l a t e to other v a r i a b l e s only i n e x c e p t i o n a l cases when they are e s s e n t i a l f o r the e f f e c t i v e n e s s of the member's program because of t h e i r macroeconomic impact.

The v a r i o u s r e s t r i c t i o n s i n t h i s paragraph r e f l e c t the d e s i r e s expressed by G-24 members during the i n t e r n a l debates on the g u i d e l i n e s review, who vrere anxious to safeguard against an expansion i n the number and subject matter of performance c r i t e r i a . I t i s easy to understand why the IT'F should f e e l u n j u s t l y t r e a t e d when the consequential u n i f o r m i t y of c r i t e r i a i s c i t e d as evidence of Fund i n f l e x i b i l i t y .

There are, i n any case, a number of f a c t o r s which add f l e x i b i l i t y to Fund programmes. For one t h i n g , i t i s c l e a r from our e n q u i r i e s that an experienced and s e l f - c o n f i d e n t mission c h i e f has a good deal of room to move out s i d e the terms of h i s b r i e f i n g paper during n e g o t i a t i o n s when c o n d i t i o n s i n s i d e the country requesting a c r e d i t j u s t i f y i t . An example i s provided i n the Kenya case study w i t h respect to the 1980 n e g o t i a t i o n s there, and i t i s c l e a r to us t h a t t h i s i s i l l u s t r a t i v e of a f a i r l y common s i t u a t i o n . I t i s therefore not u s u a l l y the case that a m i s s i o n w i l l go to a coimtry vrith i n s t r u c t i o n s to s t i c k r i g i d l y to a predetermined programme.

In economic terms, by f a r the strongest evidence of a stereotyped approach i s the almost u n i v e r s a l i n c l u s i o n of c e i l i n g s on bank c r e d i t , which i n many cases are the c h i e f t e s t the goverwaent must pass. However, there i s a considerable d i v e r s i t y as t o the forms which these take, as i s i n d i c a t e d i n Table 7-7. Considerable care i s e v i d e n t l y taken to modify the nature and d e f i n i t i o n of c e i l i n g s to s u i t l o c a l c o n d i t i o n s - a p o i n t which a l s o emerges from our country s t u d i e s . More than one c e i l i n g w i l l normally be w r i t t e n i n t o a programme; l i n e 5 of the t a b l e shows the average number v a r y i n g from 2.0 to 2.5 to 1.8 over the three sub-periods, although not too much s i g n i f i c a n c e should be attached to r e s u l t s based on sub-smnples as small as ten. 'That i s probably v a l i d f o r the e n t i r e p e r i o d i s to say that almost a l l stand-by programmes included p r o v i s i o n s that placed l i m i t s on the amount of new bank c r e d i t vrhich could be extended to both the p u b l i c and Tjrivate s e c t o r s .

Table 7"7

The range of performance c r i t e r i a on c r e d i t c e i l i n g s

(number of observations)

1964-69 1970-73 1974-79

CREDIT CEILUTGS

1. O v e r a l l c e i l i n g s (a) Banking sect o r - p r i v a t e s e c t o r 3 2 2

- net domestic assets 1 1 4 - government 2 1 4 - p u b l i c sector 4 ~ 2 ~ n o n f i n a n c i a l p u b l i c

sector - - I

(b) C e n t r a l Bank - domestic assets 3 7 2 - government 2 3 1

p u b l i c s e c t o r 1 2 - n o n f i n a n c i a l p u b l i c

sector _ _ I - p r i v a t e sector _ _ i

2. Reserve requirements - f o r commercial banks 3 5 -- f o r c e n t r a l bank 1 1 -

3. C r e d i t granted by r.onfinancial i n s t i t u t i o r s - -4. P u b l i c borrowing

- government ~ _ „ - t o t a l p u b l i c sector

5. TOT/i NO. OF OBSERVATIONS 20 25 18 Source; Note; Tor each entry the maximum no. of observations i s 10.

Even i n the matter of perforrranc© c r i t e r i a there «re f a c t o r s which make f o r f l e x i b i l i t y , f o r they are q u i t e oft«sn v a r i e d d u ring the course of a programme. 'Tiitehead i s among those who doubts whether the Fund " i n v a r i a b l y takes i t s q u a n t i t a t i v e t a r g e t s as s e r i o u s l y i n p r i v a t e as i t must c l a i m i n p u b l i c " (1980, p. 862, n. 17) and he goes on to quote from Executive Board minutes i n support of h i s suggestion. TJhen i t agrees a stand-by the Fund could be regarded as e s s e n t i a l l y expressing confidence i n the w i l l i n g n e s s and a b i l i t y of the government i n question to t a c k l e i t s balance of payments problems, along l i n e s c o n s i s t e n t w i t h o v e r a l l D4F o b j e c t i v e s . Agreement on performance c r i t e r i a might then be viewed as l a r g e l y a f o r m a l i s a t i o n of an e s s e n t i a l l y p o l i t i c a l judgement about the competence of the government i n t h i s area of p o l i c y ] i f the c e i l i n g s and other c r i t e r i a prove unworkable, i t i s always p o s s i b l e to get round them one way or another. Thus, a considerable p r o p o r t i o n of the o r i g i n a l terms of stand-by agreements are v a r i e d during the intended d u r a t i o n of the programme. I t i s u s e f u l to d i s t i n p r u i s h three d i f f e r e n t types of s i t u a t i o n l e a d i n g to a breach of the o r i g i n a l performance c r i t e r i a :

(a) 'Tien minor d e v i a t i o n s occur outside the c r e d i t c e i l i n g s or other c r i t e r i a which do not represent departures from agreed p o l i c i e s and are regarded as temporary or r e v e r s i b l e . These are d e a l t w i t h i n the Fund by means of 'waivers*, which to the extent of these d e v i a t i o n s r e l e a s e the member from i t s o b l i g a t i o n s under the o r i g i n a l t e r n s .

(b) Ilhen r e l a t i v e l y minor departures are expected because of u n a n t i c i p a t e d changes i n circumstances. These are d e a l t w i t h i n a f a i r l y r o u t i n e manner by agreeing ' m o d i f i c a t i o n s ' of the o r i g i n a l terms.

(c) T^en d e v i a t i o n s occur because of major changes i n circumstances and/or because of government f a i l u r e s to implement the agreed p o l i c y measures. In t h i s case the m.ember government ceases to be e l i g i b l e f o r any outstanding instalments of the c r e d i t u n t i l such time as i t does conform to the o r i g i n a l c r i t e r i a or new understandings can be agreed w i t h the Fund.

A l l three s i t u a t i o n s are q u i t e comon. There are those who complain t h a t waivers and m o d i f i c a t i o n s are nowadays granted so f r e e l y t h a t performance c r i t e r i a are l o s i n g s i g n i f i c a n c e . However, t h i s complaint f a i l s to d i s t i n g u i s h between absolute numbers and p r o p o r t i o n s . I t i s true that

as the number of stand-by and EFF agreements has grorm so has the number of waivers and m o d i f i c a t i o n s ; but there i s no c l e a r trend i n the p r o p o r t i o n of waivers and m o d i f i c a t i o n s r e l a t i v e to the t o t a l number of agreements i n f o r c e , vrhich has averaged about a t h i r d of a l l agreements i n recent years. Host requests f o r waivers or m o d i f i c a t i o n s are i n respect of c r e d i t c e i l i n g s .

That as high a p r o p o r t i o n as a t h i r d of agreements are amended i n the ways described i n sub-paragraphs (a) and (b) i m p l i e s that performance c r i t e r i a should not be regarded as r i g i d l y determined f o r the e n t i r e p e r i o d of the programme. There i s f l e x i b i l i t y , although we do not agree w i t h those who suggest that t h i s i s so great that performance c r i t e r i a are not meaningful. As i s amply demonstrated i n the country s t u d i e s , i t q u i t e f r e q u e n t l y happens th a t agreements break dovm, e i t h e r from the outset or during the course of the programme. Governments q u i t e commonly exceed the c r e d i t c e i l i n g s or breach the other c r i t e r i a by margins that cannot be d e a l t w i t h by waivers and thus f i n d that they no longer have access to the agreed c r e d i t . They then have to t r y to n e g o t i a t e a new 'understanding' w i t h the Fund s t a f f - an endeavour which may not succeed or may r e s u l t i n new c r i t e r i a no more welcome than the o r i g i n a l ones. C e r t a i n l y the Fund's s t a f f behave as i f they regard performance c r i t e r i a as of key o p e r a t i o n a l s i g n i f i c a n c e and they are s u r e l y c o r r e c t to do so.^^

Those who see the Fund as d o c t r i n a i r e most commonly c i t e cases i n which i t i s a l l e g e d to have imposed p o l i c i e s of demand management i n c o u n t r i e s f a c i n g ' s t r u c t u r a l ' or exogenously caused payments d i f f i c u l t i e s . We can use the questionnaires reported e a r l i e r to act as a t e s t of t h i s complaint. I t was shown i n Table 7-3 t h a t i n most but not a l l cases "expansionary demand p o l i c i e s " were i d e n t i f i e d by IIIF missions as among the p r i n c i p a l causes of -payments d i f f i c u l t i e s . Out of our sample of 30 programmes there were ten cases i n which excess demand was not mentioned as a p r i n c i p a l cause. Out of these ten there were s i x i n which demand was not even regarded as a secondary causal f a c t o r . '?& ask, t h e r e f o r e , were the programmes f o r these cases s i g n i f i c a n t l y d i f f e r e n t from those i n v/hich excess demand was regarded as a major f a c t o r ? S p e c i f i c a l l y , was there any reduced tendency to r e q u i r e c r e d i t c e i l i n g s i n c o u n t r i e s without serious excess demand?

One approach to t h i s question i s simply t o coraparc the number of c r e d i t c r i t e r i a i n the two sub-samples of c o u n t r i e s , w i t h the f o l l o w i n g r e s u l t s :

mean number of c r e d i t c r i t e r i a i n programmes where expansionary dejaand p o l i c i e s were/ were not i d e n t i f i e d as p r i n c i p a l cause of payments problem:-

p r i n c i p a l cause not p r i n c i p a l cause

1964-69 2.14 1.67 1970-73 2.43 2.00 1^574-79 1.83 2.00

T'lhole p e r i o d 2.15 1.90

In the f i r s t tvro sub-periods there were, on average, more c r e d i t c r i t e r i a i n those programmes xrhere expansionary demand p o l i c i e s had been i d e n t i f i e d as a p r i n c i p a l cause but the opposite was true i n the f i n a l sub-periodi Of course,, the number of observations i s very small but the d i f f e r e n c e i n the means f o r the two sub-samples f o r the whole

12 p e r i o d - 2.15 and 1.90 - was found not to be s t a t i s t i c a l l y s i g n i f i c a n t . Since c r e d i t c e i l i n g s (and the measures necessary i n order to remain w i t h i n then) are c h i e f l y means of demand management, i t appears on t h i s evidence that the Fund is no l e s s l i k e l y to r e q u i r e demand r e s t r a i n t even i n cou n t r i e s i n which i t s own s t a f f does not b e l i e v e excess demand to be a p r i n c i p a l cause of the payments problems. I t could be t h a t the absolute magnitudes of the c e i l i n g s are set more l i b e r a l l y i n such cases, p e r r i i t t i n g more monetary expansion than i n co u n t r i e s regarded as s u f f e r i n g from s e v e r e l y excess demand, but we do not have the evidence w i t h ^rhich to t e s t that hypothesis.

lie have examined i n more d e t a i l the three prof^rammes i n 1974-79 i n T-'hich e:q5atisionary demand p o l i c i e s were not i d e n t i f i e d as being e i t h e r a p r i n c i p a l or a secondary source of payments weakness. Trsfo of these prograEimes were conventional both i n t h e i r o b j e c t i v e s and c o n d i t i o n a l i t y but the t h i r d d i d d i f f e r s u b s t a n t i a l l y from the t y p i c a l programme. There was judged to be an acute payments problem, r e l a t e d to f a l l i n g export earnings and adverse trends on c a p i t a l account. These, i n t u r n , were r e l a t e d to d i s t o r t i o n s i n wages and p r i c e s other than the exchange r a t e , to a d e c l i n e i n export voluraes and to 'noneconoraic' problet>s.

