International Monetary Fund: Efforts to Advance U.S. Policies at the Fund
(Letter Report, 01/23/2001, GAO/GAO-01-214).

The core mission of the International Monetary Fund (IMF) is to promote
monetary cooperation and exchange rate stability and provide resources
to IMF member countries that experience balance-of-payment difficulties.
Because it is an international organization, IMF is generally exempt
from US law; however, Congress can seek to influence IMF policy by
passing laws that direct the Secretary of the Treasury to direct the
Executive Director to vote on certain issues within the Board of the
Fund. Through three case studies, GAO found that the Treasury and the
U.S. Executive Director actively promoted U.S. policies related to (1)
sound banking principles, (2) labor issues, and (3) audits of military
expenditures. It is difficult to determine whether IMF's adoption of a
policy is due solely to U.S. influence because other countries generally
support the same policies.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-214
     TITLE:  International Monetary Fund: Efforts to Advance U.S.
	     Policies at the Fund
      DATE:  01/23/2001
   SUBJECT:  Financial management
	     International relations
	     International organizations
	     Foreign governments
	     Foreign policies
IDENTIFIER:  India
	     Mexico
	     Romania
	     South Africa
	     Thailand
	     Argentina
	     Ghana
	     Kazakhstan
	     Burkina Faso
	     Indonesia
	     Guinea
	     Rwanda
	     International Monetary Fund

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GAO-01-214
A

Report to Congressional Committees

January 2001 INTERNATIONAL MONETARY FUND

Efforts to Advance U. S. Policies at the Fund

GAO- 01- 214

Letter 3 Appendixes Appendix I: U. S. Legislative Policy Mandates Concerning
the

International Monetary Fund 22 Appendix II: Treasury's Process for Pursuing
IMF Legislative

Mandates 32 Appendix III: U. S. Policy on Sound Banking Principles at the
IMF 38 Appendix IV: U. S. Policy on Labor Issues at the IMF 46 Appendix V:
U. S. Policy on Audits of Military Expenditures at

the IMF 56 Appendix VI: Objectives, Scope, and Methodology 67 Appendix VII:
Comments From the Department of the Treasury. 71 Appendix VIII: GAO Contact
and Staff Acknowledgments 73

Tabl es Table 1: U. S. Legislative Mandates Concerning the IMF 23 Table 2:
Examples of Broad Policies That Are Addressed in Multiple Laws 30

Table 3: Examples of Banking Sector Reforms Promoted by the IMF and the U.
S. Executive Director in India, Mexico, Romania, South Africa, and Thailand
Since 1998 42 Table 4: Labor Issues in Argentina, Ghana, Kazakhstan, Mexico,

and Thailand Since 1998 48 Table 5: The United States, the IMF, and Five
Countries' Efforts

to Conform to the U. S. Audits of Military Expenditures Mandate, as of
November 30, 2000 61

Figure Figure 1: Treasury's Process for Pursuing IMF Mandates 35

Abbreviations

AFL- CIO American Federation of Labor- Congress of Industrial Organizations
ILO International Labor Organization IMF International Monetary Fund

Lett er

January 29, 2001 Congressional Committees In recent years, extensive
congressional and public attention has been focused on the appropriate role
of the International Monetary Fund in the international financial system.
The Fund is the chief intergovernmental financial institution whose core
mission is to promote monetary

cooperation and exchange rate stability 1 and provide resources to Fund
member countries that experience balance- of- payments difficulties. 2
Considerable attention has been given to how to define the Fund's mission,

whether narrowly, to core issues as described in the Fund's charter, or more
broadly, to address other concerns less traditionally in the Fund's purview.
The Department of the Treasury has the lead role within the executive branch
regarding U. S. policy toward the Fund. The U. S. Executive Director, who is
appointed by the President, represents the United States at the Fund and
pursues U. S. policy objectives through its

vote in the Fund's Executive Board. 3 1 The Fund's mission is to promote
exchange stability among member countries, maintain orderly currency
exchange arrangements among members, and avoid competitive currency exchange
depreciation. 2 Balance- of- payments problems occur when a country has
difficulty obtaining the financial resources needed to meet its payments to
nonresidents. 3 The Executive Board oversees the day- to- day business of
the Fund. The Board is composed of 24 executive directors, who are appointed
or elected by member countries or by groups of member countries. The
President appoints, with the advice and consent of the Senate, the U. S.
Executive Director to represent the United States on the Board.

As an international organization, the Fund in general is exempt from U. S.
law. One of the ways in which the U. S. Congress endeavors to influence Fund
policy is by passing legislative provisions or mandates that direct the
Secretary of the Treasury to instruct the U. S. Executive Director to pursue
specific policies or vote on certain programs or assistance within the Board

of the Fund. We have identified 60 provisions of federal law that set forth
U. S. policy toward the Fund. These mandates cover a wide range of policies,
including issues considered core to the mission of the Fund, such as
exchange rate policy, and emerging issues such as environmental policy. The
legislation often directs Treasury to instruct the U. S. Executive

Director to use its “voice” and/ or “vote” at the
Executive Board to bring about a policy change at the Fund. Most mandates
instruct Treasury and the U. S. Executive Director to pursue a policy goal
at the Fund but also provide some discretion in how to implement this
instruction. However, some mandates are more directive in that they require
in certain

circumstances 4 that Treasury instruct the U. S. Executive Director to
oppose (which in practice means to vote against or abstain from voting on) 5
a country's Fund arrangement. 6 For example, the U. S. Executive Director is
directed to oppose financial assistance for a country that has excessive
debt service payments. (See app. I for more information on the 60
legislative policy mandates we identified concerning the Fund.)

4 According to Treasury, the administration, along with previous
administrations, believes that directed voting provisions, if construed as
mandatory, are an impermissible intrusion on the President's constitutional
authority over the conduct of foreign affairs. 5 Treasury interprets the
term “oppose” to allow an absention or a no vote. According to
Treasury officials, this interpretation is based on language in a 1977 House
Conference Report regarding the International Monetary Fund mandate on human
rights (22 U. S. C. 262d). In this report, the conferees stated their view
that “the term ‘oppose' can mean voting ‘no, ' voting
present, abstention, or any other action other than voting
‘yes'”( H. R. Conference Report No. 95- 363).

6 In this report, we use the term “arrangement” to describe the
broad concept of the financial assistance the Fund provides to countries and
the associated conditions that are intended to address the underlying causes
of the countries' need for financial assistance. We use the

term “program” to describe the conditions, which are the policy
changes or reforms, as outlined in the documents countries prepare in the
context of their receiving Fund assistance.

The Consolidated Appropriations Act for Fiscal Year 2000 (P. L. 106- 113
sec. 504 (e)) requires GAO to report on the extent to which Fund practices
are consistent with U. S. policies set forth in federal law. In order to
address this requirement, we (1) identified how the U. S. Treasury and the
U. S. Executive Director promote U. S. policies mandated by Congress for the
Fund and (2) assessed whether Treasury and the Executive Director have been
able to influence Fund operations and other members' policy

positions in a direction that would be consistent with U. S. policy as set
forth in law. 7 To help answer these objectives, we analyzed the process by
which Treasury pursues its legislative mandates and conducted case studies
of specific U. S. policies and Treasury's efforts to promote them for
individual countries' Fund arrangements from 1998 through 2000.

The policy issues we selected for the case studies are (1) sound banking
principles, (2) labor policies, and (3) audits of military expenditures. 8
These policies encompass issues that are both central to the traditional
focus of the Fund's mission as well as issues that are not necessarily
viewed by all

Fund members as a core part of the Fund's mission. Further, these policies
represent both “voice” and “directed vote”
provisions. 9 For each policy issue, we reviewed Fund practices with respect
to five member countries that we selected based on a number of factors,
including geographic diversity; level of economic development; type of Fund
arrangement, 10 if applicable; and range of issues connected to the policy
concern. Specifically, we selected 12 countries for our respective case
studies: 7 Recognizing that influence by any member of the Fund is hard to
discern in an organization that generally operates by consensus, for the
purposes of this report we defined “influence” as the ability of
the United States to affect Fund policies as contained in Fund programs, as
well as the actions of countries using Fund resources. 8 These policy issues
are mandated in the following legislative provisions: (1) sound banking
principles, 22 U. S. C. 262o- 2 (Oct. 21, 1998); (2) labor policies, 22 U.
S. C. 262p- 4p (Aug. 23, 1994) and 22 U. S. C. 262o- 2 (Oct. 21, 1998); and
(3) audits of military expenditures, 22 U. S. C. 262k- 1 (Sept. 30, 1996). 9
In this report, we consider “voice” mandates to be those that
direct Treasury to instruct the U. S. Executive Director to promote a policy
goal at the Fund but stop short of explicitly directing the U. S. Executive
Director to take a particular voting position. We use the term
“directed vote” to refer to those mandates that require that the
U. S. Executive Director take a specific voting position in certain
circumstances. 10 The Fund has a number of instruments that it uses to
provide financial assistance to its member countries. The instruments differ
with respect to their term length and lending rates, according to the nature
of the balance- of- payments difficulty faced by borrowing countries and
their level of economic development.

(1) for sound banking principles- India, Mexico, Romania, South Africa, and
Thailand; (2) for labor policies- Argentina, Ghana, Kazakhstan, Mexico, and
Thailand; and (3) for audits of military expenditures- Burkina Faso, Guinea-
Bissau, Indonesia, Kazakhstan, and Rwanda. Since we focused primarily on
Fund rather than country practices, we did not travel to any of these
countries as part of this review. We spoke with Fund

officials who monitor developments in these countries as well as with
several executive directors of the Fund's Executive Board in Washington, D.
C. (For more information on our scope and methodology, see app. VI.)

