INT’L FINANCIAL SYSTEM JOINT CLASS SIX

IMF CHARTER & MONETARY SOVEREIGNTY LAW

Prof. David K. Linnan UI-UGM-USC-UNDIPUniv. of South Carolina Joint Videoconferenced ClassSchool of Law September 19, 2002

CLASS LISTSERV ADMINJoining class LISTSERV1) Send e-mail to

listserv@vm.sc.edu

2) In message body

Subscribe laws-817 [first name] [last name]

3) Course listserv to send messages will be

laws-817@vm.sc.edu

CLASS LISTSERV ADMIN

Upon subscribing from e-mail address where you want to receive listserv messages, you will receive information message on using listserv

Listserv purposes are for direct student discussions and for faculty to distribute materials (like class powerpoint presentations)

Further information on listservs otherwise at

http://www.sc.edu/ars/handouts/listserv.html

Class projects adminGrading will be organized locally at each

participating university. For US students one project should be in the form of a mock negotiation during the second half of the course, carried out mostly via internet between US and Indonesian student groups representing IFIs and a hypothetical country.

The other US group project will involve the analytical examination of a specified past financial crisis to answer the question what went wrong and why, and how financial sector regulation should or would not have made a difference in its resolution.

Traditional Monetary SovereigntyCustomary Law

Pre-IMF treaty (pre-1945), a country’s money was defined as an attribute of sovereignty, meaning essentially an absolute ability to fix exchange rates, convertibility, etc.

(Serbian and Brazilian Loan Cases, PICJ gold convertibility cases)

Monetary Sovereignty & IMFIMF Articles of Agreement as Treaty

While we characterize many IMF-based actitivities as “policy” oriented rather than “legal rule” oriented, treaty does overcome customary law so issue on a more exact basis how has the IMF agreement as treaty changed matters

Monetary Sovereignty & IMFIMF Agreement as Treaty

Idea that IMF Articles of Agreement contain both an institutional structure (IMF the organization) and substantive principles (arguably changing things like monetary sovereignty)

Int’l law concept of treaty-charter as with UN Charter creating autonomous entity (like a constitution), but with ultra vires issues

Monetary Sovereignty & IMFOriginal IMF Par Value System

Definite limitation to extent fixed exchange rates under par value system, subject to notice process for changes but limiting, for example competitive devaluations

But no jurisdiction over capital controls

Monetary Sovereignty & IMFLook at Current IMF Articles, but first what is at stake and

how far might monetary sovereignty go?

Power to define a monetary unit and its value (official versus black market exchange rates)

Power under legal tender laws to require that payments be accepted at nominal value

Public banking system supervision in territorial state issuing currency (interest rates, credit policy and money supply control)

Power also to determine convertibility or non-convertibility (trade issues, current versus capital account, maintaining control over currency by not letting too much overseas)

IMF TREATYArticle I (Purposes– remember 1930s background)

1) Promote monetary cooperation (machinery for consultation & collaboration on problems)

2) To facilitate expansion & balanced growth of international trade, contributing to high employment and real income in development of member productive resources

3) To promote exchange stability, to maintain orderly exchange arrangements, to avoid competitive devaluations

IMF TREATYArticle I (cont’d)4) To establish multilateral system of payments

among members for current transactions and elimination of foreign exchange restrictions hampering trade

5) Make IMF resources temporarily available “under adequate safeguards” to members experiencing temporary (balance of payment) difficulties without resort to destructive measures

6) To lessen disequilibrium in int’l balance of payments

IMF TREATYTracking Purposes Against Monetary Sovereignty

1) Promote monetary cooperation (machinery for consultation & collaboration on problems)

Procedural rather than substantive, but casts as a policy discussion & coordination problem rather than being rule oriented

IMF TREATYTracking Purposes Against Monetary Sovereignty

(cont’d)

2) To facilitate expansion & balanced growth of international trade, contributing to high employment and real income in development of member productive resources

1930s theory, but issues whether policies can and do encourage in terms of now flexible exchange rates and monetary policy issues (interest rates)