The s p e c i f i c ' o b j e c t i v e s ' of the programne i i t c l i i d e d v a r i o u s supply-side v a r i a b l e s , i n c l u d i n g measures to p r o t e c t investment l e v e l s : p o l i c i e s f o r import s u b s t i t u t i o n and export prom.otion: promotion of energy-related p r o j e c t s ; measures to reduce petroleum consumption; and changes i n p r i c i n g p o l i c i e s . The only c r e d i t c e i l i n g among the performance c r i t e r i a was an o v e r a l l c e i l i n p ; on short-term c r e d i t , w i t h no separate c e i l i n g on borrox>ring by the government or p u b l i c s e c t o r . L i m i t s were a l s o set on i n t e r n a t i o n a l reserves and, most un u s u a l l y , on the d e f i c i t on t r a d i n g account.

This example i s of S p e c i a l i n t e r e s t on two grounds;

( i ) i t shows that i t i£ p o s s i b l e f o r the Fund to agree to programmes which are non-conventional i n i t s own terms;

( i i ) but i t i s the only example i n the sample f o r 1974-79, although there were s i m i l a r cases i n the e a r l i e r sub-periods.

I'ear i n mind, however, the r e s t r a i n t s on non-conventional programmes imposed by the c o n d i t i o n a l i t y g u i d e l i n e s , reported e a r l i e r . Bear i n mind too that a governvaent faced vrith an urgent payments c r i s i s may have l i t t l e a l t e r n a t i v e but to crack dovm on aggregate demand even i f i t does not b e l i e v e that excess demand i s the source of the d i f f i c u l t y . I t i s e s s e n t i a l l y t h i s which i s complained of as a d e f l a t i o n a r y b i a s i n i n t e r n a t i o n a l roonetary arrangements.

vJe can sum up on the issue of f l e x i b i l i t y by r e j e c t i n g tvro extre\ne vievrs: (a) that the Fund has a stereotyped package v/hich i t a p p l i e s i n a d o c t r i n a i r e manner to a l l cases and (b) that the Fund's programmes are w i d e l y v a r i e d so as to d i r e c t l y a t t a c k the root causes o f the payments problem, vrhether they emanate from the side of demand or supply. ^Jliat has emerged from the above i s a p i c t u r e of 'constrained f l e x i b i l i t y ' : an attempt t o vary c o n d i t i o n a l i t y according to circumstances but x-rithin r e s t r i c t i v e l i m i t s .

T'Tnatj n o t i , of the n r i n c i n l e of u n i f o r m i t y of treatment, defined by the Fund as meaning that ' f o r any given degree of need the e f f o r t of economic adjustment sought i n programs be broadly equivalent among nembers?" This i s much e a s i e r to s e t t l e . Rowever s e r i o u s l y the management may seek to achieve t h i s outcome, i t i s unable to do so.

Executive D i r e c t o r s , c i v i l servants and members of the Fund's s t a f f a l l agree that i n p r a c t i c e there are considerable i n e q u a l i t i e s of treatment, a f f e c t i n g perhaps a quarter to a t h i r d of a l l agreements. The s t r i n g e n c y of p o l i c y conditions w i l l i n p r a c t i c e o f t e n depend upon whether the government which has a p p l i e d f o r a c r e d i t has powerful a l l i e s w i t h i n the Executive Board. I f a country i s regarded as of key p o l i t i c a l or s t r a t e g i c importance the Executive D i r e c t o r s of the more powerful c o u n t r i e s may lobby the ,j.anaging D i r e c t o r , the r e s u l t of which w i l l o f t e n be to s o f t e n the terms. Countries regarded w i t h h o s t i l i t y or i n d i f f e r e n c e , or l a c k i n g powerful f r i e n d s , must expect t i g h t e r c r e d i t c e i l i n g s and other terms. The American d i r e c t o r s tend to be p a r t i c u l a r l y a c t i v e as w e l l as powerful; the French lobby on behalf of the c o u n t r i e s of Francophone A f r i c a ; B r i t a i n on behalf of other Commonwealth c o u n t r i e s . Among coun t r i e s w i d e l y regarded as having b e n e f i t t e d from i n f l u e n t i a l patronage are P a k i s t a n , Y u g o s l a v i a , Turkey, L i b e r i a and Z a i r e (there i s a strong f e e l i n g among Fund s t a f f t hat i t ought not to be p r o v i d i n g stand-by support i n so p e r s i s t e n t l y corrupt and mismanaged a country as Z a i r e and that i n being r e q u i r e d to do so i t i s being used as 'front man f o r the West' by the American government and o t h e r s ) .

However i n e q u i t a b l e t h i s may be, i t i s not a c c u r a t e l y described as a pro-market, a n t i - s o c i a l i s t b i a s , as suggested i n the q u o t a t i o n from the Arusha I n i t i a t i v e . The p o l i t i c a l - s t r a t e g i c c o n s i d e r a t i o n s are too complex f o r outcomes to be f i t t e d n e a t l y i n t o such a simple g e n e r a l i - , s a t i o n . In a d d i t i o n to Yugoslavia, Manley's Jamaica was f o r a time among the b e n e f i c i a r i e s of p o l i t i c a l lobbying (chapt.). And q u i t e apart from g e o - p o l i t i c a l c o n s i d e r a t i o n s , the p e r s o n a l i t y f a c t o r a l s o subverts the aim of e q u a l i t y of treatment. A sympathetic m i s s i o n head or a persuasive M i n i s t e r of Finance may make q u i t e a d i f f e r e n c e .

Adaptation i n the 19/>0s

We can approach the question o f the f l e x i b i l i t y of Fund p o l i c i e s from a d i f f e r e n t angle, by e n q u i r i n g i n t o the extent to which the Fund has responded t o the huge g l o b a l payments d i s e q u i l i b r i a vrhich f i r s t ecerged i n 1974 and were recreated i n more serious form by the 'second o i l shock* of 1979-80. The b a s i c f a c t s are f a m i l i a r and have already been described i n Chsnter 2. At the beginning of the 19808 very l a r g e surpluses vrere earned by c e r t a i n of the major OPEC co u n t r i e s as a consequance of l a r g e increases i n the r e a l p r i c e of o i l and were expected to p e r s i s t . Both i n d u s t r i a l and developing c o u n t r i e s shared the d e f i c i t s xjhich matched the OFEC surpluses but r e l a t i v e to the value of t h e i r trade and n a t i o n a l incomes the d e f i c i t s of Idcs were by f a r the l a r g e t , e s p e c i a l l y those of the l e a s t developed c o u n t r i e s (see Table 2-6). An important but r e l a t i v e l y small group of Idcs, mostly s e m i - i n d u s t r i a l i s e d , were able to finance l a r g e current d e f i c i t s w i t h Euromarket borrowings but many of the poorer Idcs had l i t t l e access to t h i s market. Those which had been able to finance t h e i r d e f i c i t s had p r e d i c t a b l y experienced a vjorsening i n t h e i r e x t e r n a l debt s i t u a t i o n and there were signs that the commercial banks x<rere becoming i n c r e a s i n g l y chary of l a r g e nevr net l e n d i n g to T h i r d World

13 c o u n t r i e s .

As an agency intended to avoid major g l o b a l d i s e q u i l i b r i a and a s s i s t c o u n t r i e s w i t h t h e i r payments problems, the f i r s t and second o i l shocks presented a major challenge to the IMF. ^That was i t s p e r c e p t i o n of t h i s challenge andTdid i t respond? I t was c l e a r about

14 the general nature of i t s r o l e i n the s i t u a t i o n of 1980:

i n view of the s i z e of the current d e f i c i t s and of the d i f f i c u l t i e s t h a t nay a r i s e i n p r i v a t e i n t e r m e d i a t i o n , the Fund must be prepared, when necessary, to lend i n l a r g e r amounts than i n the past. A l s o , the s t r u c t u r a l problems faced by many c o u n t r i e s may r e q u i r e that adjustment take place over a longer p e r i o d than has been t y p i c a l i n the framework of Fund programs i n the p*if t . F u r t h e r , l e n d i n g by the Fund must r e f l e c t the s o r t of f l e x i b i l i t y , vrith an awareness of the circumstances of merabers, t h a t i s c a l l e d f o r i n the Executive Board's current g u i d e l i n e s on c o n d i t i o n a l i t y . . .

So i t should lend more and f o r longer p e r i o d s ; and there was a h i n t of a s o f t e r a t t i t u d e towards c o n d i t i o n a l i t y . I t i s worth s p e l l i n g out some of the i m p l i c a t i o n s of t h i s response.

F i r s t , i t i m p l i e s a s h i f t of emphasis awaj' from economic adjustment towards longer-term f i n a n c i n g of payments d e f i c i t s . T his i s s i g n i f i c a n t because, as was s!iotm e a r l i e r , the Fund was o r i g i n a l l y conceived of as u s i n g i t s resources on a r e v o l v i n g fund b a s i s to provide p u r e l y temporary support to p o l i c i e s aimed at a d j u s t i n g the domestic economy to e l i m i n a t e a d e f i c i t . I t was not seen as a long-term, p r o v i d e r o f net payments f i n a n c i n g . Beginning w i t h the EFF, the Fund has g r a d u a l l y become a continuous net source of payments finance ~ a major change from i t s t r a d i t i o n a l r o l e .

Of course, adjustment p o l i c i e s were s t i l l regarded as e s s e n t i a l but the nature of the required economic changes were nm perceived d i f f e r e n t l y : as s t r u c t u r a l and, t h e r e f o r e , as r e q u i r i n g longer to achieve. By c o n t r a s t w i t h the s i t u a t i o n p r i o r to 19743 the e x i s t e n c e of a l a r g e , unviable payments d e f i c i t could not be taken as even prima f a c i e evidence of domestic msmanageracnt. The source of the problem was much more l i k e l y to be an o i l - i n d u c e d worsening i n the terms of trade. And the s o l u t i o n , i f indeed one e x i s t e d , must be sought i n the development of new sources of export earnings, and i n other changes i n the productive s t r u c t u r e that economise on imported energy and other goods, or s u b s t i t u t e f o r them by l o c a l p roduction.

