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Balance-of-payments financing: evolution of a regime

Published online by Cambridge University Press:  22 May 2009

Benjamin J. Cohen
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The regime for payments financing embedded in the postwar Bretton Woods system was based on the principle, formally articulated in the Charter of the International Monetary Fund (IMF), that nations should be assured of an adequate but not unlimited supply of supplementary financing for balance-of-payments purposes. Norms included the obligation to avoid policies inconsistent with the IMF Charter (i.e., to play by the agreed rules of the game). In the 1970s the regime seemingly underwent profound change, as the private credit markets emerged as an increasingly important rival to the IMF as a source of payments financing. Nonetheless, this change fell short of a transformation of kind, insofar as the Fund continues to play a role as informal certifier of creditworthiness in the markets. Rather, it represents an example of ‘norm-governed change.’ Despite greater ambiguity in rules and decision-making procedures, a strong element of continuity in basic principles and norms remains.

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International Organization , Volume 36 , Issue 2 , Spring 1982 , pp. 457 - 478
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Copyright © The IO Foundation 1982

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References

1 Carli, Guido, Why Banks Are Unpopular, The 1976 Per Jacobsson Lecture (Washington: IMF, 1976), pp. 6, 8Google Scholar.

2 Towards Full Employment and Price Stability, A Report to the OECD by a Group of Independent Experts, chaired by Paul Mc Cracken (Paris: OECD, 1977), para. 159. In a still longer historical perspective, Charles Kindleberger has pointed out that—on an intermittent basis—private bankers at least since the Medici have made a practice of last-resort lending to governments at times of financial crisis; see his Manias, Panics, and Crashes: A History of Financial Crises (New York: Basic Books, 1978)Google Scholar, chap. 10. Only with the growth of the Eurocurrency market, however, has balance-of-payments lending from private sources tended to become a regular practice.

3 Comprehensive histories of the wartime discussions and Bretton Woods conference can be found in Horsefield, J. Keith, ed., The International Monetary Fund, 1945–1965, vol. 1: Chronicle (Washington: IMF, 1969)Google Scholar, Part I; and Gardner, Richard N., Sterling-Dollar Diplomacy (Oxford: Clarendon Press, 1956), chaps. 5, 7Google Scholar.

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6 Although the original Fund charter contained a provision prohibiting members in most circumstances from borrowing more than 25% of quota in any twelve-month period, in practice, as IMF operations evolved, this provision was frequently waived and was finally eliminated entirely in the Second Amendment of the Articles of Agreement of the IMF in 1976.

7 As a result of the Second Amendment in 1976, gold was eliminated from the Fund system of subscriptions and quotas. In lieu of gold, members now subscribe Special Drawing Rights or national currencies; and in lieu of a gold tranche, members now have a reserve tranche.

8 Articles of Agreement of the International Monetary Fund, Art. V., Section 3 (a) (i). The original Articles are reprinted in Horsefield, The IMF, vol. 3: Documents, pp. 185–214.

9 Articles of Agreement, Art. I (iii) and (v).

10 For the evolution of the concept of policy conditionality, see Horsefield, The IMF, vol. 2: Analysis, chaps. 18, 20, 21, 23; Gold, Joseph, Conditionality, IMF Pamphlet Series, no. 31 (Washington: IMF, 1979)Google Scholar; Manuel Guitian, “Fund Conditionality and the International Adjustment Process: The Early Period, 1950–70,” Finance and Development 17, 4 (December 1980), pp. 23–27; and Frank, A.Southard, Jr, The Evolution of the International Monetary Fund, Essays in International Finance, no. 135 (Princeton: Princeton University, International Finance Section, 1979), pp. 15–21Google Scholar.

11 Formally, the Fund is governed by its Board of Governors, consisting of one Governor (usually the Finance Minister or central-bank Governor) from each member-country. However, since the Board of Governors only meets once a year, in practice most of its powers have been delegated to the Executive Board, which functions in continuous session. Executive Directors now (1981) number twenty-two, seven representing the five largest members of the Fund together with Saudi Arabia (one of the Fund's two largest creditors) and China, and fifteen representing various constituencies comprising collectively the remaining membership.

12 Decision No. 284–4, 10 March 1948, reprinted in Horsefield, The IMF, 3:227. Italics supplied.

13 Decision No. 102-(52/ll), 13 February 1952, reprinted in Horsefield, The IMF, 3:228.

14 Ibid., p. 230.

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16 For a model stand-by arrangement, see Gold, Joseph, Financial Assistance by the International Monetary Fund: Law and Practice, IMF Pamphlet Series, no. 27 (Washington: IMF, 1979), Appendix BGoogle Scholar.

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19 Articles of Agreement, Art. V, Section 7.

20 See, e. g., Southard, , Evolution of IMF, pp. 16–17Google Scholar.

21 Inadequacy of resources was not the only reason for the Fund's meager contribution during these years. In addition, there was the running debate over conditionality, which was not finally resolved until the Executive Board's landmark 1952 decision. See Southard, , Evolution of IMF, p. 17Google Scholar.

22 The text of the arrangement is reprinted in Horsefield, The IMF, 3:246–56.

23 For more detail on EPU, see Triffln, Robert, Europe and the Money Muddle (New Haven: Yale University Press, 1957), chaps. 5–6Google Scholar.