Results in Brief In 1999, the U. S. Treasury established a formal process to
systematically promote congressionally mandated policies toward the
International Monetary Fund. Treasury created an internal task force that
routinely seeks

to advance legislative mandates by identifying opportunities for the United
States to influence decisions through discussions with Fund and member
country officials and formal statements to the Fund's Executive Board
regarding members' programs and economic reviews. The process involves using
the internal task force as a coordinating mechanism to increase awareness
within Treasury of mandates that may be applicable to certain countries and
of opportunities to provide early input to the U. S. Executive

Director as part of the effort to promote U. S. policies. Because these
legislative provisions direct Treasury to instruct the U. S. Executive
Director to promote specific policies at the Fund, they are commonly
referred to as “mandates.” However, to varying degrees U. S.
officials have flexibility in determining how best to promote a particular
policy by, for

example, taking into account the individual circumstances of each country
when promoting specific policies. Our case study analyses show that Treasury
and the U. S. Executive Director actively promoted U. S. policies related to
sound banking principles, labor issues, and audits of military expenditures
as required by the applicable legislative mandates, using the task force and
other venues to identify opportunities to advance these

policies where applicable to Fund members. While Treasury and the U. S.
Executive Director have had some influence over Fund policies, it is
difficult to attribute the adoption of a policy within the Fund solely to
the influence and efforts of any one member, because the Fund generally
operates on a consensus decision- making basis. For

example, although the U. S. Executive Director has been a strong advocate of
the reforms called for within the “sound banking principles”
mandate, it is hard to discern the U. S. ' unique influence in promoting
this policy, because other Fund members also generally support sound banking

principles. Furthermore, the adoption or implementation of a policy at the
Fund depends in large part on whether the Fund's members perceive the policy
as being closely related to the institution's core mission as described

in the Fund's charter, according to Treasury and Fund officials. For
example, Treasury and the U. S. Executive Director have not had much success
in incorporating labor standards issues within Fund programs, because core
labor standards are not generally viewed by other Board members and staff as
an essential part of a country's macroeconomic reform program. Moreover,
legislative mandates that limit the discretion of U. S. officials have an
uncertain impact on U. S. influence at the Fund. For example, although
Treasury's pursuit of the audits of military expenditures mandate
illustrates how this directed vote mandate has successfully increased
pressure for countries to implement this U. S.- promoted reform,

the mandate may have had a negative impact on the broader influence of the
United States at the Fund. Some Fund members we spoke with questioned
whether the United States promoted audits of military

expenditures in certain countries simply because it is a legislatively
mandated directed vote and not because it is among the most important issues
confronting that country. In these members' view, such limitations

on an executive director's discretion run counter to the consensus decision-
making approach of the Fund. Therefore, while U. S. officials we spoke with
said they are pleased with the progress realized through their pursuit of
the mandate, they see a risk to U. S. credibility when they must

emphasize one issue over other pressing matters that a country may be
confronting.

Background The International Monetary Fund is a cooperative,
intergovernmental, monetary and financial institution, and as of November
2000, it had 182 members. As part of the Fund's mission to promote financial
cooperation among its members, the Fund may provide financial assistance to
countries facing actual or potential balance- of- payments difficulties that
request such

assistance. The Fund's approach for providing financial assistance to its
members has two main components- financing and conditionality- that are
intended to address both the immediate crises as well as the underlying
factors that contributed to the difficulties. The access to and disbursement
of Fund financial assistance are conditioned upon the adoption and pursuit
of economic and structural policy measures the Fund and recipient countries
negotiate. This Fund “conditionality,” usually in the form of
performance criteria and policy benchmarks, 11 aims to alleviate the
underlying economic difficulty that led to the country's balance- of-
payments problem and ensure repayment to the Fund.

The Fund's general framework for establishing a financial assistance
arrangement is applied on a case- by- case basis that considers each
country's individual circumstances. The Fund and the recipient countries
negotiate conditions for receiving Fund assistance that include a variety of
changes in a country's fiscal, monetary, and structural policies. Over the

course of the arrangement, Fund staff and country officials periodically
review the program's status, and Fund staff determine whether or not the
country has made satisfactory progress with respect to meeting the program's
conditions. In addition to providing financial assistance, the Fund conducts
surveillance and provides policy advice regarding members' economic policies
as they relate to their overall external payments position. Article IV of
the Fund's charter provides that all members undergo

a consultation process with the Fund as part of the surveillance effort;
these reviews are usually conducted on an annual basis.

11 Performance criteria are clearly observable and measurable indicators
that a country is making progress toward reaching the overall goals of its
Fund program, such as strengthening the balance- of- payments and reducing
inflation. Members generally must meet performance criteria to qualify for
financial disbursements under a program. Benchmarks are points of references
against which progress may be monitored, but Fund disbursements are not
dependent upon meeting these benchmarks. Benchmarks are not necessarily
quantitative and frequently relate to structural variables and policies,
such as tax reform and privatizing state- owned enterprises.

Treasury Uses a The Treasury has instituted a systematic process for
applying legislative

Systematic Process to mandates concerning the Fund to individual countries,
based on their

economic circumstances. This process, adopted in 1999, uses a task force
Promote Mandates to facilitate coordination between Treasury and the U. S.
Executive Director Based on Countries'

and to identify early opportunities to influence decisions regarding Fund
Circumstances

members' programs and economic reviews. Generally, Treasury and the U. S.
Executive Director's office pursue the mandates that are most relevant to
the particular circumstances of a given country, because they believe that
this is where they can have the greatest impact and success in influencing
Fund members. Our case study analyses show that Treasury and the U. S.
Executive Director have actively promoted U. S. policies related to sound
banking principles, labor issues, and audits of military expenditures as
required by the applicable legislative mandates, through their discussions
with Fund and member country officials and formal statements to the Fund's
Executive Board.

The Treasury Has a In response to the growing number and complexity of
legislative mandates Systematic Process to concerning the Fund, Treasury has
created a formal process to advance

Review Mandates U. S. objectives at the Fund. Specifically, in March 1999
Treasury set up the Task Force on Implementation of U. S. Policy and Reforms
in the International Monetary Fund. The task force was designed in part to
increase awareness among Treasury officials of the importance of the

mandates and identify opportunities to provide early input to the U. S.
Executive Director to advance U. S. objectives toward the Fund. Treasury
recognized the need to strengthen its efforts to routinely review and

coordinate how mandates may apply to countries, because previously it had
used an ad hoc approach of addressing mandates that relied heavily on
Treasury officials' own initiative to be cognizant of mandates. Under its
new process, Treasury disseminates information on the mandates to all
officials working on Fund matters and also makes reference material on the
mandates easily accessible electronically. In addition,

representatives from Treasury offices who work on Fund matters, and a
representative from the U. S. Executive Director's office, meet every 2
weeks as the task force to discuss how Treasury and the U. S. Executive
Director can best apply mandates, given countries' economic circumstances.
In between these meetings, Treasury and U. S. Executive Director officials
also coordinate to formulate and implement U. S.

objectives at the Fund. (A detailed description of Treasury's process for
pursuing legislative mandates concerning the Fund is provided in app. II.)

Treasury and U. S. Executive Director officials use a variety of means to
pursue legislative mandates as part of their efforts to achieve U. S. policy
objectives within the Fund. For example, on a regular basis the U. S.
Executive Director makes oral and written statements to the Fund's Executive
Board to make Board members aware of U. S. policy objectives regarding
requests from countries for new programs, Fund reviews of existing programs,
and regular Fund reviews of all members' economic

policies. In addition, to build support for U. S. policy goals, U. S.
officials also discuss U. S. policy objectives informally with other
executive directors, Fund management and staff, and occasionally country
authorities, particularly when the Fund is involved in negotiating with
countries about financial arrangements. U. S. officials also attempt to
build

support within the broader political arena to achieve U. S. objectives at
the Fund. According to the U. S. Executive Director, a large part of
advancing any policy issue is to reach a “critical mass” of
support among other countries for a particular policy. Therefore, for some
policies the dialogue necessary to reach an international political
consensus also takes place outside of the Fund in other international
forums.

Treasury's Process Since the legislative provisions direct Treasury to
instruct the U. S.

Considers a Country's Executive Director to promote specific policies at the
Fund, these policies Circumstances When are often referred to as
“mandates.” However, to varying degrees U. S. Applying Mandates
officials have flexibility in determining how best to promote particular
policies at the Fund. This flexibility generally allows Treasury and the U.
S. Executive Director to take into account the individual circumstances of
each country when promoting specific policies. This is especially true of
mandates that do not involve directed votes, as is the case for most of the
legislative mandates that concern the Fund. Treasury officials told us they
promote such mandates for each country on a case- by- case basis, using

their knowledge and judgment to decide whether an individual mandate is most
relevant for a country and, moreover, whether a particular time is
appropriate for advancing a mandate given a country's economic
circumstances. Countries that approach the Fund for financial assistance
often face multiple economic problems, and Treasury prioritizes how best to
address these problems. According to Treasury and U. S. Executive Director
officials, the U. S. message can be made more compelling and effective when
priorities are set based on country circumstances, taking into consideration
the range of problems that can be manageably addressed at one time.