I f the Fund iras to p l a y the r o l e of p r o v i d i n g much l a r g e r sums of finance f o r longer periods i n support of raore ' s t r u c t u r a l ' a d j u s t ment programmes, t h i s c l e a r l y had major i p r o l i c a t i o n s f o r i t s t r a d i t i o n a l a t t i t u d e s to c o n d i t i o n a l i t y . Hence the reference to " f l e x i b i l i t y " i n the above quotation. T l i i s not only i m p l i e d a s h i f t away from emphasis on demand managerient towards p o l i c i e s d i r e c t e d at the productive s t r u c t u r e of the economy. I t a l s o i m p l i e d changing members' image of ItlF c o n d i t i o n a l i t y . I t i s w e l l knoTO that d e s p i t e l a r g e d e f i c i t s i n the second h a l f o f the 1970s Idc governments were extremely r e l u c t a n t to u t i l i s e the h i g h e r - c o n d i t i o n a l i t y f a c i l i t i e s i t \ the b e l i e f that the medicine would be worse than the cure. As a r e s u l t , the Fund was an i n s i g n i f i c a n t net source of f i n a n c i n g f o r Idc d e f i c i t c o u n t r i e s i n t h i s p e r i o d , as i s shotm i n Table 6-2. Managing D i r e c t o r de L a r o s i e r e saw t h i s c l e a r l y at the beginning of the 1980s and took measures t o change the Fund's image i n t h i s r espect, so as to encourage d e f i c i t c o u n t r i e s to make more use of IMF f a c i l i t i e s , " h i l e much of the Fund's g r e a t l y increased lending of 1980-81 was a r e s u l t of the s e r i o u s l y d e t e r i o r a t i n g payraents s i t u a t i o n of many of i t s members, there i s l i t t l e doubt that i t was a l s o p a r t l y a response to the >Ianaging D i r e c t o r ' s e f f o r t s .

How much of the r e a l i t y had changed beneath the attempt to improve the image?'^^ Major steps were taken to increase the resources v/hich the Fund could make a v a i l a b l e , along l i n e s reported i n previous chapters. Quotas were increased; the Fund undertook l a r g e - s c a l e borrowing from Saudi Arabia and other c o u n t r i e s ; the r u l e s r e l a t i n g access to c r e d i t to country quotas were changed to permit enlarged access;; a v a r i e t y of new f a c i l i t e s had already been created i n the 1970s; the EFF, the supplementary f a c i l i t y , the compensatory finance f a c i l i t y (expanded i n 19^1 to i n c l u d e s h o r t f a l l s i n foodgrain p r o d u c t i o n ) , the o i l f a c i l i t i e s and so on. But what happened to c o n d i t i o n a l i t y ?

There are those w i t h i n the Fund who deny that any r e a l change has taken p l a c e , implying t h a t the ' s o f t e r ' image promoted at the beginning of the 1980s was based upon e s s e n t i a l l y cosmetic or t a c t i c a l f a c t o r s . Others take a d i f f e r e n t view. One s t a f f raember suggested to me e a r l y i n 1981 that 11 of the 15 most recent stand-by programmes would have been r e j e c t e d as inadequate by the standards of the 1970s; and i n d u s t r i a l - c o u n t r y Executive D i r e c t o r s grumbled about the nev; ' l a x i t y ' i n the Fund's approach and it.p w i l l i n g n e s s to accept at face value progratames u n l i k e l y to be implemented. There does indeed appear to have been a genuine change, f o r example over the speed w i t h which the Fund expected a member to execute an agreed package of adjustment measures. I t remained to be seen, however, vrhether these changes had been more than t a c t i c a l .

i?hatever the answer to t h a t , the changing nature of the adjustment p o l i c i e s r e q u i r e d to cope w i t h the raore s t r u c t u r a l d e f i c i t s of the present day have created considerable s t r e s s e s w i t h i n the Fund's approach to c o n d i t i o n a l i t y . As i t has c l e a r l y recognised, a long-terra process i s i n v o l v e d , w i t h measures d i r e c t e d p r i m a r i l y at changes i n the productive s t r u c t u r e :

As to the p o l i c y approach to be followed by the Fund, t h i s must endeavour to create c o n d i t i o n s conducive to improvement i n the supply of resources and broadening of the productive base. Such developments v r i l l r e q u i r e , of course, supportive measures on the demand s i d e d i r e c t e d to the r e d u c t i o n of excessive budr-et d e f i c i t s and government consumption expendit u r e s , to the adoption of appropriate monetary and c r e d i t p o l i c i e s , and to v a r i o u s e x t e r n a l issues of problems, ( i b i d )

This suggests that c o n d i t i o n a l i t y - includixks t h a * ^ r t o f e o t t d i t i o n a l i t y which r e a l l y r a a t t e r t , the preconditions and performance c r i t e r i a - should s h i f t i n the same d i r e c t i o n and away from the t r a d i t i o n a l concentration on demand management, rel^^pated to a supportive r o l e . I t a l s o suggests that i t would be i n c r e a s i n g l y inescapable f o r the Fund to become d i r e c t l y i n v o l v e d i n the questions of long-tenB development s t r a t e g y that i t has fought shy of i n the past.

Thup f a r the Fund has been unable to r e s o l v e the c o n t r a d i c t i o n s between i t s ovm changed perceptions of the re q u i r e d adjustirent programmes and i t s t r a d i t i o n a l approach to c o n d i t i o n a l i t y . For one t h i n g , the c o n d i t i o n a l i t y g u i d e l i n e s quoted e a r l i e r (page 13) s p e c i f y that the Fund must normally confine i t s e l f to a small number of macroeconosic v a r i a b l e s (although there i s p r o v i s i o n f o r some f l e x i b i l i t y ) , whereas the l o g i c of an emphasis on s t r u c t u r a l adjustment p o i n t s i n e x o r a b l y i n the d i r e c t i o n of a probably l a r g e r number of microeconomic measures. There i s great r e s i s t a n c e w i t h i n the management to any la r g e s h i f t away from the t r a d i t i o n a l nacroeconomic approach and attempts to square t h i s c i r c l e ( i n an unpublished paper) reduced the s t a f f to l e s s than i t s normal l e v e l of l u c i d i t y :

Questions v i l l undovibtedly a r i s e as to the c o m p a t i b i l i t y of these concerns w i t h supply aspects w i t h the g u i d e l i n e s d i r e c t i n g the Fund s t a f f to avoid m i c r o p o l i c y performance c r i t e r i a . In d i s c u s s i n g t h i s i s s u e , i t i s important to be c l e a r about the r o l e of perfonyance c r i t e r i a . They are intended s o l e l y to t r i g g e r f u r t h e r discuss? ons betvreen the Fund and the a u t h o r i t i e s of the n^embers and are therefore confined to p o l i c y v a r i a b l e s r e f l e c t i n g o v e r a l l developments. I t i s g e n e r a l l y i n a p p r o p r i a t e to t r e a t m i c r o p o l i c y a c t i o n s i n t h i s way - a l l such ac t i o n s have some tnacroimpact but normally other microactions can be taken to ensure the appropriate raacroutcome. P a r t i c u l a r l y as the choice between a l t e r n a t i v e microactions i s f r e q u e n t l y i n f l u e n c e d by p o l i t i c a l c o n s i d e r a t i o n s , on which i t i s in a p p r o p r i a t e f o r the Fund to take p o s i t i o n s , i t i s not normally s u i t a b l e f o r the Fund to include microactions as Performance c r i t e r i a . But i t i s a b s o l u t e l y e s s e n t i a l f o r tVie Fund s t a f f , i n developing i t s assessment of the program's adequacy, to have a c l e a r idea about the i m p l i c a t i o n s of s p e c i f i c a c t i o n s . Consequently the s t a f f w i l l need to c o l l a b o r a t e c l o s e l y w i t h the a u t h o r i t i e s of member cou n t r i e s i n e l a b o r a t i n g the planned a c t i o n s i n these areas. These d i s c u s s i o n s would be r e f l e c t e d i n the programs subrrdtted to the Executive Board, femphasis addedj

The p.loss presented there on the r ^ t e o f parformauce c r i t e r i a i s h a r d l y convincing and i s , i n any ca8«, in«<m»iot«nt w i t h the x«rding of the g u i d e l i n e s themselves, rrhich speak of c r i t e r i a as being " l i m i t e d to those that are necessary to ev?iluate implementation". S i m i l a r l y , reference t o " p o l i t i c a l c o n s i d e r a t i o n s " as a reason f o r not becoming involved i n microeconomic c r i t e r i a would only be persuasive i f raacroeconomic measures were sonehow p o l i t i c a l l y n e u t r a l but the intense c o n t r o v e r s i e s which have surrounded the Fund's t r a d i t i o n a l c o n d i t i o n a l i t y have disproved t h a t . For example^ the s e t t i n g of s u b " c e i l i n g s on c r e d i t to the p u b l i c sector i n v o l v e sometimes i n t e n s e l y p o l i t i c a l d e c i s i o n s about the r e s p e c t i v e r o l e s of the p u b l i c and p r i v a t e s e c t o r s . In any case, the concluding sentences of t h i s passage must mean that the Fund s t a f f w i l l need to be s a t i s f i e d about the microeconomic content of s t a b i l i s a t i o n progranmes before recotnraending them to the Board, i n which case how can i t avoid takin^^ p o s i t i o n s on " p o l i t i c a l c o n s i d e r a t i o n s " ?

As a p r a c t i c a l s o l u t i o n , the Fund has moved to strengthen i t s c o l l a b o r a t i o n w i t h the 'Torld Bank, whose c h i e f concern and e x p e r t i s e i s on supply-cum-developnent i s s u e s . But what happens i f there are d i f f e r e n c e s of view between Bank and Fund s t a f f , or i n the r a t h e r numerous cases of countries which do not simultaneously request a s s i s t a n c e from both the Fund and the Bank? The Fund has a l s o t r i e d to promote s t r u c t u r a l adjustment w i t h i n the t r a d i t i o n a l confines of i t s programmes by p l a c i n g greater emphasis on p r i c e , wage and i n t e r e s t r a t a p o l i c i e s (see l i n e 2(b) of Table 7-3, pajje 10),

At the back of the Fund's d i f f i c u l t i e s i n these matters i s i t s unhappy recent experiences w i t h attempts to become more f u l l y i n v o l v e d xrith medium-terra prograraaes of s t r u c t u r a l adjustment, through i t s l e n d i n g under the extended f a c i l i t y . The EFF x;a5 the Fund's f i r s t attempt to move toxjards longer-term and P-ore s t r u c t u r a l l y o r i e n t e d prograrrmes but i t has not xrorked ?iS i t s c r e a t o r s intended. The experiences of Kenya^ presented i n Chapter apparently i l l u s t r a t e a general tendency. Although the progranns x/as presented as being i n support of a medium-terra progratncie i t s hard cor<=>-, as represented by the performance c r i t e r i a , X'Tas a s t r i c t l y conventional focus on six-monthly c r e d i t c e i l i n g s . In the Kenyan case, the Fund s t a f f vere not much i n v o l v e d i n the p r e p a r a t i o n of the medium-term programme (although the ^'orld Bank x^ras) xvhich, i n the event, xras not much implemented.

