The past decade has witnessed the systematic reduction of barriers to the free flow of goods, services, and capital across national borders. While these changes have facilitated faster economic growth and greater prosperity, they also pose new challenges. Developed and developing countries alike are now more exposed to dramatic shifts in their external position brought about by rapid changes in market sentiment. Balance of payments crises have become a familiar--if unwelcome--feature of the global economic landscape.
The Mexican peso crisis of 1994, the Asian financial crisis of 1997, and the collapse of the Russian ruble this past summer all point to the need for new mechanisms which will more effectively protect the stability of the international monetary system. The International Monetary Fund's (IMF) 1998 Annual Meetings, held in Washington, D.C. during the first week of October, 1998, provided a forum for the IMF and its member countries to address this issue. The meetings reviewed a wide range of initiatives that seek to strengthen the "architecture" of the international monetary system.
This Article discusses the principal features of these initiatives. It first examines the preventive features of the initiatives and subsequently discusses their crisis management features. The Article ends with a brief conclusion.
II. STRENGTHENING THE INTERNATIONAL ARCHITECTURE
The IMF is responsible for preserving the stability of the international monetary system. An important purpose of the Fund, as set out in the Fund's Articles of Agreement, is "to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation."(1) Strengthening the architecture of the international monetary system will enable the Fund to accomplish its purposes more effectively.
The Fund's work on strengthening the architecture is ongoing. Many of the relevant issues have been under review in the Fund for much of the past year. While a number of the strengthened architecture features are already in place, many others are still under discussion.
A. The Preventive Features
The preventive features of the initiatives seek to forestall balance of payments crises before they emerge. Prevention rests primarily on three interdependent bases: (1) strengthening Fund surveillance; (2) strengthening the financial systems of member countries; and (3) promoting transparency and accountability.
1. Strengthening Fund Surveillance
Surveillance is a principal mechanism through which the Fund seeks to preserve the stability of the international monetary system. Since the abolition of the par value system and the emergence of floating exchange rates in the 1970s,(2) exchange stability has been preserved primarily through consultation and collaboration between the Fund and its members. Under Article IV, Section 1 of the Fund's Articles, each member country undertakes "to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates."(3) For its part, the Fund is required to exercise "firm surveillance over the exchange rate policies of members."(4)
Surveillance principally takes the form of a system of annual "Article IV consultations" between each member and the Fund.(5) These consultations involve a comprehensive analysis of a member's economy and economic policies.(6) The analysis is prepared by the Fund staff after a series of extensive meetings with the authorities of a member, and is then discussed by the Fund's Executive Board.(7)
Article IV consultations recognize that exchange stability will be most effectively ensured if each Fund member pursues prudent economic policies that are directed towards the promotion of exchange stability. To this end, these consultations normally conclude with an appraisal by the Fund's Executive Board of the member's economic and financial policies. …