However, some legislative mandates that pertain to the Fund are more
prescriptive in nature. According to Treasury's Office of the General
Counsel, Treasury and the U. S. Executive Director are more constrained in
the degree of flexibility they have to implement these mandates because they
usually direct the U. S. Executive Director to oppose (which in practice

means to vote against or abstain from voting on) a financial arrangement or
Fund disbursement when a country meets or does not meet certain criteria.
Examples include when a country has what is considered excessive external
debt service payments or has been determined by the President to violate
religious freedom. The directed nature of these mandates compels Treasury
and the Executive Director to promote them regardless of

whether they believe it is an appropriate time to do so given a country's
overall circumstances. Case Study Results Show

From 1998 through 2000, Treasury and U. S. Executive Director officials U.
S. Officials Promoted

actively promoted the policies we reviewed in our case studies- sound
Policies as Required by

banking principles, labor standards, and audits of military expenditures-
Legislation

as required by the applicable legislative mandates, by identifying
opportunities to influence Fund members' program and economic reviews. For
each policy, Treasury and U. S. Executive Director staff worked

together to prioritize the issues that should be raised for each country.
They then promoted those policies that they viewed as most relevant for the
countries we reviewed, given the country's economic and political
circumstances. For example, in a 1999 statement to the Fund's Executive

Board in support of a new program for Kazakhstan, the U. S. Executive
Director urged Kazakhstan both to ensure that any reforms to its labor code
be consistent with internationally recognized labor standards and to consult
with the International Labor Organization 12 on this matter. Also, for a
country that did not have a financial arrangement with the Fund, such as

India, but where Treasury had prominent banking sector concerns, the U. S.
Executive Director repeatedly highlighted U. S. concerns in statements to
the Board during the Fund's regular reviews of India's economic policies. If
Treasury determines through its analysis that a policy is not a major

concern relative to other priorities for an individual country, it is not 12
The International Labor Organization is a specialized agency of the United
Nations that traditionally has addressed labor issues. Created in 1919, this
organization has a mandate to improve working conditions and living
standards for workers throughout the world. It currently has 174 member
countries.

pursued at that time, unless it is a directed vote mandate. For example,
until recently, Treasury determined that adherence to labor standards was
not a major concern in Ghana relative to other problems Ghana faces as a

poor country. 13 According to a Treasury official, developing countries like
Ghana typically lack an industrial base large enough for the protection of
workers' rights to be a major issue. In poor countries, labor issues, such
as abusive child labor, are more likely to reflect human rights concerns
than

economic ones and thus are more difficult for the Fund to address. Difficult
to Discern

Our case study analysis indicates that while Treasury and the U. S. U. S.
Unique Influence

Executive Director have had some influence over Fund policies, it is
difficult to attribute the adoption of a policy within the Fund solely to
the Over Fund Policies influence and efforts of any one member, because the
Fund generally

operates on a consensus decision- making basis. Furthermore, the Fund's
willingness to adopt policy positions that are consistent with U. S.
legislatively mandated policies is affected by whether a majority of Fund
members perceive a given policy to be part of the Fund's core mission to
promote monetary cooperation and currency exchange rate stability and to

provide resources to Fund members experiencing balance- of- payments
problems. Moreover, mandated policies that constrain the U. S. Executive
Director's discretion may increase pressure on countries to implement
specific U. S.- promoted reforms but may have a negative impact on the
broader U. S. influence at the Fund by limiting the ability of U. S.
policymakers to consider the overall circumstances confronting countries.

Core Policies While Treasury and the U. S. Executive Director have actively
promoted sound banking principles at the Fund, it is difficult to discern
the unique influence of the United States because of the general agreement
within the Fund that strengthening members' banking sectors is part of the
Fund's core mission. Moreover, since the Fund's Executive Board generally
operates on a consensus basis in making decisions, it is hard to distinguish
the U. S. ' influence within the Fund from that of other members. In recent
years, partly in response to economic crises faced by Mexico in 1994- 95 and

several Asian countries in 1997- 98, the Fund increased its emphasis on 13
In an August 2000 statement to the Fund's Executive Board, the U. S.
Executive Director urged Ghanaian authorities to move forward with new draft
labor legislation, which Treasury's labor specialist identified as
conforming to International Labor Organization standards.

strengthening banking and banking supervision as part of members' programs.
Fund members now see a close interrelationship between weaknesses in a
country's banking system and the susceptibility of that country to financial
shocks. Moreover, the Fund now realizes that encouraging countries to have a
strong framework of financial regulatory policies and institutions is key to
maintaining macroeconomic stability, according to Fund officials we
interviewed.

As a result, according to Treasury and Fund officials, strengthening a
country's banking sector has been promoted irrespective of any U. S.
legislative mandate because it is now considered an important part of both
Treasury and the Fund's ongoing work. Treasury and the U. S. Executive
Director have generally been in agreement with the Fund's approach for
pursuing these reforms, and the U. S. Executive Director has been viewed by
Fund officials as a strong advocate among many supporters for the

Fund's involvement in this area. (For more information about Treasury and U.
S. Executive Director efforts to promote sound banking principles with the
Fund, see app. III.) The challenge to Treasury and the U. S. Executive
Director, amid widespread member support for sound banking principles, has
been in deciding how to influence what the Fund emphasizes within a
country's overall banking reform agenda. Given the complexity of banking
issues and the difficulty in addressing banking reforms, especially reforms
that require legal changes, there may occasionally be disagreement among the
Board members on the pace of reform of the banking sector in a particular
country, according to some executive directors. Nevertheless, we did not
identify evidence of disagreement on the importance of pursuing sound
banking policies for the five countries we reviewed, making it difficult to

distinguish the U. S. Executive Director's overall influence from those of
other members in this area.

Noncore Policies In contrast, Treasury and the U. S. Executive Director have
found it more difficult to advance some mandated policies, such as those
promoting the

adherence to the five internationally recognized core labor standards 14 or
the adoption of environmental protection policies, 15 because, according to
Treasury and Fund officials, these policies do not directly relate to the

Fund's traditional mission. For example, some Fund officials believe that in
individual country circumstances, core labor standards issues are not
central to the economic problems causing the countries' macroeconomic
difficulties. Instead, the Fund views these policies as more closely related
to the work of the International Labor Organization or the missions of other
international financial institutions, such as the World Bank. The Fund views
the mission of these institutions to be more focused on problems stemming
from microeconomic, sector- specific concerns within countries. 16 According
to a labor policy specialist at Treasury, the Fund's reluctance to

consider labor standards within the scope of its work is due in part to
conflicting academic literature on whether certain labor standards have
beneficial or detrimental effects on economic growth. Conventional economic
theory treats certain social policies, such as labor and environmental
standards, as government interventions that can inhibit the efficient
operation of the markets and, in turn, overall economic growth. According to
this Treasury official, since most Fund staff and country representatives
are trained as economists, they are reluctant to pursue

policies that their training tells them could be counter to the Fund's goal
of encouraging economic growth. As one Executive Director at the Fund
expressed, the implication of promoting stronger social standards in a
country is higher unemployment. If the choice is between workers being
employed under less than ideal labor conditions or not having them work at
14 These standards are (1) the freedom of workers to associate with one
another, (2) the

right to organize and bargain collectively, (3) the prohibition of
exploitative child labor, (4) the prohibition of forced or compulsory labor,
and (5) the protection against discrimination in employment. 15 For example,
22 U. S. C. 286ll requires that Treasury instruct the U. S. Executive
Director to encourage the Fund to make further progress toward
environmentally sound policies and

programs and incorporate environmental considerations into all Fund
programs. 16 Although the promotion of labor standards is not usually part
of a Fund program, in certain countries the Fund has focused on increasing
the flexibility of members' labor markets. Such conditions have been viewed
by some as possibly counter to the goals of the U. S. labor standards
mandate.

all, the Executive Director favored having the workers be employed and
earning income.

While Treasury and the U. S. Executive Director have made special efforts to
advance U. S. policy on core labor standards at the Fund, they have found it
challenging to convince other members that consideration of labor standards
fits within the Fund's work. Despite the resistance at the Fund to the labor
standards policy, the U. S. Executive Director has tried to build

support for this policy by discussing it with individual executive directors
who may be receptive to including this issue in Fund programs. In addition,
the U. S. Executive Director has noted in statements to the Executive Board
the importance of labor concerns in particular countries. For example, on
several occasions the U. S. Executive Director has expressed concern over
inadequate attention given to protecting labor standards in reviews of
Mexico's Fund program. Specifically, these statements noted the need to

protect the freedom of workers to associate and bargain collectively and to
prevent gender discrimination while Mexico was undertaking reforms to
modernize its labor market. Likewise, in commenting on Thailand's program at
the Executive Board, the U. S. Executive Director urged Thai authorities to
bring their labor laws into compliance with international standards and
address complaints concerning legal restrictions on the rights to unionize
and bargain collectively for employees of state enterprises. Despite these
and other statements by the U. S. Executive Director in support of labor
standards, we did not find evidence that the

Fund has sought to have the adherence of labor standards specifically
incorporated as a structural benchmark or performance criterion within a
program. 17 (The Treasury's and the U. S. Executive Director's efforts to
promote labor policies at the Fund are described in more detail in app. IV.)

17 The fact that a policy is not immediately accepted at the Fund does not
mean that it will not become accepted over time. According to the U. S.
Executive Director, sometimes it is the cumulative effect of many efforts
that finally achieves results in advancing U. S. policy

objectives. Gradually, through many debates and Board discussions, a change
can take place in sentiment among members as they begin to support these
policies. An example is the effort to increase transparency, that is, the
amount of information publicly available about Fund operations and its
lending to member countries. Treasury and U. S. Executive Director officials
told us that the United States and a few other members pushed very hard over
a number of years before other members changed their views and supported
increased transparency at the Fund. Good governance, including ensuring rule
of law, improving the efficiency and accountability of the public sector,
and tackling corruption, is another example of a policy that was not
considered part of the Fund's core mission but in recent years has become an
increasing focus of the Fund's work. Increased transparency and good
governance are both the subjects of U. S. legislative mandates.

