IMF change of bylaws gives it unprecedented power over national capital controls
October 1996
As citizens and parliaments around the world have awoken to the risks posed by the Multilateral Agreement on Investment (MAI), a similar but more secretive agreement is being pursued by the IMF. The IMF is trying to expand its mandate by seeking global authority over national governments' ability to control capital in and outflows. In an effort to certify this expansion, IMF management is actively, be it very privately, negotiating an important amendment of its Articles of Agreement which would give the IMF the power to require member countries to commit to full capital account liberalization. The IMF justifies this new grab for power by claiming that: 1) the benefits of liberalizing the capital account outweigh the potential costs; and 2) only the IMF can guarantee that capital account liberalization is carried out in an orderly, non- disruptive way. But as recently experienced by the citizens of Mexico and East Asia, 1) the demonstrated costs of speculation overshadow the theoretical benefits of unregulated capital flows; and 2) the IMF's dismal track record in stabilizing economies inspires little confidence in the institution.
The MAI's quest to remove all barriers to capital flows
To guard against the worst effects of speculative foreign investment and to avoid financial crises, some developing countries put controls on inflows of foreign money. The aim is to limit the flows to levels that don't overwhelm the domestic economy, and to screen out short-term speculative investments in favor of longer-term commitment. Despite the value of capital controls, the MAI would establish a general right for foreign investors to make portfolio investments free from any restrictions or government oversight.
Another way to deal with the risks of speculative capital flows is to regulate capital outflows. Chile, for example, requires foreign investors to keep initial investments in the country for at least one year, although earnings from the investment can be taken out at will. The Chilean government has imposed this requirement so that investors cannot come in for a short time just to profit from currency fluctuations or other forms of speculation. According to the MAI, the ability to make financial transfers is considered a core investor right. Under the proposed agreement, investors would be able to withdraw their investments and profits without government oversight.
Changing the IMF's bylaws to expand control over capital account liberalization
By amending its Articles of Agreement, the IMF is advancing the same agenda of capital deregulation as promoted by the MAI. Possibly as soon as its Spring meeting in April, IMF management will seek an amendment of Article VIII and XIV of the Articles of Agreement. Today, these articles apply to a nation's current account and oblige members to refrain from imposing any restrictions on payments and transfers for trade and international business transactions. Countries' requests to maintain some trade barriers require IMF approval, as do macroeconomic policy decisions tied to full trade liberalization.
Amending the Articles of Agreement to include capital account liberalization under the general obligations of the Fund would commit members to fully liberalize their capital accounts that is, remove all barriers to international capital flows. This amendment would extend the same power the IMF has over a nation's current account to its capital account. The IMF would be able to dictate the extent of the controls a country may maintain (for the time being), the rate of the capital account liberalization, and changes in macroeconomic policy. In other words, the IMF would become the ultimate authority on capital account liberalization.
The IMF's new authority over capital accounts would vastly expand the IMF's mandate. The IMF's current mandate gives it power over a very narrow category of international economic regulation. Under the IMF's expanded mandate, a more expansive and loosely defined set of government policies can be overruled or outlawed by the Fund.
All governments regulate flows of money, products, and services across their borders. These regulations of international economic transactions can be divided into three categories:
Trade barriers: These typically take the form of tariffs, quotas and subsidies intended to foster domestic production. The Fund is ideologically committed to removing trade barriers but can only act on its beliefs in countries undergoing a structural adjustment or stabilization program by conditioning the IMF loan approval on the removal of specific trade barriers;
Restrictions on payments relating to trade and investment deals: Governments sometimes impose such restrictions to prevent domestic companies' payments for imports or foreign companies' repatriated profits from depleting a nation's foreign reserves. Under the general membership obligations of the current Articles of Agreement, the IMF has the power to approve or disapprove all of these restrictions on payments;
Investment controls (capital accounts): These include limitations on the ability of foreign corporations to invest in certain economic sectors and limitations on foreign investors' ability to purchase stocks or bonds, make bank loans, or issue bonds. As with trade, the IMF currently can only force governments to limit these restrictions in countries undergoing structural adjustment.
By amending its Articles of Agreement, the IMF is seeking to expand its power over all investment controls. The IMF's current controls on payments, while potentially important, merely adjust the way in which trade and investment transactions are paid. Trade and investment policies are the primary means by which governments regulate economic integration with other countries. Giving the IMF control over capital accounts (which essentially is national investment policy) would allow the fund to move closer to the position of ultimate regulator of the global economy. It would also give the fund a veto over such sensitive social policies as foreign ownership of the media or promotion of local businesses over multinational corporations.