Senior Fund s t a f f accept that the SFF has not been the break w i t h conventional short-term prograTuraes that was expected. One s e n i o r o f f i c i a l went so f a r during interview^ as to c a l l i t "a sham" and vrished t h a t i t could be discontinued because i t pretended to be d i f f e r e n t from what i t a c t u a l l y was. 'tost of the s t a f f would not go so f a r but there i s v i r t u a l unanimity that the Fund has had great d i f f i c u l t y i n agreeing workable medium-term prof.';rammes w i t h governments. The general complaint i s that governments f i n d i t very d i f f i c u l t to commit themselves to s p e c i f i c courses of a c t i o n f o r more than tx/elve months ahead. P a r a d o x i c a l l y , the increased d i s e q u i l i b r i a which have created a need f o r s t r u c t u r a l adjustment have a l s o made i t more d i f f i c u l t to p l a n f o r the medium term because of the increased g l o b a l u n c e r t a i n t i e s . Fund s t a f f a l s o complain that they have no p a r t i c u l a r e x p e r t i s e when i t comes to investment programmes and the like r . and a l s o that the IMF does not have a l a r g e enough s t a f f to undertake that k i n d o f work ( i t s p r o f e s s i o n a l s t a f f i s much smaller than that of the Hank). But these d i f f i c u l t i e s pose even more s t a r k l y the question, how then can Fund progranmes move away from conventional forms i n the d i r e c t i o n s required to match up to i t s own perception of present-day needs?

P-ecent changes i n IMI'' p o l i c i e s towards the i n c l u s i o n of devaluations i n stand-by programmes i l l u s t r a t e f u r t h e r dilemmas. Since the break-doxTi of the system of f i x e d p a r i t i e s and the passage of the second amendment the Fund has perfo r c e accepted that i t s members may pursue a v a r i e t y of exchange rat e p o l i c i e s . I t i s now o f f i c i a l l y n e u t r a l as between exchange r a t e f l e x i b i l i t y or adherence to the o r i g i n a l 'adjustable peg' philosophy. More s i g n i f i c a n t l y , i t i s now w i l l i n g i n i t s proTammes to accept f i s c a l measures vrhich simulate a d e v a l u a t i o n vrhile leaving the o f f i c i a l e^rchange r a t e unchanged - export s u b s i d i e s , import duty surcharges and the l i k e . Such p r a c t i c e s would have been anathema not long ago and would have been r u l e d by the Fund's lawyers as i n c o n s i s t e n t vritb a system of f r e e r r j u l t i l a t e r a l payments. The Fund i s c l e a r that such measures are second-best a l t e r n a t i v e s , at l e a s t i n economic terms, but no longer r u l e s them out.^^

Even though we have sho-m i n the d i s c u s s i o n of Table 7-5 th a t devaluations have not been included i n raore than a m i n o r i t y of stand-by progracaneE, i t does appear that a d e c i s i o n was taken to s o f t e n the Fund's starice on t h i s i s s u e , ar. part of the campaign to give the Fund a mi l d e r r e p u t a t i o n on c o n d i t i o n a l i t y and to encourage governments

to make greater use of i t s f a c i l i t i e s . In those c o u n t r i e s where the IldF b e l i e v e d a d e v a l u a t i o n to be d e s i r a b l e but the government d i d not agree, i t became standard p r a c t i c e d u r i n g 1980 t o vnrite a clause i n t o the agreement p r o v i d i n g f o r a j o i n t government-IMF study of the exchange r a t e q u e s t i o n , at the end of which the p o l i c y conclusions of the study would be acted upon, i n s t e a d of r e q u i r i n g a devaluation as a p r e c o n d i t i o n to an agreement, as would have been more l i k e l y i n e a r l i e r y e a r s .

On t h i s i s s u e , then, there was some 's o f t e n i n g ' but to many i t seemed a p e c u l i a r p o l i c y v a r i a b l e to choose, given the s t a t e d d e s i r e to encourage s t r u c t u r a l adjustment. Chapter 4 surveys the merits and demerits of the dev a l u a t i o n t o o l but what i s beyond question i s t h a t , other things being equal, i t does act upon the productive structures i n c r e a s i n g the p r o f i t a b i l i t y of tradeables v i s a v i s non-tradeables; c r e a t i n g new p r o f i t a b l e investment o p p o r t u n i t i e s . In being l e s s i n s i s t e n t on exchange r a t e changes the Fund thus appeared to be moving away from p r e c i s e l y one of the small number of macroeconomic v a r i a b l e s upon which i t had a c l e a r l y e s t a b l i s h e d i n t e r e s t and which would help promote the type of adjustment which i t saw as p a r t i c u l a r l y necessary i n contemporary c o n d i t i o n s . E s s e n t i a l l y , t h i s was an i n i t i a t i v e of the Tlanaging D i r e c t o r and one that was viewed with dismay by some of h i s s t a f f and Executive Board, and a l s o w i t h i n the ITorld Bank.

To sum up, i t i s evident that the Fund has sought hard to adapt i t s e l f to the g l o b a l d i s e q u i l i b r i a of the 1930s. I t has shown a c l e a r understanding of the i m p l i c a t i o n s of these c o n d i t i o n s f o r the d e f i c i t c o u n t r i e s and f o r i t s oim r o l e . I t has moved q u i c k l y and e f f e c t i v e l y to enlarge i t s f i n a n c i a l resources and l e n d i n g , and i n the d i r e c t i o n of longer-term f i n a n c i n g . I t has s h i f t e d the financing/adjustment balance tovrards the former and introduced some more ' f l e x i b i l i t y ' i n t o i t s c o n d i t i o n a l i t y , although whether t h i s i s more than t a c t i c a l i s unclear. But i t has been l e s s d e c i s i v e about the i m p l i c a t i o n s of i t s oim a n a l y s i s f o r the content of i t s c o n d i t i o n a l i t y . The l o g i c of the s i t u a t i o n of most d e f i c i t Idcs p o i n t s to a need f o r d i f f e r e n t adjustment p o l i c i e s than the Fund's t r a d i t i o n a l concern w i t h the r e s t r a i n t of aggregate demand. But i t has t r i e d to remain w i t h i n the t r a d i t i o n a l confines of i t s c o n d i t i o n a l i t y , perhaps because of b u r e a u c r a t i c i n e r t i a , perhaps because i t judges t h a t the Executive Board would r e j e c t more r a d i c a l changes, perhaps because of a more clouded v i s i o n of i t s own r o l e i n the i n t e r n a t i o n a l economy. Once again, 'constrained f l e x i b i l i t y ' summarises the response.

^ T i i l e the Fund has sought hard to adapt, i t has nevertheless acted d e f e n s i v e l y , responding to events r a t h e r than moulding them. As compared, say, w i t h the 1960s, there i s l e s s c l a r i t y about what k i n d of world nonetary system i s both d e s i r a b l e and p r a c t i c a b l e , l e s s confidence i n the r i g h t n e s s of i t s a^m p o l i c y p r e s c r i p t i o n s . Aad i t f e e l s hemmed i n by h a r d - l i n e i n u d s t r i a l country members of the Executive Board already uneasy about the extent of i t s p o l i c y s h i f t s j on the one hand, and Idc r e s i s t a n c e s to greater Fund involvement i n p o l i c i e s of s t r u c t u r a l adjustment, on the other. F i n a l l y , i t f e e l s impotent to provide adequate assi s t a n c e to the poorer Idcs of A f r i c a and elsevrhere, d e a l t a severe blow by the successive o i l shocks and needing d i f f e r e n t forms of finance from those f'hich the Fund can provide;

In a l l cases, the p r o v i s i o n of l a r g e r and longer f i n a n c i n g i s appropriate only where there i s a reasonable prospect t h a t the member w i l l e v e n t u a l l y a t t a i n a v i a b l e balance of payraents. I t i s not appropriate i n those cases where the member cannot a t t r a c t c a p i t a l flows from p r i v a t e markets because of i t s l i m i t e d c a p a c i t y to s e r v i c e e x t e r n a l debt and where e x t e r n a l a s s i s t a n c e to improve the economic s i t u a t i o n must take the form of concessional a i d .

I t has ther e f o r e become an a c t i v e l o b b y i s t f o r l a r g e r amounts of development a i d to the most s e r i o u s l y a f f e c t e d c o u n t r i e s .

I l l - CREDIT CEILINGS REVISITED

ITe have shotm (a) that c e i l i n g s on t o t a l domestic c r e d i t and on that p a r t o f i t l e n t to the p u b l i c s e c t o r are almost i n v a r i a b l e components of stand-by and EFF nrogrammes and (b) th a t i n most cases observance of these c e i l i n g s i s the o n l y , o r most s e r i o u s , hurdle xrhich the government must surmount i n order to r e t a i n access t o the c r e d i t i n ouestion. Thus, c r e d i t c e i l i n g s (CCs) were f a r and away the raost common objects of requests f o r wai^'ers and m o d i f i c a t i o n s , as discussed e a r l i e r . Given the p i v o t a l r o l e of such c e i l i n g s i t i s important to examine the econordc r a t i o n a l e f o r t h e i r i n c l u s i o n , which i s the subject of the remainder of t b i s chapter. In undertak3.ng t h i s task, however, we munt beware the danger of o v e r - r a t i o n a l i s a t i o n .

The IMF i s a f a i r l y l a r g e o r g a n i s a t i o n , d i v i d e d i n t o a number of departments each w i t h i t s o m defined r e s p o n s i b i l i t y . Even though (perhaps becausel) most of i t s s t a f f are t r a i n e d economists, there i s bound to be

a s u b s t a n t i a l spectrum of viex-rpoints w i t h i n i t ; and there i s no reason to suppose that the PtF iri immune to the inter-deoartmental and i n t e r - p e r s o n a l d i f f e r e n c e s that mark any s u b s t a n t i a l bureaucracy. Moreover, i t i s subjected to a v a r i e t y o f e x t e r n a l c o n s t r a i n t s and pressures - from members of the Executive Board; from the governments that apply f o r c r e d i t s ; from major s p e c i a l - i n t e r e s t groups such ;as G-10 and G-24; from other o r p a n i s a t i o n s such as the World Bank; \ t o say nothing of the unexpected shocks to which the world economy ha 'p proved so prone. We should the r e f o r e not expoct complete consistency e i t h e r across co u n t r i e s or over tine;; nor i s i t s e n s i b l e to t r e a t ' Fund c o n d i t i o n a l i t y as a rigorous attempt to pursue the p r e s c r i p t i o n s of some h i g h l y a r t i c u l a t e d theory of balance of payments p o l i c y .

