The UK government is leading the effort to enable the IMF to pursue capital account liberalisation (CAL) in its member countries. This will require amending Article 1 of the Fund’s articles of agreement.
Executive directors (EDs) have agreed a proposed redraft which would give the IMF a legal basis to respond to balance of payments problems originating in countries’ capital accounts, but not an explicit role in supervising CAL more universally. The changes to Article 1 will not be applied until agreement is reached on whether to introduce further new articles giving powers to pursue CAL in all countries.
G24 Southern governments accept the need for strengthened international cooperation and changes to the IMF‘s articles of agreement, but have called for a task force to review the global financial system. This would examine international financial institutions’ capacity to prevent and respond to crises, and suggest how financial burdens can be shared fairly amongst private creditors, borrowers and governments.
NGOs want to stall changes to the IMF‘s articles for the following reasons:
- full CAL is not desirable for all countries. Even the World Bank Chief Economist, stated recently (see article below) that financial market liberalisation may increase instability;
- international capital markets do not operate rationally and will not be made to do so just through measures such as providing more information;
- the IMF‘s powers should not increase so soon after it has been severely criticised for its response to the Asian crisis;
- countries without liberalised financial systems (such as China and Taiwan) were less affected by the Asian financial crisis;
- there must be action to make investors share responsibility in the event of financial crises;
- talks have stalled on the Multilateral Agreement on Investment, so the IMF may be used as a backdoor means to press for open investment markets and liberalised capital accounts, and;
- countries that feel ready can and do liberalise their capital accounts without needing IMF cajolement.
The IMF hopes EDs will agree on the changes by the annual meetings in October, but this is unlikely. It will need an 85% majority of the Board, followed by votes in IMF member country parliaments. There has been considerable debate amongst EDs about the role and extent of the IMF‘s powers. Some governments – led by the UK and the US – want liberalisation speeded up, whilst others think the IMF might have a useful role to play in preventing countries from liberalising too soon. There is also extensive debate about what defines a capital flow or a restriction. Should, for example, restrictions on foreign ownership of domestic firms be considered a restriction in this context?
Philippe Maystadt, the Belgian Chair of the IMF‘s Interim Committee, favours capital account liberalisation with “prudential measures”, possibly including permanent controls on short-term capital such as those used by Chile.
In a reply to a letter from UK NGOs, the UK government stated that it tends to oppose controls as “they are generally inefficient and costly for an economy, and ineffective if sustained for long”, although it states that “it will often be wise for countries that have controls to delay removing restrictions on short term capital flows until a late stage in the process of liberalisation. And in some cases a judicious use of prudential controls on short term capital inflows, such as those which have been adopted by Chile, can help reduce the volume of short term movements while also acting to reduce banking system vulnerability.”
Proposals, reports and letters available from the Bretton Woods Project.