24 For more detail on the various support operations arranged for Britain during this period, see Cohen, Benjamin J., The Future of Sterling as an International Currency (London: Macmillan, 1971), pp. 97–98Google Scholar.

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26 In fact, OPEC's absorptive capacity after the first round of oil price increases in 1973–74 surpassed expectations, and by 1978 its investable surplus (which averaged some $45 billion annually, 1974–76) had fallen to below $10 billion. But with the second round of price increases starting in late 1978, the surplus soared to $68 billion in 1979 and $112 billion in 1980. Most observers expect this OPEC surplus to persist for much longer. See, e. g., Morgan Guaranty Trust Company, World Financial Markets, 09 1980, pp. 1–13, and May 1981, pp. 3–5Google Scholar; Citibank Monthly Economic Letter, April 1981, pp. 5–6; IMF, World Economic Outlook (Washington, D. C., 06 1981)Google Scholar.

27 More recently, the Compensatory Financing Facility has been liberalized to permit borrowings up to 100% of quota.

28 For more detail on the Fund's various special facilities, see Gold, , Financial Assistance; and IMF Survey, 05 1981Google Scholar, “Supplement on the Fund,” pp. 6–10. It should be noted that of these facilities, only three—the Compensatory Financing Facility, the Buffer Stock Financing Facility, and the Extended Fund Facility-represent permanent additions to the IMF's lending authority.

28 For more detail, see Cohen, Benjamin J., Banks and the Balance of Payments, in collaboration with Fabio Basagni (Montclair, N.J.: Allenheld, Osmun, 1981), chap. 1Google Scholar.

30 Ibid.

31 Guth, Wilfried, in Guth, and SirLewis, Arthur, The International Monetary System in Operation, The 1977 Per Jacobsson Lecture (Washington: IMF, 1977), p. 25Google Scholar.

32 Burns, Arthur F., “The Need for Order in International Finance,” International Banking Operations, Hearings before the Subcommittee on Financial Institutions Supervision, Regulation, and Insurance of U. S., Congress, House Committee on Banking, Finance and Urban Affairs (Washington, D.C., 03–04 1977), p. 860Google Scholar.

33 IMF, Annual Report, 1977, p. 41Google Scholar.

34 For more detail on the Peruvian and other examples cited in this section, see Cohen, Banks and the Balance of Payments, chap. 4 and Appendix.

35 Kirbyshire, J. A., “Should Developments in the Euro-Markets be a Source of Concern to Regulatory Authorities?,” Bank of England Quarterly Bulletin 17, 1 (03 1977), p. 44Google Scholar.

36 See, e. g., Magnifico, Giovanni, “The Real Role of the IMF,” Euromoney, 10 1977, pp. 141–44Google Scholar; Charles Lipson, “The IMF, Commercial Banks, and Third World Debts,” in Aronson, Jonathan David, ed., Debt and the Less Developed Countries (Boulder, Col.: Westview Press, 1979); andGoogle ScholarNeu, Carl R., “The International Monetary Fund and LDC Debt,” in Franko, Lawrence G. and Seiber, Marilyn J., eds. Developing Country Debt (New York: Pergamon Press, 1979)Google Scholar.

37 Hill, Richard D., International Debt, Hearings before the Subcommittee on International Finance of U. S., Congress, House Committee on Banking, Housing and Urban Affairs (Washington, D. C., 1977), p. 127Google Scholar.

38 There seems little to be done to reverse this erosion, at least by way of formal reforms, without losing the acknowledged benefits of private lending for balance-of-payments purposes. See Cohen, , Banks and the Balance of Payments, pp. 171–76Google Scholar.

38 See, e. g., Kenen, Peter B., Giant Among Nations (New York: Harcourt, Brace, 1960), pp. 93–94Google Scholar.

40 See, e. g., Group of 24, Outline for a Program of Action on International Monetary Reform, reprinted in IMF Survey, 15 October 1979, pp. 319–23; North-South: A Programme for Survival, Report of the Independent Commission on International Development Issues, chaired by Willy Brandt (Cambridge: MIT Press, 1980), chap. 13; and Dell, Sidney and Lawrence, Roger, The Balance of Payments Adjustment Process in Developing Countries (New York: Pergamon Press, 1980)Google Scholar. I have associated myself with this point of view in Cohen, Benjamin J., “Balancing the System in the 1980s: Private Banks and the IMF,” in Hufbauer, Gary Clyde, ed., The International Framework for Money and Banking in the 1980s (Washington: International Law Institute, 1981)Google Scholar.

41 See IMF Survey, 19 March 1979, pp. 82–83; and Gold, , Conditionality, pp. 14–37Google Scholar.

42 In practice the limit is even higher, since the 600% figure does not take into account loans from either the Compensatory Financing Facility or the Buffer Stock Financing Facility. See IMF Survey, May 1981, “Supplement on the Fund,” p. 10. The first country to borrow up to this new maximum was Turkey, in June 1980. See IMF Survey, 25 June 1980, p. 177. The IMF had never previously lent more than 400% of a member's quota.

43 Wright, E. Peter, “World Bank Lending for Structural Adjustment,” Finance and Development, 09 1980, p. 21Google Scholar.