This notwithstanding, we have already seen that there are ^ considerable s i m i l a r i t i e s between Fund-supported s t a b i l i s a t i o n prograiames. There i s a l s o much homogeneity of view among i t s p r o f e s s i o n a l s t a f f , which i s p a r t l y s e l f - s e l e c t e d because of the Fund's f a i r l y well-kno\TO approach to s t a b i l i s a t i o n ; peer pressures and inf o r m a l promotion norma, probably r e i n f o r c e t h i s homogeneity. Quite apart from such c o n s i d e r a t i o n s , since CCs have i n some sense been chosen by the Fund as the hard core of most of i t s programmes i t i s both l e g i t i m a t e and important to enquire i n t o the reasons f o r t h i s choice. In f a c t , a v a r i e t y of reasons have been given, which v-e novr examine.

C r e d i t c e i l i n g s as a monitoring device

Perhaps the most comraonly s t a t e d reason f o r choosing CCs i s that the degree of observance of these serves as an i n d i c a t o r of the extent to which the s t a b i l i s a t i o n prograinme as a whole i s being implemented. I t i s t h i s view, f o r example, which i s r e f l e c t e d i n the r e v i s e d c o n d i t i o n a l i t y g u i d e l i n e s quoted e a r l i e r , s t a t i n g that 'Performance c r i t e r i a w i l l be l i m i t e d to those t h a t are necessary to evaluate implementation of the program..." On t h i s view, the use of CCs i s a bu r e a u c r a t i c response to a d e s i r e to have an o v e r s i g h t of s t a b i l i s a t i o n p o l i c y vTithout becoming i n v o l v e d i n the monitoring of d e t a i l e d p o l i c y implementation. A 1971 paper p r o v i d i n g guidance to IMF s t a f f on the formulation of CCs th e r e f o r e t r e a t s the determination of c e i l i n g s as a r e s i d u a l outcome of other p o l i c y d e c i s i o n s , x j i t h roughly the f o l l o w i n g sequence: (1) The extent of nature of the payments problem i s to be assessed-

(2) the payments o b j e c t i v e i s defined; (3) c o n s i d e r a t i o n i s given to the p o l i c y a c t i o n s needed to achieve the o b j e c t i v e - on the exchange r a t e , on f i s c a l measures, on the f i n a n c i n g of the r e s t of the p u b l i c s e c t o r , on p o l i c i e s a f f e c t i n g the p r i v a t e s e c t o r ; (4) the consequences of a l l these measures f o r domestic c r e d i t are then q u a n t i f i e d by e s t i m a t i n g t h e i r impact on the demand f o r money and on the f o r e i g n assets of the banking system, vrith domestic c r e d i t derived as a r e s i d u a l .

But i s i t reasonable to expect CCs t o he e f f i c i e n t monitoring devices of rride-ranging s t a b i l i s a t i o n programmes? One doubt concerns the degree of p r e c i s i o n vnth v-rhich the domestic c r e d i t i m p l i c a t i o n s of the programmes can be q u a n t i f i e d i n p r a c t i c e and a l s o the extent t o which changes i n the l e v e l of c r e d i t are l i a b l e to be a f f e c t e d by u n a n t i c i p a t e d disturbances exogenous to the programmes. Given e r r o r s i n the q u a n t i f i c a t i o n procedures and/or exogenous d i s t u r b a n c e s , observance of the GCs w i l l not n e c e s s a r i l y y i e l d i n f o r m a t i o n on the extent to which a prograraae i s being observed. A government which i s f a i t h f u l l y executing an agreed programme of measures may f o r exogenous reasons f i n d i t s e l f o u t s i d e the CCs; another government may remain Tîthin the c e i l i n g s d e s p i t e s l i p s h o d implementation of the programme. T r e a t i n g CCs as a r e s i d u a l tônitoring device r e q u i r e s l e v e l s of i n f o r m a t i o n and confidence i n a p p r o p r i a t e to many country circumstances. Iôreover, observance of CCs i s used as a yes/no t e s t of e l i g i b i l i t y of access: i f the c e i l i n g s are breached access i s denied f a i l i n g a waiver,, m o d i f i c a t i o n or new understanding. Against t h i s yes-no usage, i t i s s u r e l y more reasonable to expect programme execution to be on a continuum.

A r e l a t e d d i f f i c u l t y concerns the tenuous connection between the CCs and the n o l i c y s p e c i f i c s which they are supposed to monitor. There was a p e r i o d i n the Fund's h i s t o r y when i t recognised t h i s . During the 1960s i t was more common to l a y Aoim s p e c i f i c f i s c a l performance c r i t e r i a than became the case l a t e r . The i n c l u s i o n of f i s c a l c r i t e r i a i s explained i n the Fund's o f f i c i a l h i s t o r y as f o l l o w s ( S p i t z e r , 1969, p. 503, emphasis added);

... major i n f l a t i o n a r y pressures f r e q u e n t l y o r i g i n a t e i n p u b l i c s e c t o r d e f i c i t s . In such s i t u a t i o n s i t has not been s u f f i c i e n t to place g l o b a l c e i l i n g s on the expansion of bank c r e d i t , or separate c e i l i n g s on c e n t r a l bank c r e d i t to the government or the p u b l i c sector as a whole. These i n d i r e c t nethods of c o n t r o l l i n g p u b l i c finances do not go to the r o o t " o f the problem; moreover, being" subject to strong pressure from the govemtaent, the c e n t r a l bank a u t h o r i t i e s cannot always enforce these c e i l i n g s . Therefore, more d i r e c t f i s c a l neasures have been s t i p u l a t e d i a many programs...

- A l -

I f the connection betcreen the n u b l i c finances and domestic c r e d i t i s too i n d i r e c t , how much t r u e r t h i s i s of the connection w i t h yrara-statal p r i c i n g p o l i c i e s , wage p o l i c i e s , export promotion measures, and so on. ' • ^ i l e the d e s i r e (imperative?) to avoid becoming i n v o l v e d i n the monitoring of d e t a i l e d programme s p e c i f i c s i s easy to understand, i t must be doubted whether GCs are a s a t i s f a c t o r y way out.

C r e d i t c e i l i n g s as a response t o data shortages

Another reason given by Fund s t a f f metnbers of how CCs came to prominence i s that data on c r e d i t and r e l a t e d monetary magnitudes were among the few s i g n i f i c a n t economic data that were a v a i l a b l e i n almost a l l c o u n t r i e s w i t h a h i g h degree of accuracy and short time lags d u ring the formative years of c o n d i t i o n a l i t y . Banking data compared favourably w i t h n a t i o n a l accounts, balance of payments estimates, data on the p u b l i c f i n a n c e s , and data on many other important aspects of economic a c t i v i t y . Moreover, i n nresent-day circumstances of large imbalances and much u n c e r t a i n t y i t i s p a r t i c u l a r l y important to avoid long lags betxreen events and the data r e c o r d i n g them. F i n a l l y , i t i s not easy f o r governments to 'massage' these data i n order to present a more favourable impression than the r e a l i t y warrants.

There i s o b v i o u s l y much i n t h i s as an h i s t o r i c a l e x p l a n ation but does i t provide an adequate contemporary r a t i o n a l e ? F i r s t , i t appears from I n t e r n a t i o n a l F i n a n c i a l g t a t i s t l c s and other compilations of economic s t a t i s t i c s that the coverage and promptness (and probably the r e l i a b i l i t y ) of economic data has shovm an improving trend i n most c o u n t r i e s , so that the data shortage case f o r CCs i s l e s s compelling now than, say, twenty years ago. Second,fmore p o s i t i v e approach to a p a u c i t y of good data would be an increased e f f o r t to strengthen government s t a t i s t i c a l s e r v i c e s , e s p e c i a l l y i n the production of short-term economic i n d i c a t o r s . Use of CCs could then be seen as a temporary, second-best expedient pending improved data but that i s not the impression conveyed by the Fund. ^Tere inadequate data viewed as a c o n s t r a i n t to more e f f e c t i v e c o n d i t i o n a l i t y the Fund would s u r e l y have placed more eitqihasis i n i t s t e c h n i c a l a s s i s t a n c e s e r v i c e s to member governments on widening the data base.

There i s , noreover, a p r a c t i c a l c o n s i d e r a t i o n to set against the one j u s t discussed. One of the drawbacks of the emphasis on CCs i s that i t i s prone to impose an a t t e n t i o n b i a s i n stand-by n e g o t i a t i o n s between governments and Fund missions (e.g. see Chanter on Kenya). There i s a tendency f o r meetings to become preoccupied w i t h debating the m e r i t s of r i v a l f i s c a l and monetary q u a n t i f i c a t i o n s and w i t h haggling about a few m i l l i o n more or l e s s of domestic c r e d i t , r a t h e r than c o n c e n t r a t i n g on a c h i e v i n g a consensus about the nature of the economic problem and the steps needed to deal w i t h i t . There are those w i t h i n the Fund who recognise t h i s weakness but they do not see a b e t t e r a l t e r n a t i v e .

Since i t appears that n e i t h e r the 'monitoring' nor the 'data shortage* reasons provide an e n t i r e l y s a t i s f a c t o r y r a t i o n a l e of the choice of CCs, p a r t i c u l a r i n t e r e s t thus attaches to another l i n e of ex p l a n a t i o n , i n t e r p r e t i n g CCs as an expression of a monetary approach to balance of oayments management.

C r e d i t c e i l i n g s and monetary apprcaches

P a r t l y under the impulse of the data problem, members of the Fund's research department began during the 1950s to develop a model of balance of payments n o l i c y t'hich would u t i l i s e monetary data, be s u f f i c i e n t l y simple t o be employed by Fund missions on the ground and would f i t the observed determinants of balance of payments performance. The well-knoxm r e s u l t of t h i s wor!c was the Polak model described i n Chapter 3 (pp. 15-16) and i t i s an accepted p a r t of the h i s t o r y of economic thought that the x-TritinGs of IMF economists played a l a r g e r o l e i n the post-war renewal of i n t e r e s t i n monetary approaches to the balance of p a y m e n t s . T h i s t r a d i t i o n has remained a c t i v e xxathin the Fund, as i s apnarent from the contents of i t s j o u r n a l , the S t a f f Papers, but i n recent years raore p u r e l y academic work on monetary theory has occupied centre stage, c h i e f l y through the T?ritings of Mundell and Johnson, and under the i n d i r e c t i n f l u e n c e of T l i l t o n Friedman.