In certain circumstances, Treasury and the U. S. Executive Director have had
difficulty reaching consensus on how adherence to core labor standards best
fits into the Fund's work and how to effectively advance U. S. policy on
labor issues at the Fund. For example, in March 2000, a Treasury official
recommended that the U. S. Executive Director ask the Fund to report on the
state of collective bargaining, union organization, and labor and management
relations in Argentina, especially in the context of the U. S. Executive
Director's and the Fund's recommended labor reforms in that country.
However, the U. S. Executive Director did not raise this point because
concerns were advanced that such a review of the Argentine labor market was
beyond the Fund's expertise.

To help address these ongoing challenges, Treasury has developed two
documents since April 2000. One is a reference document outlining economic
arguments for the relevance of labor standards to the Fund's work for use by
U. S. officials in their discussions with Fund members. The

other is a document that sets out guidelines on how Treasury should advance
U. S. policy on labor standards at the Fund through the U. S. Executive
Director's office. Treasury adopted these guidelines in November 2000, after
several months of internal debate during which senior Treasury policy
officials were consulted to settle differences of view among staff- level
officials. According to Treasury officials, the guidelines clarify U. S.
policy objectives and legislative obligations concerning labor standards to
facilitate Treasury's efforts to provide the U. S. Executive Director with
timely and effective input.

Directed Vote The impact of directed vote mandates on U. S. influence at the
Fund is uncertain. By limiting the discretion of the U. S. Executive
Director, such mandates may increase pressure for countries to implement U.
S.- promoted reforms but may have had a negative impact on the broader U. S.
influence at the Fund by limiting the ability of U. S. policymakers to
consider the overall circumstances confronting countries. This tradeoff is
demonstrated by the audits of military expenditures mandate. Specifically,
this mandate directs the U. S. Executive Director to oppose (which in
practice means to vote against or abstain from voting on) any loan or
utilization of funds for

countries that do not have a functioning system for conducting an audit of
military spending and reporting the results to a civilian authority. On the
one hand, U. S. efforts to advance the mandate have successfully increased
pressure on countries to make their military audit systems conform to the
mandate's requirements. On the other hand, the constraints the mandate
places on U. S. officials may negatively affect U. S. credibility at the
Fund,

according to Treasury, U. S. Executive Director, and Fund officials. For
example, the mandate has required Treasury and U. S. Executive Director
officials to raise military audit concerns when they otherwise may not have
chosen to do so because of the overall circumstances confronting the
country. As a result, other Board members expressed the view that the United
States may at times promote the issue primarily because it is a legislative
requirement and not because it is the most appropriate for the borrowing
country at that time.

U. S. efforts to promote audits of military expenditures and influence the
Fund have met with some success. Several countries we examined improved
their military audit systems, partly in response to the threat of U. S.
opposition to their Fund programs. All of these countries had a financial
arrangement with the Fund where the U. S. directed vote could be applied. 18
Although U. S. opposition to a Fund arrangement does not, on its own,
prevent a country from having access to Fund resources, 19 countries strive
to avoid having the Fund's largest member register such opposition,

according to an official in the U. S. Executive Director's office. For
example, following the threat of U. S. opposition to their receipt of
resources under their Fund arrangement, both Burkina Faso and Rwanda took
steps to improve their military audit processes or accelerated efforts to
conform to the U. S. mandate. 20 18 For this case study, we chose five
countries that have financial arrangements with the Fund because the
directed vote is only applied to countries with such arrangements. In 1999,
U. S. officials deemed 22 countries as noncompliant with the mandate; of
these, only the 5 countries we selected have had a financial arrangement
with the Fund since the mandate went into effect. Four of the five countries
we reviewed have become compliant. However, while Treasury and the U. S.
Executive Director have pursued the mandate with several additional
countries, only 1 of the other 17 countries that were originally deemed
noncompliant and that have not had a financial arrangement with the Fund has
become compliant as of November 9, 2000.

19 Approval of the use of Fund resources requires the acceptance by a simple
majority of the votes cast of the Executive Board. Since the U. S. ' share
of voting power represents about 17 percent of the total, the United States
cannot unilaterally block the approval of a country's program. 20 It should
not be concluded that U. S. leverage is always this evident when a mandate
requires a directed vote. According to a Treasury representative, the
importance of the issue has been generally agreed to within the Fund. In
contrast, the U. S. Executive Director at the

World Bank routinely opposes loans to countries due to several additional
directed vote mandates, including those pertaining to human rights, the
environment, and nuclear nonproliferation. According to an official from the
World Bank's U. S. Executive Director's office, the routine nature of the U.
S. opposition has blunted its impact and has not necessarily led to any
change in countries' policies.

U. S. efforts to advance the mandate have been successful in four of the
five countries we reviewed in part because the Fund has agreed that military
audits are important for countries where military spending is not
transparent or where there is suspicion that the country may have high
levels of hidden, off- budget spending for the military. Prior to Treasury's
implementation of the mandate in 1999, the Fund already viewed excessive

and unproductive spending by the military as having an adverse impact on
individual countries' overall macroeconomic stability. Generally, the Fund
does not require countries to perform annual audits of military spending.
Fund members we spoke with generally agreed that the auditing and
transparency mechanisms promoted by the mandate could potentially bring
important information regarding military spending to the attention of
donors. The Fund's agreement on the importance of audits of military
expenditures is part of a broader campaign to improve the transparency and
management of public finances. This has made it easier for the U. S.

Executive Director to promote this mandate than, for example, the core labor
standards mandate. Treasury and U. S. Executive Director officials are
pleased with the progress that has been made in bringing several countries
that are under a financial arrangement with the Fund into compliance with
the mandate's requirements. However, at the same time, several of these
officials are concerned that the lack of discretion that the mandate gives
the U. S. Executive Director can have negative consequences. For example,
the mandate required Treasury and U. S. Executive Director officials to
raise audits of military expenditures concerns with Indonesia, when they
otherwise might not have chosen to do so, given the overall circumstances
confronting the country. In their view, the economic and political turmoil
that the country has faced in recent years has presented more pressing
reform priorities than the improvement of the audit of its military
expenditures. Nevertheless, Treasury and the U. S. Executive Director were
compelled by the directive nature of the mandate to make this a high

priority issue with the country. This lack of discretion could also result
in U. S. opposition to a program that it believes should be endorsed. For
example, the U. S. Executive Director was compelled to abstain from voting
to make a financial disbursement for Rwanda's program because Rwanda was not
yet in full compliance with the standards set forth in the military audit
mandate. This occurred despite Treasury's knowledge that Rwanda

would become compliant with the mandate shortly, and, in Treasury's
judgment, was making satisfactory progress in implementing economic reforms
and improving fiscal transparency. Other Fund Board members questioned
whether the U. S. Executive Director pursued military audit

concerns because of the legislative requirements and not necessarily because
it was most appropriate for these countries at the time. These Board members
noted that limitations on an executive director's discretion run counter to
the consensus decision- making approach of the Fund. Therefore, while
Treasury and U. S. Executive Director officials agree with the intent of the
mandate, they see a risk to U. S. credibility when Treasury

and the U. S. Executive Director must emphasize an issue over other pressing
matters that a borrowing country may be confronting. (See also app. V for
more information on Treasury and U. S. Executive Director officials' efforts
to advance this mandate.)

Agency Comments and We received written comments on a draft of this report
from the Our Evaluation

Department of Treasury, which are reprinted in appendix VII. Treasury's
comments characterized the report as a thorough and balanced appraisal of
the administration's efforts to advance in the Fund policies set out in U.
S. legislative mandates. Treasury said that the report helps illustrate the
risk

that legislative mandates can at times weaken its ability to promote in the
Fund the very objectives that the mandates aim to achieve. Treasury also
states that the continued expansion of legislative mandates by Congress,
without consolidating the provisions already in effect, risks overloading

and thereby weakening its policy message and influence at the Fund. Treasury
and the International Monetary Fund separately provided technical comments
that GAO discussed with relevant officials and included in the text of the
report, where appropriate.

We are sending copies of this report to other interested committees; the
Honorable Paul H. O'Neill, Secretary of the Treasury; the Honorable Horst
K�hler, Managing Director of the International Monetary Fund; and other

interested parties. Copies will also be made available to others upon
request.

