Mussa

IMF Surveillance over China’s Exchange Rate Policy By Michael Mussa Senior Fellow Peterson Institute for International Economics Paper presented at the Conference on China's Exchange Rate Policy Peterson Institute October 19, 2007
© Peterson Institute for International Economics. All rights reserved.

Introduction By the provisions of section 3(a) of the revised Article IV of the IMF Articlesof Agreement, the Fund is charged with the overarching responsibility to “…oversee the international monetary system in order to insure its effective operation…,” as well as with the more specific responsibility to “…oversee the compliance of each member with its obligations under Section 1 of this Article.” In order to fulfill these functions, the Fund is instructed to “…exercise firmsurveillance over the exchange rate policies of members, and…adopt specific principles for the guidance of all members with respect to those policies.” When I joined the IMF staff as the Economic Counsellor and Director of the Research Department in September 1991, it is fair to say that—despite the clear requirements of Article IV--exchange rate policies and their role in the effective functioning of theinternational monetary system were not subjects that attracted much attention or effort by the IMF staff, Management, the Executive Board, or the membership.1 Indeed, while the G5/G7 countries began in 1987 to involve the Managing Director in surveillance discussions among their finance ministers and central bank
Much work had been done by the Fund on exchange rate issues under the par value systemof the original Articles of Agreement, during the interregnum when the Second Amendment was being debated and agreed, and in the late 1970s and the early to mid 1980s. This included a good deal of work in the Research Department that found significant practical application, including in the actually setting of exchange rates. The histories of the Fund prepared by Margaret de Vries (1976) and(1985) describe some of these activities. Jacques Polak’s essay (1994) provides an excellent survey.
1

2

governors, he was specifically invited only “in his personal capacity;” not in his institutional capacity as Chairman of the IMF Executive Board. Moreover, the G-7 generally excluded the Managing Director from detailed discussions of exchange rate policies, including interventions and otheractions designed to influence exchange rates. The European countries involved in the Exchange Rate Mechanism of the European Monetary System were, if anything, even more aggressive in excluding the IMF from any role in their discussions of exchange rate policies. Not surprisingly in view of the example set by the industrial countries, developing countries generally did not welcome meaningful IMFsurveillance over their exchange rate policies. Thus, by a pact of mutual non-aggression among the members of the Executive Board (as representatives of the countries in their constituencies), the annual Article IV surveillance reports on each IMF member and their discussions by the Executive Board rarely involved any substantive consideration of exchange rate policies. Indeed, in describing theIMF’s “firm surveillance” over exchange rate policies, I once characterized it “as about as firm as an overripe avocado—without the pit.” As a senior member of the IMF staff especially devoted to the Articles of Agreement, I was deeply dissatisfied with this situation. Beginning in August 1992, with the essential and invaluable support of Managing Director Michel Camdessus, I directed an effort toreinvigorate IMF exchange rate surveillance and bring it much closer to the role envisioned in Article IV. This effort made significant progress from the pitiful state into which the IMF’s exchange rate surveillance had fallen; but there were also important failures (such as in foreseeing Mexico’s need for exchange rate adjustment in 1994); and much remained to be done when I left the IMF in...