J u s t as the e f f o r t s o f Polak and others were p r o v i d i n g an important input i n t o the general stream of i d e a s , they were a l s o having a major i n f l u e n c e on p o l i c i e s , ^ olak h i m s e l f came to occupy a p o s i t i o n of

great i n f l u e n c e w i t h i n the o r g a n i s a t i o n and many members o f the research department he headed subsequently moved i n t o key p o s i t i o n s i n geographical and p o l i c y - f o r m i n g departments of ths Fund, Uie FolaU model and I t s subsequent e l a b o r a t i o n has not only served to provide an ezi post explanation of the Fund's approach to s t a b i l i s a t i o n but has a l s o

19 i n f l u e n c e d the ex ante content of that approach. Thus, the o f f i c i a l Fund h i s t o r y , w h i l e a l s o n o t i n g the 'monitoring' and 'data shortage* motives, s t a t e d t h a t , " C e i l i n g s on domestic c r e d i t expansion were emphasised because performance c r i t e r i a i n stand-by arrangements were based on the view ... that changes i n the supply of money and c r e d i t i n an economy had a strong impact on aggregate domestic demand and a r e l a t e d e f f e c t on the balance of payments" (de V r i e s , 1976, p. 363). More r e c e n t l y , two d i s t i n g u i s h e d members of the IMF research department have w r i t t e n t h a t ,

T'Jhile there i s no s i n g l e t h e o r e t i c a l model un d e r l y i n g a l l f i n a n c i a l programs, a broad framework w i t h i n which viost of them are formulated has evolved i n the Fund over the years. In t h i s framework there i s a f a i r l y w e l l - d e f i n e d r e l a t i o n s h i p between money, the balance of payments and domestic p r i c e s i n which the supply/and demand f o r money p l a y a c e n t r a l l i n k i n g r o l e (Khan and Knight, 1981, p. 3 ).

I t i s thus appropriate to examine the use of CCs on the b a s i s of an e v a l u a t i o n of the monetary approach to the balance of payments, to iThich we now t u r n .

The e s s e n t i a l s o f the Mundell-Johnson approach are summarised i n the dictum that "the balance of pajraKnts i s e s s e n t i a l l y a monetary phenomenon" (Frenkel and Johnson, 1976, p. 21)^^ Compare w i t h Friedman's famous a s s e r t i o n t h a t " I n f l a t i o n i s always and everywhere a monetary phenomenon...'" The balance i n question i s the o v e r a l l (or monetary) balance and whether i t i s i n surplus o r d e f i c i t w i l l depend upon the s t a t e of the supply of and demand f o r money. On t h i s view and given soKffi strong assumptions about the s t a b i l i t y of the demand-for-money f u n c t i o n , the behaviour of domestic c r e d i t , the exi s t e n c e of f u l l employment, the s t a b i l i t y of the money m u l t i p l i e r , the f i x i t y of exchange r a t e s e t c . , a payments d i s e q u i l i b r i u m r e f l e c t s a stock d i s e q u i l i b r i u m between the demand f o r and supply of money, A payments d e f i c i t r e f l e c t s an excess supply of money. In t h i s s i t u a t i o n people t r y to get r i d of t h e i r unwanted money balances, f o r example by buying imports or by i n v e s t i n g abroad. The d e f i c i t i s thus a u t o m a t i c a l l y s e l f - c o r r e c t i n g

because the e f f e c t of such a c t i o n s i s to reduce tbe f o r e i g n exchange assets of the monetary a u t h o r i t i e s and, v i a the money m u l t i p l i e r , the t o t a l stock of money. The monetary a u t h o r i t i e s can postpone t h i s c o r r e c t i o n by i n c r e a s i n g domestic c r e d i t to o f f s e t the monetary c o n t r a c t i o n emanating from the l o s s of f o r e i g n assets but only a t a heavy f u r t h e r cost to the balance of payments.

The p o l i c y i m p l i c a t i o n s of such a model are evident. I f a pa3mtents d i s e q u i l i b r i u m i s a monetary phenomenon i t can only be r e c t i f i e d by changes which r e s t o r e a stock e q u i l i b r i u m i n money supply and demand. Although they may have some t r a n s i t o r y e f f e c t s , measures such as devaluations and exchange c o n t r o l s are u l t i m a t e l y i n e f f e c t u a l , except t o the extent t h a t they a f f e c t money supply or demand. Because payments d e f i c i t s are a u t o m a t i c a l l y s e l f - c o r r e c t i n g no d e l i b e r a t e p o l i c y a c t i o n s are necessary, although they can be u s e f u l i n speeding up the s e l f - c o r r e c t i o n process. The only way to s u s t a i n a payments e q u i l i b r i u m i s to ensure a continuing, e q u a l i t y betti?een the demand f o r and supply of money.

Both s i m i l a r i t i e s and d i f f e r e n c e s w i t h the Mundell-Johnson approach can be discerned i n the Polak s c h o o l , as may be judged from the f o l l o w i n g summary of the i m p l i c a t i o n s of a v e r s i o n of t h e i r mjdel designed s p e c i f i c a l l y to s u i t Idc circumstances (Polak and Argy, 1971, p. 5 ) :

A o n c e - f o r - a l l increase i n c r e d i t v / i l l a l l leak out i n the long run i n the form of increased imports. I n the t r a n s i t i o n a l p e r i o d income w i l l be hig h e r , but i n the long run both income and imports w i l l r e v e r t back to t h e i r o r i g i n a l l e v e l s . This case demonstrates t h a t , over time, an excess of c r e d i t w i l l r e s u l t i n a l o s s of reserves of the same order. The important p o l i c y i m p l i c a t i o n here i s t h a t , given expected r e c e i p t s from exports and net c a p i t a l f l o w s , the appropriate r a t e of c r e d i t expansion i s determined by the d e s i r e d change i n the net f o r e i g n assets of the banking system.

C h a r a c t e r i s t i c a l l y , the Polalc school i s raore concerned w i t h managing the balance of payments i n the shorter-term and i s l e s s p a s s i v e or p e s s i m i s t i c about the manipulation of doiMstic monetary p o l i c i e s f o r t h i s purpose. On the other hand i t concurs w i t h the Mundell-Johnson school i n seeing the balance of payments as determined by monetary f a c t o r s .

I-Jhile i t i s g e n e r a l l y recognised that monetary theory has made a valuable c o n t r i b u t i o n to our understanding of the balance of payments, i t has a l s o been subjected to s e v e r a l c r i t i c i s m s , not l e a s t by the IMF's own economists. F i r s t , c r i t i c s have pointed to the wide range of strong assumptions upon which the theory i s based ( T h i r l w a l l , 1980, Qi. 5", B l a c k w e l l , 1978), e s p e c i a l l y concerning the s t a b i l i t y of the fun c t i o n s d e s c r i b i n g the demand f o r and supply of money, the s u b s t i t u t e -b i l i t y of goods produced at home and abroad, and the p a s s i v i t y of domestic c r e d i t p o l i c y . The demand f u n c t i o n f o r money has already been surveyed by Sharpley i n Chapter 3, who br i n g s out the c o n ^ l e x i t y of t h i s and the d i f f e r e n c e s of view concerning the e m p i r i c a l evidence on i t s s t a b i l i t y (pp. 3-8). She goes on to survey the l i t e r a t u r e r e l a t i n g to the supply of money (pp. 8-14), r e v e a l i n g t h i s a l s o to be a cotT5>licated matter and r e f e r r i n g to e m p i r i c a l work suggesting that the money m u l t i p l i e r may not i n p r a c t i c e possess the s t a b i l i t y assimed by monetary theory. B l a c k w e l l and other have f u r t h e r c r i t i c i s e d the Mundell-Johnson furmulations f o r t h e i r n e glect of the time dimension and the unduly sharp dichotomy they make between money and other f i n a n c i a l c l a i m s .

Tiie theory i n i t s Polak v e r s i o n can a l s o be c r i t i c i s e d f o r overs i m p l i f y i n g the dynamic r e l a t i o n s h i p between domestic c r e d i t and imports. Thus Khan and Knight b u i l d upon the b a s i c Polak approach to develop a dynamic model which explores the r e l a t i o n s h i p s between output, p r i c e s , i n t e r n a t i o n a l r e s e r v e s , money and f i s c a l p o l i c y . They f i n d a complex connection betx^een domestic c r e d i t and the balance of payments (pp. 35-6):

vjhen a given increase i n i n t e r n a t i o n a l reserves must be achieved w i t h i n a s p e c i f i e d p e r i o d of time, our model y i e l d s q u i t e a complicated path f o r domestic c r e d i t c e i l i n g s . . . The p r a c t i c a l i m p l i c a t i o n i s t h a t policy-makers cannot 'fine-tune' domestic c r e d i t c e i l i n g s from quarter to quarter or even year to year v/ithout having much more comprehensive i n f o r m a t i o n about the s t r u c t u r e of the econonty than they can reasonably be expected to possess.

Since they present t h e i r model as an i n t e r p r e t a t i o n of "the b a s i c t h e o r e t i c a l paradigm u n d e r l y i n g the f i n a n c i a l programming e x e r c i s e s of the Fund..." (p. 4 ) , the i m p l i c i t c r i t i c i s m of the use of simple CCs i s q u i t e s e r i o u s . Another in-house c o n t r i b u t i o n a l s o casts doubts.

K e l l e r ' s (1979) examination of the i m p l i c a t i o n s of c r e d i t p o l i c i e s f o r output and the balance of payments argues that "at l e a s t i n the longer run, increased l e v e l s of ' p r o f i t a b l e ' c r e d i t w i l l strengthen the current account performance ra t h e r than place a burden on the balance of pajmsents" (p. 11). He regards t h i s as c o n s i s t e n t w i t h the Fund's i n s i s t e n c e i n i t s programmes on avoiding the crowding-out of p r i v a t e investment because of borrowing by the p u b l i c s e c t o r , but the f a c t s are that the b i n d i n g p a r t s of the Fund's programmes - the performance c r i t e r i a and p r e c o n d i t i o n s - are g e n e r a l l y s i l e n t on the a l l o c a t i o n of c r e d i t , except very broadly as between the p u b l i c and p r i v a t e s e c t o r s , and t h a t a c o n c l u s i o n that c r e d i t can strengthen the balance of payiMnts runs i n c l e a r o p p o s i t i o n to the b a s i c p o l i c y t h r u s t of monetary models.

Both the papers j u s t r e f e r r e d to are concerned w i t h the n e g l e c t i n monetary theory of the i m p l i c a t i o n s of monetary v a r i a b l e s f o r output and growth - a n e g l e c t of p a r t i c u l a r concern i n the context of developing c o u n t r i e s . The Khan and Knight model emphasises that short-term programmes designed to strengthen the balance of payments through the r e s t r a i n t of domestic c r e d i t can impose heavy economic c o s t s : "programs designed to achieve quick r e s u l t s on the balance of payn^nts v i a sharp d e f l a t i o n are l i k e l y to hav3 s i g n i f i c a n t and undesirable e f f e c t s on output, enplo3nnent and f a c t o r incomes, p a r t i c u l a r l y i n the

21 short run" (p. 36). In these respects longer-term programmes are "unanbiguously" s u p e r i o r . This c o n c l u s i o n supports a s h i f t i n the Fund tot^ards more medium-term prograiames but i t e q u a l l y i m p l i e s a serious c r i t i c i s m of the short-term programmes th a t have c h a r a c t e r i s e d the Fund i n the past and to the present time, and c a l l s i n t o question the standard Fund a s s e r t i o n that s t a b i l i s a t i o n promotas long-run development. This makes i t a l l the more r e g r e t t a b l e that the EFF concept has not i n p r a c t i c e marked much change from standard short-term programmes. A g h e v l i and Rodriguez (1979) a l s o develop a model which i n c l u d e s the i n f l u e n c e of monetary v a r i a b l e s on output. They provide s i m u l a t i o n s showing negative e f f e c t s of monetary r e s t r a i n t on output, even i n the longer term, and ( i n c o n t r a s t to K e l l e r ) a t r a d e - o f f betx?een balance of payments and growth o b j e c t i v e s .