Please contact me at (202) 512- 4128 if you or your staff have any questions
concerning this report. Another GAO contact and staff acknowledgments are
listed in appendix VIII. Harold J. Johnson, Director

International Affairs and Trade Sheila K. Ratzenberger, Managing Associate
General Counsel

List of Committees The Honorable Jesse A. Helms Chairman The Honorable
Joseph R. Biden, Jr. Ranking Member Committee on Foreign Relations United
States Senate

The Honorable Ted Stevens Chairman The Honorable Robert C. Byrd Ranking
Member Committee on Appropriations United States Senate

The Honorable Michael G. Oxley Chairman The Honorable John J. LaFalce
Ranking Minority Member Committee on Financial Services House of
Representatives

The Honorable Bill Young Chairman The Honorable David R. Obey Ranking
Minority Member Committee on Appropriations House of Representatives

Appendi xes U. S. Legislative Policy Mandates Concerning

Appendi x I

the International Monetary Fund We identified 60 legislative mandates
concerning U. S. policy objectives toward the International Monetary Fund
(IMF) as of November 2000 through our own legal analysis supplemented with
documentation obtained from the Department of the Treasury. We used two
criteria as the basis for identifying the relevant laws for this review.
These criteria were defined as (1) any current law that explicitly directs
the U. S. Executive Director to the

IMF to use its vote at the IMF to achieve a policy goal and (2) any current
law that seeks to have the U. S. Executive Director use its voice at the IMF
to promote a U. S. policy or make a policy change. Table 1 identifies the
mandates and includes a brief description of the broad policy objective they
address, as well as some of the actions they require on the part of the U.
S. Treasury and the U. S. Executive Director. The mandates span more than 50
years, dating from as early as 1945 to as recently as 2000, with the
majority being enacted in the last decade. Many mandates address multiple
policy issues, sometimes overlapping with one another. Table 2 identifies
some policies that are addressed in multiple laws.

Many of the mandates direct the Secretary of the Treasury to instruct the U.
S. Executive Director to use its “voice” and “vote”
at the IMF to pursue certain policies. Other mandates are even more
directive in that they require Treasury to instruct the U. S. Executive
Director in certain

circumstances to oppose a decision regarding a country's use of IMF
resources. (In practice, “oppose” means to vote against or
abstain from voting.) We identified 21 such mandates that address a variety
of issues, including combating terrorism, nuclear and chemical
nonproliferation, religious persecution, and human rights abuses in other
countries. Several of the directed vote mandates have primarily applied to
countries that

borrow from the World Bank, and the United States has implemented them
there.

Table 1: U. S. Legislative Mandates Concerning the IMF Law and date of
Directed enactment a Subject matter Required actions vote

22 U. S. C. 262d Human rights,

Treasury shall instruct the USED to oppose loans to countries whose
governments Yes Oct. 3, 1977 international engage in a pattern of gross
violations of internationally recognized human rights terrorism, religious
or provide refuge to individuals committing acts of international terrorism
by freedom, and hijacking aircraft, unless such assistance is directed to
serve basic human needs.

others, including Severe violations of religious freedom should be
considered in determining if the nuclear material country has engaged in
gross violations of internationally recognized human acquisition

rights. Further, Treasury is to instruct the USED to consider a list of
concerns when carrying out its duties, including whether recipient countries
are seeking to acquire unsafeguarded special nuclear material.

22 U. S. C. 262e Salaries and The President shall direct the USED to take
all appropriate actions to keep the No Oct. 3, 1977 benefits of IMF
compensation for IMF employees at a level comparable to the compensation
employees

provided employees of both private business and the U. S. government in
comparable positions. 22 U. S. C. 262h

Trade, mining, and Treasury shall instruct the USED to use its voice and
vote to oppose any IMF

Yes Oct. 15, 1986 (also surplus assistance for the production or extraction
of any commodity or mineral for export, repeated in commodities.

if it is in surplus on world markets and if the assistance would cause
substantial P. L. 106- 429, sec. injury to the U. S. producers of the same,
similar, or competing commodity. 514, Nov. 6, 2000) 22 U. S. C. 262k

Impact of country Treasury shall instruct the USED to consider, when
reviewing loans, credits, or No

Aug. 15, 1985 adjustment other uses of IMF resources, the effect that
country adjustment programs would programs on have on individual industries'
sectors and international commodity markets industries and including
specific criteria to be considered as a basis for a vote against certain
commodity markets mining and related project proposals.

22 U. S. C. 262k- 1 Military spending

Treasury shall instruct the USED to use its voice and vote to oppose any
loan, Yes

Sept. 30, 1996 and audits other than for basic humanitarian needs, to any
country that the Secretary of the Treasury determines does not have in place
a functioning system for reporting to civilian authorities audits of
receipts and expenditures that fund activities of the armed and security
forces and that has not provided to the IMF information about the audit
process requested by the institution.

22 U. S. C. 262k- 2 Female genital

Treasury shall instruct the USED to use its voice and vote to oppose any
loan, Yes

Sept. 30, 1996 mutilation other than for basic humanitarian needs, for any
government that the Secretary of the Treasury determines has a known history
of practicing female genital mutilation and has not taken steps to implement
educational programs designed to prevent

this practice. 22 U. S. C. 262n- 3

Trade barriers and Treasury shall instruct the USED to use aggressively its
voice and vote to No

Oct. 21, 1998 agricultural vigorously promote policies to encourage the
opening of markets for agricultural commodities commodities and products by
requiring recipient countries to make efforts to reduce trade barriers.

(Continued From Previous Page)

Law and date of Directed enactment a Subject matter Required actions vote

22 U. S. C. 262o- 1 Military spending

Treasury shall instruct the USED to consider, when deciding whether to
support a No Aug. 23, 1994 and good country's loan program, the extent to
which IMF borrowing countries have governance

demonstrated a commitment to (1) providing accurate and complete data on
military spending; (2) establishing good and publicly accountable
governance, including to end excessive military involvement in the economy;
and (3) to make substantial reductions in excessive military spending and
forces. The USED shall

promote a policy that seeks to channel funding toward growth and development
priorities and away from unproductive expenditures, including military
spending.

22 U. S. C. 262o- 2 Transparency, debt,

Treasury shall instruct the USED to use aggressively its voice and vote to
enhance No

Oct. 21, 1998 private sector, the general effectiveness of the IMF with
respect to numerous issues, including

trade, crisis lending, exchange rate stability, trade liberalization,
antitrust reform, core labor standards, exchange rates, social safety nets,
sound banking principles, private sector burden- sharing, labor, the

disclosure of market information, debt, crises lending, good governance,
environment, procurement reform, corruption and bribery, drug- related money
laundering, military spending, excessive military spending, ethnic and
social strife, environmental protection, sound banking, transparency, and
microenterprise lending, especially to the world's poorest, social safety
nets, heavily indebted countries. good governance, corruption, the poor, and
ethnic and social strife.

22 U. S. C. 262p- 4n Equal employment Treasury shall instruct the USED to
use its voice and vote to urge the IMF to adopt

No Nov. 5, 1990 opportunities at the

policies and procedures that ensure that the IMF does not discriminate
against any IMF

person on the basis of race, ethnicity, gender, color, or religious
affiliation in any determination related to employment.

22 U. S. C. 262p- 4o Respect for Treasury shall direct the USED to use its
voice and vote to bring about the creation

No Aug. 23, 1994 indigenous peoples and full implementation of policies
designed to promote respect for and full protection of the territorial
rights, traditional economies, cultural integrity, traditional knowledge,
and human rights of indigenous peoples.

22 U. S. C. 262p- 4p Internationally Treasury shall direct the USED to use
its voice and vote to urge the IMF to adopt

No Aug. 23, 1994 recognized worker policies to encourage borrowing countries
to guarantee certain internationally

rights recognized worker rights and to include the status of such rights as
an integral part of the policy dialogue with each country. In addition, the
USED shall urge the IMF to establish formal procedures to screen projects
and programs for any negative impact in a borrowing country with respect to
those rights. 22 U. S. C. 262p- 4q State support of Treasury shall instruct
the USED to use its voice and vote to oppose any loan for a

Yes Apr. 24, 1996 international country for which the Secretary of State has
made a determination that it is a terrorism

terrorist state. 22 U. S. C. 262p- 6

Debt relief Treasury should urge the IMF to complete a debt sustainability
analysis by No Nov. 29, 1999 December 31, 2000, and determine eligibility
for debt relief for as many countries

under the modified Heavily Indebted Poor Countries Initiative as possible.
Treasury should also instruct the USED to ensure that an external assessment
of the Heavily Indebted Poor Countries Initiative takes place by December
31, 2001. 22 U. S. C. 262p- 7

Extended Structural Treasury shall instruct the USED to use its voice and
vote to promote the IMF's No Nov. 29, 1999 Adjustment Facility establishment
of poverty reduction policies and procedures to support countries' reform

efforts under programs developed and jointly administered by the World Bank
and the IMF containing those components listed in the mandate.

(Continued From Previous Page)

Law and date of Directed enactment a Subject matter Required actions vote

22 U. S. C. 262r- 5 GAO audits of the

Treasury shall instruct the USED to facilitate timely access by the GAO to
IMF No Oct. 21, 1998 IMF documents and information needed by GAO to perform
financial reviews of the IMF

that will facilitate the conduct of U. S. policy with respect to the IMF. 22
U. S. C. 262t

Personnel practices It shall be U. S. policy that no initiatives,
discussions, or recommendations No Dec. 19, 1989 at the IMF concerning the
placement or removal of any personnel employed by the IMF shall be based on
the political philosophy or activity of that individual.

22 U. S. C. 286e- 8 Treatment of Treasury shall instruct the USED to seek to
assure that no decision by the IMF No Oct. 10, 1978 creditors in debt

departs from U. S. policy regarding the comparability of treatment of public
and rescheduling

private creditors in cases of debt rescheduling where official U. S. credits
are involved. 22 U. S. C. 286e- 9

Investment, Treasury shall instruct the USED to encourage IMF staff to
formulate economic No Oct. 10, 1978 employment, and

stabilization programs that foster a broader base of productive investment
and basic human needs

employment, especially in those productive activities that are designed to
meet basic human needs. 22 U. S. C. 286e- 11 Countries harboring

Treasury shall instruct the USED to work in opposition to financing for
countries No Oct. 10, 1978 international either harboring international
terrorists or failing to take measures to prevent acts terrorists

of international terrorism. 22 U. S. C. 286k

International trade In considering the policies of the United States in
foreign lending, the USED shall No

July 31, 1945 and economic give careful consideration to progress made in
reaching agreement among nations stability to reduce restrictions on
international trade and promote international economic stability.