IMF TREATYTracking Purposes Against Monetary Sovereignty

(cont’d)

3) To promote exchange stability, to maintain orderly exchange arrangements, to avoid competitive devaluations

Worked under par value system, but now? Issues of how to maintain “orderly” floating rates given market events like 1997 Asian financial crisis

IMF TREATYTracking Purposes Against Monetary Sovereignty

(cont’d)

4) To establish multilateral system of payments among members for current transactions

and elimination of foreign exchange restrictions hampering trade

More of historical interest with 1930s Sterling Block (trade & currency preferences within colonial empires), but issues now of what “Yen Block” and alternate Asian arrangements ultimately mean post-1997 crisis

IMF TREATYTracking Purposes Against Monetary Sovereignty (cont’d)

5) Make IMF resources temporarily available “under adequate safeguards” to members experiencing temporary (balance of payment) difficulties without resort to destructive measures

To extent IMF is a kind of mutual bank for states, the exact meaning of “under adequate safeguards” is the issue of policy versus rules and whether conditionality is ultra vires in theory

IMF TREATYTracking Purposes Against Monetary Sovereignty

(cont’d)

6) To lessen disequilibrium in int’l balance of payments

Originally aimed at 1940s WW II debt more, but how does this work on current account imbalances as discussed by Cathy Bonser-Neal?

IMF TREATYArticle III Quotas & Subscriptions

Originally in dollars, now special drawing rights concepts

Effect of article XXII (5) rule of votes allocated at rate of 250 plus 1 per 100,000 SDRs means big payers control matters requiring a vote

IMF TREATYArticle IV Obligations Regarding Exchange Arrangements

1) Direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances

An economist’s statement, but now a treaty obligation: what does it mean? What of the anti-inflationary price stability undertaking? Given claims (Pres. Suharto, early 1998) that IMF program “unconstitutional” (art. 33 UUD 1945), how do you reconcile apparent treaty obligation on how to run economy with domestic law, either constitutional or at the level of the central bank?

IMF TREATYArticle IV Obligations Regarding Exchange Arrangements

(cont’d)

2) Promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions

What does this mean post-1997 Asian financial crisis? What does it mean for domestic economic policies in developing countries (eg, Argentina) or industrialized countries (eg, US with current account issues)? Does that explain why no one wants a rules oriented legal system as opposed to a policy oriented nonp-compulsory system?

IMF TREATYArticle IV Obligations Regarding Exchange

Arrangements (cont’d)

3) Avoid manipulation of exchange rates or the international monetary system to prevent effective balance of payments adjustment or gain unfair competitive advantage over others

How does this compare with Washington consensus and export oriented development approaches favored until recently? Does this have implications for open or closed capital or current accounts re convertibility?

IMF TREATYArticle IV Obligations Regarding Exchange

Arrangements (cont’d)

Since 1976, Art IV (2) prompt notification obligation on exchange system (fixed, floating, mixed, etc.) and any changes

Art IV (3) IMF to exercise “firm surveillance” over exchange policies, but qualifier about respecting the domestic social and political policies of members & their circumstances

IMF TREATYArticle V IMF Operations and TransactionsSpecifies that IMF works through central banks and

national treasuries only

Idea that use of IMF general resources in funding member requests can only be for permitted purposes [IMF Charter]

There is even a formal demand inquiry for the IMF to query a member whether it is using IMF general resources for purposes contrary, in which case country can be declared ineligeble to use any IMF general resources

IMF TREATYArticle VI Capital Transfers

Idea impermissible to use IMF general resources to stem large or sustained capital outflows

Why?

IMF TREATYArticle VIII General Obligations

Need IMF permission to close current account

Currency contracts inconsistent with exchange controls permitted under IMF Charter unenforceable in any member state

Obligation to cooperate in making exchange controls effective

Discriminatory currency practices outlawed

Obligation to buy currencies members obtain in current transactions

Reporting obligation (to furnish information)