Neither the Polak nor Mundell-Johnson models incorporated output v a r i a b l e s ; the l a t t e r simply assumed that changes i n money supply do not a f f e c t r e a l v a r i a b l e s but the r e s u l t s j u s t reported suggest that the p o l i c y inferences of such models need considerable m o d i f i c a t i o n when the impact on growth i s incorporated. This c r i t i c i s m can be r e l a t e d to a more general complaint that the Mundell-Johnson approach assumes ai?ay a l l the f a c t o r s x^hich can make the balance of payments a problem ( T h i r l w a l l , p. 114). Even i f there are f o r c e s making f o r eventual s e l f - c o r r e c t i o n of a payments d e f i c i t , the length of time and the course of events i n v o l v e d i n the t r a n s i t i o n are a l l - i m p o r t a n t ; "the '^problem' i s the cost of adjustment and the p o l i c y i s s u e i s hov; to minimise the c o s t " ( K r e i n i n and O f f i c e r , 1978, p. 73).

I t could be complained that the Fund has tended to ignore the c o s t - m i n i m i s a t i o n task and that the s p e c i f i c a t i o n of the b a s i c Polak model may have c o n t r i b u t e d to that n e g l e c t . I'Thether or not t h a t i s the case, w i t h the Fund moving towards longer-term programmes and beginning to emphasise the importance of s t r u c t u r a l , supply-side adjustment, i t i s i n c r e a s i n g l y important that i t s u n d e r l y i n g model of economic p o l i c y (however i n f o r m a l that may be) should pay e x p l i c i t a t t e n t i o n to the i n f l u e n c e of i t s c o n d i t i o n a l i t y on r e a l v a r i a b l e s . The country work of Fund missions has f a l l e n behind the t h i n k i n g of i t s own research economists.

There i s l a s t l y the question of th?. success of monetary models i n e m p i r i c a l t e s t i n g . Tests reproduced i n IMF (1977)' and subsequently by IMF-based economists have g e n e r a l l y reported s a t i s f a c t o r y s t a t i s t i c a l r e s u l t s , e s p e c i a l l y when Polak-type models are a p p l i e d to developing-country data. K r e i n i n and O f f i c e r are l e s s c o n f i d e n t , however. They conclude from a review of 40 e n ^ i r i c a l s t u d i e s that the evidence i s i n c o n c l u s i v e (p. 74):

The number of s t u d i e s we consider to y i e l d negative r e s u l t s concerning the monetary approach i s approxiiriately equal to the number that produce p o s i t i v e r e s u l t s . A l s o and perhaps more r e v e a l i n g , the vast m a j o r i t y of s t u d i e s , viewed independently of one another, provide mixed f i n d i n g s .

Given the strong b i a s i n published w r i t i n g s against the r e p o r t i n g of negative f i n d i n g s (xjhich are d i f f i c u l t to get published i n j o u r n a l s anyway*.)

t h i s i s a s t r i k i n g r e s u l t . S p e c i f i c a l l y on tho hypothesis t h a t payments d i s e q u i l i b r i a are the r e s u l t of stock d i s e q u i l i b r i a hetwoen money supply and demand, they summarise the r e s u l t s of 15 t e s t s (pp. 36-7). These y i e l d e d 4 p o s i t i v e , 3 negative and 8 mixed r e s u l t s . Hp d i f f e r e n t i a t i o n was evident as between t e s t s on data from i n d u s t r i a l and developing c o u n t r i e s .

Their o v e r a l l assessment of the monetary approach i s thus t h a t , w h i l e i t has made a s i g n i f i c a n t c o n t r i b u t i o n , i t s f o l l o w e r s may have gone too f a r i n t h e i r emphasis on monetary v a r i a b l e s to the v i r t u a l e x c l u s i o n of e v e r y t h i n g e l s e (p. 72). A s i m i l a r judgement i s i m p l i c i t i n B l a c k w e l l ' s review.

I f 5 t h e r e f o r e , we take the Fund's CGs as ari expression of a monetary approach to the balance of payments, i t appears t h a t t h e i r a n a l y t i c a l and e m p i r i c a l foundations are l e s s than f u l l y secure. We repeat, however, that i t would be wrong to view the Fund as an

o r g a n i s a t i o n i n t e n t on the rigorous a p p l i c a t i o n of some t h e o r e t i c a l model. In i t s a t t e n t i o n to the current account as w e l l as the o v e r a l l balance; i t s concern \fith f i s c a l matters g e n e r a l l y ignored i n the monetary approach; i t s a t t e n t i o n to questions of domestic a b s o r p t i o n and expenditure s w i t c h i n g ; i t s advocacy of d e v a l u a t i o n as a p o l i c y instrument; the g e n e r a l l y i n t e r v e n t i o n i s t t h r u s t of i t s programmes -i n a l l these ways the Fund's p r a c t i c a l work makes c l e a r departures fromfpurely monetary approach. I t i s a l s o important to make a d i s t i n c t i o n between 'monetary' and 'monetarist*. As we have seen, the Fund can reasonably be s a i d to adhere g e n e r a l l y to a monetary approach to pa>~u!ents management. But the Fund i s not monetarist i n the sense of r e l y i n g upon monetary p o l i c y to the e x c l u s i o n of other instruments. We should a l s o beware the a r i d 'Keynes varsus monetarism' debate, w i t h the Fund placed i n the l a t t e r camps f o r there are strong a f f i n i t i e s

22 between the Polak and Keynssian models.

But w h i l e the IMF i s n e i t h e r purely monetarist nor p u r e l y monetary, the l i t e r a t u r e r e f e r r e d to above does r a i s e s e r i o u s questions about the appropriateness of the Fund's con c e n t r a t i o n on c r e d i t p o l i c i e s . Tlie connection between c r e d i t and the balance of payments i s complex and u n c e r t a i n . For reasons surveyed i n Chapter 3 and i l l u s t r a t e d i n Chapter on Kenya, there are f o n s i d a b l e p r a c t i c a l d i f f i c u l t i e s

i n the way of s e c u r i n g t a r g e t increases i n c r e d i t from the manipulation of f i s c a l and monetary instruments. The Welfare costs of c r e d i t c o n t r o l s i n short-term progrananes may be unduly l a r g e . The same nay be

of the p o l i t i c a l c o s t s , f o r the p o i n t was made at the c o n c l u s i o n of Chapter 2 that monetary explanations are s u p e r f i c i a l because they f a i l to explore the p o l i t i c a l impulses which generate p e r s i s t e n t 'excess' c r e d i t c r e a t i o n . There might, i n other words, be a t r a d e - o f f between economic and p o l i t i c a l s t a b i l i s a t i o n i f the former e n t a i l s s t r i n g e n t c r e d i t c o n t r o l s * C e r t a i n l y such c o n t r o l s are bound to have p o l i t i c a l r epercussions. Johnson (1967, p. 76) suggests that i n some coxintries:

I n f l a t i o n a r y f i n a n c i n g represents the only a v a i l a b l e way of b r i d g i n g deep p o l i t i c a l d i v i s i o n s . The i n s i s t e n c e of outside advisers on conservative monetary and f i s c a l p o l i c i e s i n these circumstances amounts i n r e a l i t y to a demand f o r p o l i t i c a l s t a b i l i s a t i o n and g e n e r a l l y a demand f o r ... r e s o l u t i o n of p o l i t i c a l c o n f l i c t in favour of one of the d i s p u t a n t s .

IV - SUIIIARY AJID COI'TCLUSIOM

Tl i i s chapter has been p r i m a r i l y concerned w i t h the content of IMF c o n d i t i o n a l i t y , the degree of f l e x i b i l i t y and a d a p t a b i l i t y which i t has d i s p l a y e d i n the a p p l i c a t i o n of t h i s , and the underlying r a t i o n a l e f o r i t s concentration on domestic c r e d i t c e i l i n g s as key elements i n i t s programmes. Some of the c h i e f conclusions to have emerged are as f o l l o w s .

(a) I t i s i n the nature of the IMF that i t s c r e d i t s , and the programmes which they support, are i n response to balance of payments d e f i c i t s . A strengthening of the payments s i t u a t i o n i s i n v a r i a b l y the primary o b j e c t i v e of such programmes. 'Objectives' concerning i n f l a t i o n and grov;th are secondary. Questions concerning the d i s t r i b u t i o n of income and wealth s c a r c e l y feature at a l l .

(b) Fund s t a f f diagnoses of the sources of pajnaents d i f f i c u l t i e s p l a c e a heavy emphasis on the e f f e c t s of expansionary demand p o l i c i e s and other aspects of domestic management. Exogenous f a c t o r s are g e n e r a l l y considered of l e s s importance. This i s even true of the post-1973 p e r i o d , although to a reduced e x t e n t .

(c) IMF-supported s t a b i l i s a t i o n programmes are made up of three components: p r e c o n d i t i o n s : performance c r i t e r i a ; other non-binding elements. The performance c r i t e r i a form the hard core and these u s u a l l y emphasise c e i l i n g s on domestic bank c r e d i t both o v e r a l l and to the government or p u b l i c s e c t o r . I t i s unusual f o r measures r e l a t i n g to the exchange r a t e , vrages and p r i c e s , and s p e c i f i c f i s c a l changes to be included as performance c r i t e r i a .

(d) Only a quarter to a t h i r d of IMF programmes appear to have been ass o c i a t e d tdLth a currency d e v a l u a t i o n . L i b e r a l i s a t i o n of trade and payments more g e n e r a l l y defined i s a l s o included i n only a m i n o r i t y of cases but there are standard clauses o b l i g a t i n g borrowing members to d e s i s t from i n t r o d u c i n g new, or i n t e n s i f y i n g e x i s t i n g , exchange c o n t r o l s .

(e) The Fund's s t a t e d p o l i c y i s to adapt c o n d i t i o n a l i t y to country c o n d i t i o n s X;rhile r e t a i n i n g u n i f o r m i t y of treatment across c o u n t r i e s . Our evidence shows that i t i s not the case that there i s a stereotyped FfF package which if? a p p l i e d to a l l cases but that there are f a i r l y severe l i r a i t n to the degree of f l e x i b i l i t y which i t achieved i n i t s programmes during the 1970s. In p a r t i c u l a r , i t u s u a l l y (but not alvrays) p r e s c r i b e d a programme of demand management even i n cases where the IMF mission had not found excess demand to be a p r i n c i p a l cause of payments d e f i c i t s , "e c h a r a c t e r i s e i t s achievements as 'constrained f l e x i b i l i t y ' .