22 U. S. C. 286s Basic human needs The USED shall recommend and work for
changes in IMF guidelines to ensure the

No Oct. 7, 1980 and economic effectiveness of economic adjustment programs
by considering the effect the

adjustment program will have on issues such as jobs and investment. The USED
shall also programs work toward improved coordination between the IMF, the
World Bank, and other appropriate institutions in this area.

22 U. S. C. 286u Dollar- Special Treasury shall encourage IMF member
countries to negotiate a dollar- Special

No July 31, 1945 Drawing Rights

Drawing Rights substitution account in which equitable burden- sharing would
exist substitution account

among participants in the account. 22 U. S. C. 286v

Membership for The USED shall notify the IMF that it is U. S. policy that
Taiwan be granted No Oct. 7, 1980 Taiwan in the IMF appropriate membership
in the IMF. 22 U. S. C. 286w Denial of

The USED shall notify the IMF that it is U. S. policy that the Palestinian
Liberation No Oct. 7, 1980 membership for the

Organization not be given membership or other status at the IMF. Palestinian
Liberation Organization

22 U. S. C. 286x Assistance to The USED shall promote the use of IMF
programs to assist the private sector in No Oct. 7, 1980 private sector of
any nation, though particularly El Salvador and Nicaragua, in creating an

El Salvador, environment that will stabilize a nation's economy. Nicaragua,
and other nations

22 U. S. C. 286y Exchange rate The USED shall work for adoption of policies
in the IMF to promote exchange rate No Nov. 30, 1998 stability stability.
Also, in determining a vote of assistance to any IMF borrower, the USED
shall take into account whether the borrower's policies are consistent with
certain

IMF requirements.

(Continued From Previous Page)

Law and date of Directed enactment a Subject matter Required actions vote

22 U. S. C. 286z Transparency Treasury shall instruct the USED to initiate
discussions at the IMF and propose

No Nov. 30, 1983 and vote for adoption of procedures to increase both the
sharing of information

among IMF members and the public dissemination of certain IMF information
concerning international borrowing and lending.

22 U. S. C. 286aa Denial of lending to Treasury shall instruct the USED to
actively oppose any facility involving use of

Yes Nov. 30, 1983 communist

IMF credit by any communist dictatorship unless certain conditions are met.
dictatorships 22 U. S. C. 286bb Elimination of

Treasury shall instruct the USED to propose and work for the adoption of an
IMF No Nov. 30, 1983 predatory policy encouraging members to eliminate all
predatory agricultural export agricultural export subsidies that might
result in the reduction of other member countries' exports.

subsidies 22 U. S. C. 286cc Trade, bank The USED shall recommend and shall
work for changes in IMF guidelines and Yes Nov. 30, 1983 solvency, and
policies that encourage countries to formulate economic adjustment programs
that

external debt deal with their balance- of- payment difficulties and external
debt owed to private

servicing banks. The USED shall also oppose and vote against fund assistance
for a country

whose annual external debt services exceed 85 percent of its annual export
earnings, unless Treasury can document why an exception should be given.

22 U. S. C. 286dd Bank bailouts and

Treasury shall instruct the USED to oppose and vote against any IMF drawing
by a Yes

Nov. 30, 1983 debt rescheduling member country that would be used to repay
loans imprudently made by banking institutions to a member country, and to
ensure that the IMF encourages borrowing countries and banking institutions
to renegotiate a rescheduling of debt that is consistent with safe and sound
banking practices and the country's ability to pay.

22 U. S. C. 286ee International

Treasury shall instruct the USED to propose that the IMF adopt policies with
No Nov. 30, 1983 lending and respect to international lending, including a
policy to examine the trend and volume external of external indebtedness of
private and public borrowers in Article IV consultations.

indebtedness 22 U. S. C. 286ff

IMF interest rates Treasury shall instruct the USED to propose and work for
the adoption of IMF No Nov. 30, 1983 policies regarding the rate of
remuneration paid on use of members' quota

subscriptions and the rate of charges on IMF drawings to bring those in line
with market rates.

22 U. S. C. 286gg Elimination of trade Treasury shall instruct the USED to
consult with the IMF to reduce obstacles to

No Nov. 30, 1983 and investment and restrictions upon international trade
and investment in goods and services, restrictions

eliminate unfair trade and investment practices, and promote mutually
advantageous economic relations. The USED shall also work to have the IMF
obtain agreement with countries to eliminate certain unfair trade and
investment practices and shall take a country's progress into account in
formulating its position on requests for loans for periodic financial
disbursements.

22 U. S. C. 286kk Impact of IMF Treasury shall instruct the USED to seek
policy changes at the IMF that will result

No Dec. 19, 1989 programs on the

in a review of policy prescriptions implemented by the IMF to determine both
if IMF poor and the

objectives were met and the social and environmental impacts of such
environment prescriptions, and the establishment of procedures to ensure
that policy options that reduce the potential adverse impact on the poor or
the environment are included in future economic reform programs.

(Continued From Previous Page)

Law and date of Directed enactment a Subject matter Required actions vote

22 U. S. C. 286ll IMF policy Treasury shall instruct the USED to promote
regularly and vigorously in program

No Oct. 24, 1992 concerning

and quota increase discussions a variety of policy proposals including a
proposal transparency, the designed to alleviate poverty, promote policy
audits in the areas of poverty and the poor, and the

environment, and to allow public access to certain IMF information.
environment

22 U. S. C. 286mm Measures to reduce The USED shall use its voice and vote
to urge the IMF to continue to develop an No Oct. 24, 1992 military spending
economic methodology to measure the level of military spending by every

developing country. The USED shall also urge the IMF to provide annual
reports that estimate the level of military spending by each developing
country and urge the IMF to include in every Article IV consultations with
such countries an analysis on this issue. 22 U. S. C. 286nn

Debt reduction Treasury is authorized to instruct the USED to vote to
approve the sale of gold No Nov. 29, 1999 such that proceeds can be used
toward debt reduction for the Heavily Indebted Poor Countries Initiative.

50 U. S. C. 1701 Serbia and Treasury shall instruct the USED to use the
voice and vote of the United States to Yes

note (P. L. 103- 160, Montenegro oppose any IMF assistance to the
governments of Serbia and Montenegro, except sec. 1511, Nov. 30, for basic
human needs or unless a proper waiver or certification is made. 1993 & P. L.
104208, sec. 540, Feb. 12, 1996)

22 U. S. C. 2225 Integration of Treasury is requested to instruct the USED
to encourage and promote the

No Dec. 30, 1974 women integration of women into the national economies of
IMF member countries and into professional positions within the IMF
organization. In addition, Treasury is to

take any progress or lack of progress into account when making contributions
to the IMF.

22 U. S. C. 2370a Expropriation of

Treasury shall instruct the USED to vote against any use of IMF funds for
the Yes Apr. 30, 1994 U. S. property benefit of any country that has, after
1956, nationalized or expropriated U. S. property without compensation or
adequate arbitration, unless the funds are

directed to programs that serve the basic human needs of the citizens of
that country, or the President waives this prohibition on the basis of U. S.
national interests. 22 U. S. C. 2799aa- 1 Nuclear transfers The U. S.
government shall oppose the extension of any IMF loan or financial or

Yes Apr. 30, 1994 and illegal exports technical assistance to any country
that the President determines either delivers nuclear reprocessing
equipment, material, or technology to any country or

receives such equipment, materials, or technology from another country, or
is a nonnuclear state that exports from the United States illegally any
material, equipment, or technology that would contribute significantly to
their ability to manufacture a nuclear explosive device and will be used for
such a device.

22 U. S. C. 5605 Sanctions against

The United States shall oppose, in accordance with 22 U. S. C. 262d, the
extension Yes

Dec. 4, 1991 use of chemical and of any loan or financial or technical
assistance to any country that the President biological weapons

determines uses chemical or biological weapons either in violation of
international law or against its own nationals. 22 U. S. C. 6034

Opposition to Treasury shall instruct the USED to use the voice and vote of
the United States to Yes Mar. 12, 1996 Cuban membership oppose admission of
Cuba as a member of the IMF until the President submits a determination that
a democratically elected government is in power in Cuba.

(Continued From Previous Page)

Law and date of Directed enactment a Subject matter Required actions vote

22 U. S. C. 6302 Nuclear

Treasury shall instruct the USED to use the voice and vote of the United
States to Yes Apr. 30, 1994 nonproliferation oppose any use of IMF funds to
promote the acquisition of unsafeguarded special

nuclear material or the development, stockpiling, or use of any nuclear
explosive device by any non- nuclear- weapon state.

22 U. S. C. 6445 Religious freedom The President shall instruct the USED to
oppose and vote against loans primarily

Yes Oct. 27, 1998 benefiting a foreign government, agency, instrumentality,
or official determined by the President to be a violator of religious
freedoms.

22 U. S. C. 6713 U. S. liability,

The United States shall oppose any IMF loan or financial or technical
assistance to Yes Oct. 21, 1998 confidential either a foreign government or
any foreign person, officer, or employee of the

business Organization for the Prohibition of Chemical Weapons whose actions
taken in the information, and implementation of the Chemical Weapons
Convention make the United States chemical weapons liable, or who knowingly
divulge U. S. confidential business information, or in the case of a
government, encourage or assist a person in making such disclosures.

