IMF Trade Integration Mechanism: Sweetening a sour deal

24 May 2004

With much fanfare, the Board of the IMF approved the Trade Integration Mechanism (TIM) in April, a new “insurance policy” to entice developing countries back to the multilateral trade table. The mechanism marks a concession by the Fund that trade liberalisation is not beneficial for all countries all of the time, and that funds should be made available to the losers. Importantly however, the TIM makes funds available only for countries which suffer damages as a result of others’ liberalisation; offers no new money; and may require applicants to undergo additional structural adjustment.

Qualification for TIM funds would be limited to countries that are hurt when other countries increase market access or remove trade subsidies. This would, for example, include countries which lose preferential market access, or food-importing countries which lose the benefit of subsidised agricultural products. The Fund says that countries are unlikely to suffer from their own liberalisation but if they do it is covered by existing Fund programmes. A further qualification restricts the mechanism’s use to damages inflicted by changes in the multilateral regime only. Reflecting the Fund’s bias against sub-international agreements, changes in regional or south-south agreements do not qualify for the TIM.

TIM funds are only available as loans, coming as part of a conventional arrangement with the Fund. Recipients will add to their existing debt load for damages caused by a restructuring in the global trade system beyond their control. The time given to repay the debt and the interest rate charged will depend on which arrangement a country holds with the Fund. Low-income countries will be charged concessional rates while middle-income countries will pay market rates. Disbursement of the TIM will depend on countries implementing at least the same number of conditions that are demanded by the larger programme: “In some cases, however, conditionality specifically related to the adjustments that the TIM is designed to support may be called for.”

its focus is too limited

There is some question of whether countries will ever receive any money under the TIM at all, or indeed if this was ever the intention. Critics point to the experience with the Fund’s Compensatory Financing Facility (CFF), a programme established in the 1960s to assist countries hurt by fluctuating world commodity prices. The CFF has remained virtually unused because countries have not wanted to go into debt for damages incurred as a result of an unfair global trading system. Timeliness and inflexibility have also restricted the CFF in practice. The TIM may suffer from the same problems.

An additional concern lies in the methodology used to calculate the damages caused to a country by others’ liberalisation. Based on the Fund’s enthusiastic support for all forms of trade liberalisation, Fund economists are prone to seeing any negative impacts of liberalisation as symptoms of poor or incomplete policy implementation. Witness Acting Managing Director Anne Krueger’s recent comments: “The clear evidence is that only a very small number of countries will ever find themselves needing the assistance that the TIM offers. But if its existence helps provide policymakers in those countries with the assurance they need, it should make it much easier for them to embrace the Doha Development Agenda”.

A number of developing country members, including Mauritius, Bangladesh, Jamaica and Colombia, reacted negatively to the presentation of the TIM to the WTO General Council 18 May, noting that its focus on balance of payment problems was too limited. The Kenyan representative feared that the TIM might be a diversion from the more important issue of market access: “if such contradictions are left unresolved swift solutions that are prescribed will make matters worse for developing countries.”