( f ) P o l i t i c k i n g by Executive D i r e c t o r s i s a c h i e f reason why the Fund i s unable to achieve u n i f o r m i t y of treatment across c o u n t r i e s . On the other hand, the r e s u l t i n g d i s t o r t i o n s are not best described as a n t i s o c i a l i s t . Countries l a c k i n g i n g e o - p o l i t i c a l importance are the c h i e f s u f f e r e r s , whatever the hue of t h e i r governments.

/ ( g ) . . .

(<*) In a v a r i e t y of ways the Fund has sought hard to adapt to the new problems created by the f i r s t and second o i l shocks: increases i n i t s l e n d i n g power; the c r e a t i o n of new f a c i l i t i e s or enlargement of e x i s t i n g ones; some apparent recent s o f t e n i n g i n i t s c o n d i t i o n a l i t y . However, i t has found i t d i f f i c u l t to a l t e r i t s programraes to accommodate the changed forms of adjustment r e q u i r e d i n response t o exogenously generated payments d e f i c i t s . Again, 'constrained f l e x i b i l i t y ' i s an apt summarisation.

(h) Te i d e n t i f y three reasons f o r the Fund's focus on c r e d i t c e i l i n g s i n i t s stand-by programmes: as a monitoring device; as a response to data shortages; as an expression of a monetary approach to the balance of payraents. I t i s shoxm that each of these has weaknesses. I t i s improbable that c r e d i t c e i l i n g s can shoulder the monitoring burden " h i c h i s placed upon them. The 'data shortage' explanation cannot provide a long-term b a s i s f o r a contin u i n g c o n c e n t r a t i o n on c r e d i t c e i l i n g s . The monetary approach to the balance of payments, to which the Fund has made important c o n t r i b u t i o n s , i s subject to a v a r i e t y of l i m i t a t i o n s and c r i t i cisms, and the evidence concerning i t s v a l i d i t y i s i n c o n c l u s i v e . There are considerable elements of e c l e c t i c i s m i n the Fund's approach and i t i s not pu r e l y monetarist. Nevertheless, i t s underlying p o l i c y model may have c o n t r i b u t e d to a neg l e c t of concern w i t h minimising the costs of adjustment.

Reviewing t h i s chapter, what perhaps emerges most f o r c e f u l l y i s the st r e n g t h of the i n t e r n a l and e x t e r n a l c o n s t r a i n t s against an adaptation of BIF c o n d i t i o n a l i t y . As the Fund i t s e l f has c l e a r l y recognised, the l o g i c of the type of payments d i s e q u i l i b r i u m faced by the t y p i c a l o i l - i m p o r t i n g Idc i n the e a r l y 1930s (a) st r e s s e d the l i m i t a t i o n s on the degree of domestic adjustment that could reasonably ba expected i n the sbort~to-medium-term, but (b> emphasised the increased importance of changes i n the s t r u c t u r e of nroduction and demand. Both the inherent u n c e r t a i n t i e s of the s i t u a t i o n and strong Idc r e s i s t a n c e s to any extension of I!tF performance c r i t e r i a i n t o the realms of supply-oriented, microeconomic p o l i c y measures have made i t d i f f i c u l t , i f not imp o s s i b l e , f o r the Fund to s h i f t the substantive content of i t s c o n d i t i o n a l i t y i n these d i r e c t i o n s .

A profotmd arabiguity i s apparent i n Idc a t t i t u d e s towards c o n d i t i o n a l i t y . On the one hand, they contplain about too much emphasis on demand management and too l i t t l e adaptation to d i f f e r i n g country circumstances. On the other hand, the G-24 i s i n s i s t e n t that performance c r i t e r i a should be few and normally confined to macro-economic v a r i a b l e s , thus l e a v i n g the Fund l i t t l e room to do other than continue vrith the orthodox demand-management programmesit developed to meet other circianstances. One d i f f i c u l t y i s that a move towards supp l y - o r i e n t e d performance c r i t e r i a i s perceived as being a d d i t i o n a l to the conventional demand-oriented t e s t s . This was e x p l i c i t l y the case w i t h the EFF (see Ken3'a chapter, page 47). Developing-country governments might adopt a d i f f e r e n t a t t i t u d e i f they perceived supply-o r i e n t e d c r i t e r i a as a l t e r n a t i v e s to c r e d i t c e i l i n g s and the l i k e . However, we have found no support w i t h i n the Fund management f o r a p o l i c y of t r a d i n g - o f f demand f o r supply c r i t e r i a and i t must be doubted whether the Executive Board vrould sanction such a change.

However, before a rounded vie'r can be formed on t h i s and the v a r i o u s other i s s u e s r a i s e d i n t h i s chapter we need to study how Fund programmes have xrorked out i n p r a c t i c e , what t h e i r Impact has been on n a t i o n a l economies. We turn to t h i s task i n the f o l l o w i n g chapter.

FOOTNOTES

1. D r a f t chapter of an.ODI p r o j e c t on the IMF and economic s t a b i l i s a t i o n i n deve.lcpinn c o u n t r i e s . I should l i k e to thank the s t a f f of the IMF f o r t h e i r a s s i s t a n c e i n the p r e p a r a t i o n of t h i s chapter. Other papers from t h i s p r o j e c t are a v a i l a b l e as ODI Working Papers l i s t e d bsloTT, the charge f o r which i s i n d i c a t e d i n brackets?

1. Extent, causes and consequences of d i s e q u i l i b r i a i n developinr; c o u n t r i e s . Tony K i l l i c k (£2,00)

2. The UtF and the developing c o u n t r i e s ; e v o l v i n g r e l a t i o n s , use of resources and the debate over c o n d i t i o n a l i t y . Graham " i r d (£2.00)

3. The costs and b e n e f i t s of s t a b i l i s a t i o n programmess some L a t i n American experiences. Mary Sutton (£2.00)

4. The IMF and economic ir'anagement i n Fenya. Tony K i l l i c k (£2.00)

In a d d i t i o n , a working papef by J e n n i f e r Sharpley, 'The p o t e n t i a l of domestic s t a b i l i s a t i o n measures i n developing c o u n t r i e s ' i s a v a i l a b l e from the Chr. Michelsen I n s t i t u t e , N~5036 F a n t o f t , Bergen, Norrrav.

2. Indeed, i t could be claimed that access i s t h r i c e ble'=;sed i f i t a l s o results i n increased inflows of c a p i t a l from other sources.

3. From the nress communiqu^ of G-24, 30 September 1979, as reported i n lOT, Sumnary Proceedings of *jinual Meeting, 1979 (Washington, 19P0), p.' 320.

4. This and the f o l l o w i n g tables are based on questionnaires k i n d l y completed by the IMF. In order to p r o t e c t the c o n f i d e n t i a l i t y of the Fund's dealings w i t h i t s meraber-governments, i t vras agreed that the questionnaires should be such as to make country i d e n t i f i c a t i o n impossible. The IMF was requested to s e l e c t a r e p r e s e n t a t i v e sample of n o n - o i l developing countries r e c e i v i n g upper-tranche stand-bys. No country should be i n c l u d e d more than once i n each of the sub-samples and there should be a reasonable geographical spread among the c o t i n t r i e s chosen. The sample excluded cases i n which the c r e d i t was c a n c e l l e d or suspended.

5. ''•Teintraub i n C l i n e and Weintraub, 1981, p. 286.

6. Johnson, 1977, p. 20. See a l s o S p i t z e r i n H o r s e f i e l d , 1969, p. 492, f o r a s i m i l a r statement, and Gold, 1979 pp. 30-34, f o r some e l a b o r a t i o n .

7. See Beveridpe and K e l l y , 1980 Table 1.

8. Faye ^^eitzman provided v a l u a b l e a s s i s t a n c e i n the p r e p a r a t i o n of Table 7-5.

9. The Arusha I n i t i a t i v e was issued by the South-Worth Conference on the I n t e r n a t i o n a l Monetary Systeif and the New I n t e r n a t i o n a l Order, Arusha, J u l y 1980. I t i s reproduced i n Development Dialogue, 1980 No.2, from which the above quoatations are taken.

10. From Executive Board d e c i s i o n 6056-(79/38), March 2 1979; reproduced i n IMF Annual Report 1979, pp. 136-37. See a l s o Gold, op. c i t .

11. For a p u b l i s h e d example, see Beveridge and K e l l y , 1980, vhose methodology hinges e n t i r e l y upon a sharp d i s t i n c t i o n between performance c r i t e r i a and other programme elements.

12. In a t e s t of the s i g n i f i c a n c e of the d i f f e r e n c e bettreen the two sample means, the t-value obtained ( t = 0.290) was f a r below the r e q u i r e d value ( t 2.045) f o r a 5% s i g n i f i c a n c e l e v e l .

13. For an account of these and r e l a t e d trends and prospects see the I l i F ' s annual -Torld Econor.ic Outlook. See a l s o the World Bank's annual World Development Report;, l i n d the OECD's annual t r r i c e - y e a r l y , Economic"Outlook.

14. From ''lorld Economic Outlook, 1980 as summarised i n IMF Survey, 25 June 1980, p. 200.

15. For a u s e f u l account of changing a t t i t u d e s to c o n d i t i o n a l i t y i n the 1970s and 1980s see G u i t i l n , 1931(A) and ( B ) .

16. A recent paper by a member of I-iF s t a f f (Laker, 1980) has shox^ t h a t the economic e f f e c t s of a devaluation can be f u l l y d u p l i c a t e d by f i s c a l p r o x i e s but t h a t i n p r a c t i c e they are not, and that f i s c a l p r o x i e s can r e s u l t i n heavy economic costs which would be avoided by a straightfon»'ard dev a l u a t i o n . On the other hand, the p o l i t i c a l costs to governments may be l a r g e r w i t h a d e v a l u a t i o n .

17. The f o l l o w i n g i s e x t r a c t e d from the paper quoted on page 34.

18. For a b r i e f h i s t o r y of the development of t h i s l i t e r a t u r e see K r e i n i n and O f f i c e r , 1978, chapter 6.

19. The f i r s t formal statement of the model was presented i n Polak, 1957. The IMF, 1977, provides a v a l u a b l e c o l l e c t i o n of key c o n t r i b u t i o n s , i n c l u d i n g a u s e f u l i n t r o d u c t o r y survey by Rhomiberg and K e l l e r .

20. The F r e n k e l and Johnson volume (1976) probably rena i n f the most a u t h o r i t a t i v e statement of academic monetary theory. See K r e i n i n and O f f i c e r (1978) f o r a u s e f u l i n t r o d u c t o r y survey and an extensive b i b l i o g r a p h y . See a l s o Johnson (1976) f o r a l u c i d i n f o r m a l statement of the theory and i t s p o l i c y i m p l i c a t i o n s .

21. L e f f and Sato, 1980, a l s o s t r e s s the p o t e n t i a l l y l a r g e output l o s s a s s o c i a t e d w i t h a r e d u c t i o n of c r e d i t , because they hxmothesise investment to be h i g h l y e l a s t i c w i t h respect to c r e d i t .

22. For statements of t h i s p o i n t of view see Kewlyn (1969); B o l n i c k (1975); Fumess (1975); and Drake (1980).

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