The IMF manufacturing a sphere of influence
At a time when the IMF is being criticized for having outlived its purpose, this new mandate would legitimize its existence in a rapidly changing global financial world. Most significantly, it would finally provide the IMF with power and control over economic policy decisions in emerging markets and East and Central European countries. In the past, these countries' rejection of IMF assistance severely limited the IMF's influence over their macroeconomic policy decisions. Now, any country that has capital account controls would have to relinquish their decision making power over degree of capital movements to the IMF. They would have to negotiate with and abide by the IMF's targets for capital account liberalization and the policy changes required to promote further liberalization. If a country chooses not to follow IMF advice, the country would lose its access to IMF funding and, therefore, would never have access to future financial assistance as part of an IMF stabilization, structural adjustment or bailout program. Furthermore, losing the IMF stamp of approval severely limits access to private capital.
The IMF in search of a rationale behind expanding its power
According to the IMF, extending its power over the design of the macroeconomic policy framework for capital account liberalization is supposed to reduce the risk of inappropriate government economic policies that would shock market confidence and lead to the flight of money out of the country. With the IMF in charge, inappropriate market swings would be avoided as the institution would prescribe the right policy framework. In other words, the IMF maintains that only its own programs are sound, and need to be implemented world wide in order to ensure global financial stability.
Emphasizing the need for transparency, the IMF's new Special Data Dissemination Standard (SDDS) and the associated Dissemination Standard Bulletin Board on the Internet also gives the IMF a promotional boost. The SDDS requires governments to provide better and more timely information to the markets which would lead to earlier and more appropriate market behavior. The IMF regards its SDDS as another critical contribution the IMF is making to a more orderly liberalization of capital movements.
Finally, the IMF justifies its critical role in providing surveillance based on an analysis of a country's economic situation. The IMF Article IV consultations analyze the current economic situation and provide IMF Board with recommendations for needed economic policy reforms. The IMF suggests that it would need to strengthen its surveillance function in order to detect warning signals of future crises. It is to be understood, though, that these discussions would continue in secret as the market tends to overreact to IMF concerns.
The IMF searches for more money
Last but not least, the IMF's budget would need a vast expansion. In the words of IMF Deputy Managing Director Stanley Fisher, "no matter how much information is provided to markets, surveillance is strengthened, prudential regulations are refined, and the government policies will improve, crises will happen." What Fisher is referring to is that markets do not always act appropriately, they tend to act too late, too early or excessively. Contagion effects are all too common, irrational and the result of herd behavior or an inaccurate appraisal of the underlying economic situation. In order to avoid the possibly devastating consequences of inappropriate capital market reactions, it is the role of the IMF to bail out governments and to "correct maladjustments in countries' balance of payments without resorting to measures destructive of national and international prosperity."
The IMF needs more money because increased capital account liberalization will increase the scale of international capital flows. Any financial crisis, therefore most likely will be of a larger scale than previous crises. But the IMF expects fewer crises to require official funding in the future as its authority over countries' capital account liberalization process should also increase the efficiency of international capital markets. In other words, the IMF argues that capital account liberalization will increase the likelihood of larger, even if fewer, crises. A resource increase is needed to ensure that the IMF remains up to the task of promoting orderly liberalization of international capital markets.
Finally, the budget increase has the important side effect of strengthening the IMF's power in requiring policy changes. The IMF needs to be able to guarantee it can finance any future bailout of its member countries in order to force countries to follow IMF advice. With the quota increase, the IMF can make its case that future bailouts will depend on the governments' willingness to implement IMF imposed capital account liberalization policies.
Who will pay the price?
The IMF's amendment of its Articles of Agreement is subsidized by people both in the North and the South. U.S. taxpayers are called on to give more money to the IMF to bail out reckless investors and bankers. Without public debate, the US public is asked to endorse a policy that will create more financial crises and force us to bail out investors who were reaping great profits from house-of-cards schemes. The IMF's approach towards capital account liberalization provides a cushy deal for corporations and investors, but leaves little incentive for lenders to evaluate risk fully and little hope that the taxpayer won't be called upon repeatedly to rescue failing economies.
Finally, while the financial crises might be short lived, people in these countries will be paying back for a long time to come. The IMF bailout of countries is actually a bailout of private investors and commercial banks. The IMF socializes private debt. In the case of East Asia, foreign loans to private companies are now guaranteed by the government, even though these loans were privately contracted. The private sector's foreign debt, that can no longer be serviced, will ultimately be borne by the citizens of Thailand, Indonesia, and South Korea. Without the IMF bailout, foreign banks would have had to absorb more of the losses. With the IMF bailout scheme most of international banks' financial responsibility has been absolved. Furthermore, unlike private debt, debt to the IMF cannot be renegotiated, sold at a discount on the secondary market, reduced, or forgiven. And, the IMF required economic stamp of approval, to attract foreign capital, ensures that governments pay back their loans on time at the appropriate rate.
The official debt will then be paid back through an economic reform program subsidized by the local people who did not assume the financial risk. In fact, the IMF "solution" has ensured that foreign lenders, the actors that assumed the financial risk, face no losses while squeezing the East Asian population for repayment of IMF loans. Through this approach, the IMF is violating Article I of its Articles of Agreement, which mandates the IMF to help member countries in need so that they won't have to resort to "measures destructive of national and international prosperity." Measures promoting job loss, economic depression, and destruction of natural resources are destructive of national prosperity.
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