Possibly the most important reason to focus on the unity of the role of the IMF as an institution is to highlight the close relationship between its two best known activities, surveillance and conditionality. This section will focus on the dependence of both surveillance and conditionality on the code of conduct and on how variations in that code may influence them.
The "rules-based" regime adopted at the Bretton Woods Conference laid out clearly the rationale and scope of international policy surveillance. The aim was to ensure consistency between members' domestic economic policies and their commitment to keep a par value for their currencies without resorting to restrictions on current payments and transfers. In such a setting, the nature of conditionality was fairly unambiguous. Lack of consistency between the stance or the mix of policies (or of both) and the code of conduct tended to manifest itself by the emergence of a balance of payments problem, typically in the form of a deficit. The exercise of conditionality then became the instrument through which IMF assistance would in effect help restore consistency between domestic policies and international commitments. The importance of those commitments rendered monitoring and adjusting domestic policies, when necessary, all the more essential.
A framework for exercising conditionality during the Bretton Woods period was developed that also reflected the clear focus of the code of conduct on the international order. In fact, the code of conduct made it possible to design a relatively straightforward set of policies and procedures to guide the extension of IMF financial assistance. Those policies and procedures conformed to the prescriptions of the Articles of Agreement and had their foundations in well established economic analysis.
Among other things, the Articles of Agreement called for the IMF to assist members by allowing them to use its resources in a manner consistent with the purposes of the institution and under adequate safeguards to ensure that such use would be temporary. In essence, the first requirement directed IMF assistance to support policies that were in accord with the code of conduct; the second requirement intended that those policies would be effective in eliminating balance of payments problems, thus ensuring only transitory use of IMF resources. These two requirements led to the development of stand-by arrangements as the instruments to channel IMF assistance to individual members. It was based on a set of specific policy understandings reached between the member and the institution that gave an assurance of balance of payments recovery.42
During the Bretton Woods period, short-term economic fluctuations were typically viewed as traceable to changes in aggregate demand. These changes, together with a relatively stable aggregate supply function, were considered the major factors behind short-run variations in output, prices, and the balance of payments. The analytical perspective therefore focused--though, it must be stressed, not exclusively--on the relationship between aggregate demand developments and the balance of payments. Accordingly, the analysis sought to identify quantifiable policy variables that would influence aggregate demand (or the allocation of resources, when this was perceived as an element of the problem) so as to bring about external balance. In the process, the relevance of fiscal and monetary policies, external debt management, and the critical role of relative prices for the external accounts in particular and for efficiency and balance in the economy in general, became progressively and widely accepted.43
There was an important interplay between the code of conduct's clear focus on an international order and the external economic environment, which tended to make surveillance and conditionality relatively unobtrusive. The commitment of members to the rules of the game tended to limit the incidence of national policy-induced shocks and make detailed surveillance and conditionality redundant or unnecessary.
The increased scope for discretion in national policymaking had important consequences for the evolution of the world economy at the national and international levels. From a global standpoint, it loosened the link between observance of the code of conduct and the attainment and maintenance of stability in the world economic environment. From a national standpoint, this weaker link contributed to an increase in the likelihood or frequency of conflict between external and internal balance.
A number of adaptations became necessary to align the exercise of surveillance and conditionality with these new and changing circumstances. With respect to surveillance, developments proceeded in several directions and on a number of fronts. Within the IMF, an early need was to supplement the amended code of conduct with a set of principles on surveillance. Those principles aimed at establishing a clear and agreed domain for the assessment of members' policy obligations on the basis of a variety of indicators that spanned the spectrum of policy variables, from policy objectives to policy instruments. Policy objectives encompassed external variables (balance of payments or the exchange rate) as well as domestic variables (output, employment, prices). Policy instruments included monetary, fiscal, and incomes policies, as well as external debt management and structural policies that directly addressed resource allocation and thus aimed at efficiency and supply enhancement. The principles for assessing policies were supplemented by the introduction of procedures for surveillance that, inter alia, provided for regular consultations with all member countries.44
In the process, the scope of surveillance was adapted to new needs. It broadened to take account of the interrelationships among sets of policy objectives and available policy instruments within an economy. The standard of measurement of performance moved toward the attainment of a set of objectives, including external balance with price stability and sustained economic growth. It therefore had to focus on a relatively broad set of instruments, which besides those of a macroeconomic nature encompassed policies with an impact on the structure and productive capacity of the economy. The scope of surveillance was also broadened in the area of policy interdependencies across countries. Not only did this aspect become increasingly important in discussions with individual members, but also constituted the central focus of regular exercises of multilateral surveillance based on the Executive Board's appraisal of the World Economic Outlook.
A parallel set of developments took place with respect to conditionality. The increasing variety of policy objectives also required adaptations in the scope of policy instruments. As with surveillance, the search for external balance, accompanied by the attainment of aims in the domestic sphere (such as inflation control and growth promotion), led to extensions on two different fronts: one was the need to focus on an array of policy instruments beyond the strictly macroeconomic sphere, and the other was allowance for a time framework and scale of assistance commensurate with the broader policy package and aims.45 Conditionality practices, therefore, looked for ways to set economies on a sound growth path in a relatively unfavorable international economic environment.
There are two clear challenges ahead for both surveillance and conditionality. The first is a consequence of the weakening in the post-Bretton Woods era of the link between the code of conduct and economic performance nationally and internationally. In the abstract, this entailed a certain loss of legitimacy for the overseeing functions of the IMF and an accompanying perception of increased IMF obtrusiveness through conditionality and possibly also surveillance. In a sense, such a perception may well correspond to reality, because, paradoxically, the softening of a code of conduct, which typically reflects a desire to avoid constraints on national behavior, is often accompanied by attempts to strengthen its implementation through close monitoring of its observance.
The second challenge is posed by the formerly centrally planned economies of the world currently in the process of reform. It derives from their desire to integrate into the established international economic order, and it opens up two questions. One is implicit in any system based to a large extent on discretion: can such a regime provide the requisite frame of reference for the integration of new parties to it? The other is implicit in the reforming economies themselves: the central task in these economies is to set the foundations for and develop a market, yet the world order into which they want to integrate is based on the market already being in place; so the question is, how can a code of conduct that takes the existence of a market for granted best help in the development of a market framework?
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