P. L. 104- 208, Burma and human Treasury shall instruct the USED to vote
against any utilization of IMF funds for

Yes sec. 570

rights Burma until such time as the President certifies to Congress that
Burma has made Sept. 30, 1996 measurable and sustainable progress in
improving human rights practices and implementing a democratic government in
Burma, or the President waives the sanction by certifying to Congress that
the sanction is contrary to U. S. national

interests. P. L. 105- 277,

Korea Treasury shall instruct the USED to exert the influence of the United
States to Yes sec. 602 oppose further disbursements of funds to the Republic
of Korea under the stand- by Oct. 21, 1998

arrangement of Dec. 4, 1997, unless it can be certified that no IMF
resources made available under the arrangement were used to provide
financial assistance to the semiconductor, steel, automobile, shipbuilding,
or textile and apparel industry and that the Republic of Korea has committed
itself to meet all conditions contained in the stand- by arrangement. P. L.
106- 113,

Purchase of Treasury shall report to Congress annually on the efforts of the
USED to comply No

sec. 545 American- made with Congress' sense that all agriculture
commodities, equipment, and products Nov. 29, 1999 equipment and

purchased with funds made available under the Foreign Operations, Export
products Financing and Related Programs for fiscal year ending Sept. 30,
2001, should be American made.

P. L. 106- 309, Multilateral It is the sense of Congress that Treasury shall
instruct the USED to advocate the No sec. 109 Microenterprise development of
a coherent and coordinated strategy to support the Oct. 17, 2000

Assistance microenterprise sector and an increase of multilateral resource
flows for the purpose of building microenterprise retail and wholesale
intermediaries.

P. L. 106- 386, Combat Trafficking

The President will instruct the USED to vote against, and to use her best
efforts to Yes sec. 110 in Persons deny, any loan or other use of IMF funds
for the subsequent fiscal year to a country Oct. 28, 2000

that fails to comply or is not making significant efforts to bring itself
into compliance with the minimum standards for the elimination of
trafficking in persons. This mandate does not apply to humanitarian
assistance, trade- related assistance, or development assistance and can be
waived by the President if the continuation of assistance is in the national
interest. P. L. 106- 429,

Compensation for No funds appropriated by the Foreign Operations, Export
Financing, and Related No sec. 533 the USED Programs Act, 2001, may be made
as payment to the IMF while the USED is Nov. 6, 2000

compensated by the IMF at a rate that, together with the compensation the
USED receives from the United States, is in excess of the rate provided for
an individual occupying a position at level IV of the Executive Schedule
under 5 U. S. C. 5315.

(Continued From Previous Page)

Law and date of Directed enactment a Subject matter Required actions vote

P. L. 106- 429, Clean coal Treasury, through the USED, should, as
appropriate, vigorously promote the use of No sec. 537

technology U. S. clean coal technology in environmental and energy
infrastructure programs, Nov. 6, 2000

projects, and activities, such as in reconstruction assistance for the
Balkans. P. L. 106- 429,

Countries providing Treasury shall instruct the USED to work in opposition
to and vote against any

Yes sec. 564 sanctuary to

extension of IMF grants or financial or technical assistance to any country
whose Nov. 6, 2000

indicted war authorities have failed, as determined by the Secretary of
State, to take necessary criminals

steps to apprehend and transfer persons convicted by the International
Criminal Tribunal for the former Yugoslavia. Exempt from this provision is
any IMF lending to a country to support common monetary and fiscal policies
at the national level as contemplated by the Dayton Peace Accord. P. L. 106-
429,

Cambodia Treasury shall instruct the USED to oppose loans to the central
government of Yes sec. 570 Cambodia, except loans to support basic human
needs. Nov. 6, 2000

P. L. 106- 429, Serbia After March 31, 2001, Treasury shall instruct the
USED to support loans and

No sec. 594,

assistance to the Yugoslavian government subject to certain conditions,
including Nov. 6, 2000

that the Yugoslavian government is taking steps consistent with the Dayton
Peace Accord to end financial, political, security, and other support that
served to maintain separate Republika Srpska institutions. With respect to
such loans, 22 U. S. C. 262k- 1, which requires transparency of military
budgets, shall not apply. Finally, the Secretary of State shall also
instruct the USED to support membership for Yugoslavia in the IMF subject to
certification by the President that the

government has taken appropriate steps to resolve certain issues. P. L. 106-
429,

User fees Treasury shall instruct the USED to oppose any loan that would
require user fees Yes sec. 596 or service charges on poor people for primary
education or primary healthcare, Nov. 6, 2000

including prevention and treatment efforts for Human Immunodeficiency Virus/
Acquired Immune Deficiency Syndrome and malaria, among others. P. L. 106-
429,

Short- and medium- It is the policy of the United States to work to
implement reforms in the IMF to No

sec. 805 term financing, achieve the following goals: primarily using short-
term balance- of- payments Nov. 6, 2000

misreporting, and financing, limiting the use of medium- term financing,
introducing premium pricing

premium pricing for lending that is greater than 200 percent of a member's
quota in the IMF, and

redressing cases of misreporting of information in the context of IMF
programs. Legend USED = U. S. Executive Director a This column reports the
original date of enactment. However, many of these mandates were amended

subsequent to this date. Source: GAO analysis of legislative mandates
concerning the IMF.

Table 2: Examples of Broad Policies That Are Addressed in Multiple Laws
Broad policy objective Law

Administrative and personnel matters 22 U. S. C. 2225 (Dec. 30, 1974) 22 U.
S. C 262e (Oct. 3, 1977) 22 U. S. C. 262t (Dec. 19, 1989) 22 U. S. C. 262p-
4n (Nov. 5, 1990) P. L. 106- 429, sec. 533 (Nov. 6, 2000)

Banking 22 U. S. C. 286cc (Nov. 30, 1983) 22 U. S. C. 286dd (Nov. 30, 1983)
22 U. S. C. 262o- 2 (Oct. 21, 1998)

Debt 22 U. S. C. 286e- 8 (Oct. 10, 1978) 22 U. S. C. 286cc (Nov. 30, 1983)
22 U. S. C. 286dd (Nov. 30, 1983) 22 U. S. C. 286ee (Nov. 30, 1983) 22 U. S.
C. 262o- 2 (Oct. 21, 1998) 22 U. S. C. 286nn (Nov. 29, 1999) 22 U. S. C.
262p- 6 (Nov. 29, 1999)

Employment 22 U. S. C. 2225 (Dec. 30, 1974) 22 U. S. C. 286e- 9 (Oct. 10,
1978)

Environment 22 U. S. C. 286kk (Dec. 19, 1989) 22 U. S. C. 286ll (Oct. 24,
1992) 22 U. S. C. 262o- 2 (Oct. 21, 1998) P. L. 106- 429, sec. 537 (Nov. 6,
2000)

Exchange rate stability 22 U. S. C. 286y (Nov. 30, 1998) 22 U. S. C. 262o- 2
(Oct. 21, 1998)

Governance 22 U. S. C. 262o- 1 (Aug. 23, 1994) 22 U. S. C. 262o- 2 (Oct. 21,
1998)

Human rights 22 U. S. C. 262d (Oct. 3, 1977) 22 U. S. C. 262p- 4o (Aug. 23,
1994) P. L. 104- 208, sec. 570 (Sept. 30, 1996)

Investment 22 U. S. C. 286e- 9 (Oct. 10, 1978) 22 U. S. C. 286s (Oct. 7,
1980) 22 U. S. C. 286gg (Nov. 30, 1983)

Labor 22 U. S. C. 262p- 4p (Aug. 23, 1994) 22 U. S. C. 262o- 2 (Oct. 21,
1998)

Poverty alleviation and education 22 U. S. C. 286kk (Dec. 19, 1989) 22 U. S.
C. 286ll (Oct. 24, 1992) 22 U. S. C. 262o- 2 (Oct. 21, 1998) 22 U. S. C.
262p- 7 (Nov. 29, 1999) P. L. 106- 429, sec. 596 (Nov. 6, 2000)

Military spending and military audit 22 U. S. C. 286mm (Oct. 24, 1992) 22 U.
S. C. 262o- 1 (Aug. 23, 1994) 22 U. S. C. 262k- 1 (Sept. 30, 1996) 22 U. S.
C. 262o- 2 (Oct. 21, 1998)

(Continued From Previous Page)

Broad policy objective Law

Nuclear and chemical nonproliferation 22 U. S. C. 2799aa- 1 (Apr. 30, 1994)
22 U. S. C. 6302 (Apr. 30, 1994) 22 U. S. C. 6713 (Oct. 21, 1998) 22 U. S.
C. 5605 (Dec. 4, 1991)

Religious freedom 22 U. S. C. 262d (Oct. 3, 1977) 22 U. S. C. 6445 (Oct. 27,
1998)

Terrorism 22 U. S. C. 262d (Oct. 3, 1977) 22 U. S. C. 286e- 11 (Oct. 10,
1978) 22 U. S. C. 262p- 4q (Aug. 24, 1996)

Trade 22 U. S. C. 286k (July 31, 1945) 22 U. S. C. 286bb (Nov. 30, 1983) 22
U. S. C. 286cc (Nov. 30, 1983) 22 U. S. C. 286gg (Nov. 30, 1983) 22 U. S. C.
262k (Aug. 15, 1985) 22 U. S. C. 262h (Oct. 15, 1986) (also repeated in P.
L. 106- 429, sec. 514, Nov. 6, 2000) 22 U. S. C. 262n- 3 (Oct. 21, 1998) 22
U. S. C. 262o- 2 (Oct. 21, 1998) P. L. 106- 113, sec. 545 (Nov. 29, 1999)

Transparency 22 U. S. C. 286z (Nov. 30, 1983) 22 U. S. C. 286ll (Oct. 24,
1992) 22 U. S. C. 262o- 2 (Oct. 21, 1998) 22 U. S. C. 262r- 5 (Oct. 21,
1998)

Use of IMF resources 22 U. S. C. 286u (July 31, 1945) 22 U. S. C. 286ff
(Nov. 30, 1983) P. L. 106- 429, sec. 805 (Nov. 6, 2000)

Women's issues 22 U. S. C. 2225 (Dec. 30, 1974) 22 U. S. C. 262k- 2 (Sept.
30, 1996)

Source: GAO analysis of legislative mandates concerning the IMF.

