CAN IMF BRING ORDER TO EXCHANGE MARKETS?

6:57 AM May 5, 1993

CAN IMF BRING ORDER TO EXCHANGE MARKETS?
Geneva 5 May (Chakravarthi Raghavan) -- When the meetings last week in Washington of the Group of Seven, the Group of Ten, the Group of 24 and the combination of all of them (in the Interim Committee of the International Monetary Fund) ended with the statements and communiques, news accounts spoke of the new global cooperation and the IMF being called upon to exercise new responsibility to head off repetition of the recent turmoil on currency markets.

Perhaps the currency markets and 'speculators' would be impressed, but any genuine investor banking on this and planning his investments would soon burn his fingers. None of the finance ministers or the IMF/Bank officials would order their own private affairs on this premise.

There was little clue on how the IMF, with less instruments on hand than in the days of the fixed exchange rates and international disciplines, would achieve the task assigned to it.

The final communique of the Interim Committee spoke of members agreeing to "strengthen our collaboration" with the Fund as "central international monetary financial institution".

Under the IMF articles, the Fund staff already carry out role of 'surveillance' of member countries' financial and economic policies and holds discussions with them.

In his speech to the Interim Committee, IMF Managing Director Michel Camdessus said "Our ongoing efforts to strengthen surveillance are built upon three pillars: more continuity and flexibility in the (IMF) Board's oversight activities; more sharply focused staff work, especially as regards exchange rates and their consistency with macro-economic policy fundamentals; and enhanced cooperation with individual members"

Camdessus spoke of IMF taking steps to improve informal contacts with regional groupings, including the EC and "seeking to encourage members to remove remaining exchange restrictions and adopt the convertibility provisions" of the Fund Charter, of "meaningful and informed dialogue at appropriate senior policy-making level" in bilateral discussions with national authorities and, in the case of industrial countries, "a more informed understanding of how policy is responding to market pressures through provision of appropriate information on foreign exchange intervention on a strictly confidential basis."

If there were any doubts, finance ministers did not express them. And with developing country finance ministers now advocating more orthodoxy and without the kind of private doubts that even Fund/Bank economists now begin to voice, there were none to challenge or question it.

Only a speech by UNCTAD raised some questions and cast some scepticism.

Perhaps, the finance ministers gathered in Washington genuinely believe that all this talk would by themselves curb speculation on the foreign exchange markets, and the countries, particularly the major industrial countries would cooperate and achieve through dialogue what, within Europe and in the EC context, the dialogue among the Central Banks or that of finance ministers of the rest of EC with Germany and Bundesbank failed to achieve and forced the Italian Lira and the British Pound to get out of the EC's Exchange Rate Mechanism (ERM).

But with the combined official reserves of countries a small percentage of what is "traded" on the currency markets by foreign exchange dealers, banks, insurance companies and pension funds etc trying to make a profit or increase the capital value, the limited resources that central banks can bring to bear, individually or collectively, won't impress the markets one bit, one analyst commented.

Nor are currency movements and relative prices influenced by the fundamentals of a country's economy.

Whether in terms of inflation or control of government expenditures or determination of a government to follow a steadfast course or other tests and norms, the French currency was clearly stronger than the German or other continental and other currencies. Yet it saw severe assaults on it and, after expending a very substantial portion of its reservers and help from the Bundesbank, the scores were even between the French authorities and the markets, while the public paid for the high interest rates through unemployment.

When the Bretton Woods institutions were founded, there was the argument between White (for the US) and Keynes about the roles and responsibilities of the surplus and deficit countries and provisions to enforce automatic discipline on the surplus countries.

The United States, at that time the only surplus country, was not ready to accept this and give up its sovereignty of decision-making in national economic policy (whether budget, finance or trade)

There was no problem in the beginning when the US was providing Marshal aid to Europe, and accepting discriminatory trade practices against itself from Europe to strengthen their economies.

But as Europe recovered and, particularly as a result of the Vietnam War, Europeans began creating trade surpluses, acquiring and holding dollars or gold, strains developed.

In the result, while the Fund was able to exercise discipline on the deficit countries (except the USA which could issue dollars and 'pay' its deficit), through the conditionality of its lending (for devaluation, deficit reduction and other macroeconomic policies), it had no leverage whatsoever on the surplus countries (Germany or Japan or France) -- in forcing them to revalue and thus import more and export less.

At that time private international liquidity and reserves were a moiety of the official ones.

All this was reversed after the 1971 "Nixon Shock" (as a recent Japanese study has put it) when President Nixon repudiated the US obligations under the IMF charter, and subsequently in the Jamaica agreement for amendments to the IMF articles this was all regularised through 'floating currencies'.

The oil price 'shocks' of 1973 and 1979, while it piled up a lot of funds with the transnational banking system and thus unleashing private liquidity in the world, the way had actually been shown much before through the Eurocurrency markets that started with the Soviet Union trying to park its 'dollars' and other foreign exchange currencies beyond the reach of the US and its 'sequestering' them.

And with the major industrial countries able to raise funds on the private capital markets, and with mutual swap arrangements, the IMF lost any influence and its only influence and control was over the developing countries (and now eastern Europe) to safeguard the interests of the transnational banks and their credits.

With private liquidity and reservers several times more than any combined official reserves of the world, and with free movement of capital (and IMF advocating removing even existing ones), there are no financial instruments easily available to tame the foreign exchange markets or bring about the symmetry between the surplus and deficit countries.

The attempts of Europe to create relative stability through the European Exchange Rate Mechanism and, through the Maastricht treaty, to create a European Monetary Union have so far failed, for the same reason namely lack of symmetry between surplus and deficit countries.

Can the IMF, through private dialogue now succeed to create the pressures on the surplus countries that public dialogue and pressures failed over the last few years?

By its advocacy of reducing even further, the restrictions on capital movements and achieving the full convertibility, the Fund clearly would or should oppose controls or restrictions on short-term capital movements -- such as in bringing through central banks considerable discipline on the transactions of banks on foreign exchange markets and their moving funds in and out of countries and parking them in offshore markets to escape the disciplines of the central banks.

The only instrument left is thus 'trade'-- to create international trade instruments authorising the imposition of high tariffs on the goods imported from the countries with structural surpluses or for countries to unilaterally restrict imports, rather than liberalize trade.

Apart from the fact that this would need changes in the GATT system, for the IMF (and the GATT) and their economists even to contemplate it would mean giving up another dogma: unilateral trade liberalization benefits the liberalizing country, a text-book theory view that can be thrust on the Third World, but one which few governments or parliaments of the North would accept.