Treasury's Process for Pursuing IMF

Appendi x II

Legislative Mandates The Department of the Treasury uses a systematic
process to discuss and formulate a strategy for pursuing U. S. policies
toward the IMF, including policies set forth in legislative mandates.
Treasury has the lead role within the executive branch for formulating U. S.
policy toward the IMF, while the U. S. Executive Director represents the
United States at the IMF and pursues U. S. policy objectives through its
membership on the IMF's Executive Board. In March 1999, Treasury created the
Task Force on Implementation of U. S. Policy and Reforms in the IMF with the
broad

purpose of strengthening the process by which the United States pursues its
objectives in the IMF. In particular, the task force was designed to improve
the implementation of U. S. policy and reforms called for in legislative
mandates by increasing awareness among Treasury staff about the mandates and
identifying early opportunities to provide input to the

U. S. Executive Director to influence decisions regarding IMF members'
programs and economic reviews. Treasury and the U. S. Treasury's Office of
International Affairs along with the Office of the U. S. Executive Director
Executive Director of the IMF formulate, evaluate, and implement Treasury

policy concerning U. S. participation in the IMF, including policies set
forth Jointly Formulate U. S. in 60 legislative mandates (for more
information on these mandates, see Policy Positions app. I). The Office of
International Affairs has regional and functional Regarding Legislative

offices staffed with country officers and policy specialists who monitor
developments in individual countries and various policy matters. Over

Mandates time, Treasury has hired or created specialist positions to monitor
country

developments concerning policies for which Treasury traditionally did not
have expertise. For example, according to Treasury officials, Treasury began
covering environmental issues in the late 1980s and began hiring
environmental specialists in the early 1990s. In 1996, Treasury created a
military audit specialist position to follow issues related to military
audit concerns, and in 1998, Treasury created a similar position to monitor
country developments concerning labor practices. According to Treasury
officials, the environmental and military audit specialists initially
focused

primarily on pursuing U. S. policy and legislative mandates concerning the
multilateral development banks. Beginning in 1998, these specialists also
focused on IMF practices.

The U. S. Executive Director, who represents the United States on the IMF's
Executive Board, pursues U. S. objectives, including legislative mandates,
through various channels at the IMF. For example, on a regular basis the U.
S. Executive Director makes oral or written statements to the Board to make
Board members aware of U. S. policy objectives regarding requests

from countries for new programs, Fund reviews of existing programs, and
regular Fund reviews of all members' economic policies. The U. S. Executive
Director prefers to make oral statements but does provide written statements
when the United States has a major policy

pronouncement to make or when the topic being discussed is contentious.
Written statements allow IMF staff and Board members to become familiar with
the U. S. position prior to the Board's discussion and serve as a reference
point for the discussion. To build support for U. S. policy goals,

the U. S. Executive Director also discusses U. S. policy objectives with IMF
staff and management and other Board executive directors, outside Executive
Board meetings.

Treasury country officers, policy specialists, and U. S. Executive Director
staff share the responsibility for applying to countries the standards set
forth in the mandates, although their roles differ somewhat. Treasury
country officers are responsible for being broadly aware of U. S. policy and
legislative mandates and the topics these mandates cover; policy specialists
are responsible for tracking specific U. S. policies. Country

officers generally consult the policy specialists first when evaluating
whether a mandate applies to a country's circumstances.

Like Treasury country officials, U. S. Executive Director staff must be
mindful of legislative mandates as they monitor the status of the countries
they cover. They are also responsible for assisting Treasury staff in the
development of the U. S. policy position for IMF member countries.
Specifically, they are tasked with (1) providing additional perspectives
about country circumstances and whether mandates apply, (2) helping craft
input to the U. S. Executive Director, (3) alerting Treasury officials about
upcoming opportunities to pursue legislative mandates, and (4) sharing
information about discussions among Executive Board members and IMF staff.
U. S. Executive Director staff are in regular contact with Treasury staff
about specific country matters.

The ongoing collaborative approach Treasury and U. S. Executive Director
officials use to formulate and implement U. S. objectives at the IMF,
including legislative mandates, is illustrated in figure 1. It starts with
Treasury and U. S. Executive Director officials identifying and sharing
information with one another on upcoming opportunities to influence the Fund
concerning U. S. objectives. According to Treasury officials, on a daily
basis Treasury and U. S. Executive Director officials consult about when
countries are coming before the IMF Executive Board for a program or
economic review or when IMF missions to a country are planned as part of
these reviews. 1 Working together, Treasury and U. S. Executive Director

staff determine whether legislative mandates are relevant to these countries
and jointly develop input to the U. S. Executive Director on U. S.
objectives to be used in oral or written statements to the Executive Board
or other discussions with IMF officials. In addition to this ongoing
contact,

Treasury's task force is used to coordinate and collaborate on developing
and implementing the U. S. policy position toward IMF members.

1 Treasury focuses more attention on countries that are requesting IMF
assistance or have a program under way because the IMF has greater leverage
over the reforms that these countries pursue, according to Treasury
officials.

Figure 1: Treasury's Process for Pursuing IMF Mandates

Treasury and USED look for opportunities to pursue mandates

Treasury's Office of -- Country officers and functional specialists bring
expertise

International and knowledge of country developments

Monetary Policy receives -- USED staff provide information to Treasury
officials on

Executive Board calendar informal contacts with IMF management and staff
regarding

from USED and circulates country matters

to Treasury task force members

Ongoing contacts Task force

among Treasury meeting

officials and every two

USED weeks

For countries on Board calendar,

No End of

are there mandate process

issues? Yes Are there upcoming opportunities to implement mandates, such as

Discuss mandates planned IMF missions for new and

Yes that are potentially

Country officers, with ongoing programs, and economic

relevant for country assistance from functional

reviews; bilateral discussions; specialists, collaborate

or Treasury public with USED staff to

statements? After task force meeting,

develop U. S. policy country officers and

position and draft input for functional specialists

statement or talking conduct further research

points, as necessary No

and discuss merits of mandates for country

USED delivers policy End of process

through various channels as opportunities arise, including via written and

Is this an oral statements to IMF

appropriate Executive Board and

opportunity to raise Yes

discussions with IMF mandate issue

management and staff with IMF?

and country authorities. No End of process

Source: GAO analysis. Legend USED = U. S. Executive Director.

Composition of the Task Treasury's task force is composed of staff- level
representatives from the Force

regional and functional offices within Treasury's Office of International
Affairs, Treasury's Office of General Counsel and the U. S. Executive
Director's office and meets every 2 weeks to discuss how Treasury and the U.
S. Executive Director can best apply legislative mandates given a country's
economic circumstances. Task force members seek to provide early input to
the U. S. Executive Director as opportunities arise to influence the IMF, in
part because Treasury and U. S. Executive Director officials believe the
United States can have the most impact if it engages

early with IMF officials prior to decisions regarding program and economic
reviews. Task force meetings are conducted informally and are designed to
address several goals: ? Ensure that Treasury staff are aware, as early as
possible, of upcoming

opportunities to provide input to the U. S. Executive Director, especially
with respect to requests by IMF members for new programs, IMF reviews of
existing programs, periodic IMF reviews of members' economic policies, and
general policy discussions.

? Exchange views at an early stage regarding which policy goals and
legislative mandates are especially important for particular upcoming
events. ? As needed, seek to resolve issues concerning particular policy
goals or

mandates. ? Encourage consistency of purpose across and coordinate U. S.
strategy among the international financial institutions. 2

Task Force Serves as According to Treasury officials, the task force serves
an important role as a

Coordinating Mechanism mechanism to systematically remind Treasury officials
of the need to but Not Final Arbiter of U. S.

address legislative mandates. As shown in figure 1, prior to each task force
Policy Position

meeting, a tentative schedule of the IMF Executive Board meetings for
upcoming weeks is circulated to task force members. Also before the meeting,
task force members review the schedule to keep abreast of what countries
will be discussed by the Board and when Treasury should be ready to provide
input to the U. S. Executive Director staff for the Board

discussions. In addition, Treasury officials, through their ongoing contacts
with U. S. Executive Director staff, may identify and come prepared to 2
Many legislative mandates also concern other international financial
institutions besides the IMF, such as the World Bank. The task force serves
as a mechanism to help promote

consistency in Treasury's position across these institutions.

share information on other opportunities to attempt to influence the IMF,
such as through discussions with Fund officials when an IMF mission is
planned to a given country as part of negotiations for a new or existing
program or an economic review. At their meetings, task force members
informally discuss both what opportunities exist to implement mandates and
whether there are mandates that may be potentially relevant for a given
country. According to the Treasury official who generally chairs these
meetings, the aim of the discussion is to identify the best opportunities to
make a credible and convincing case for pursuing a mandate at a given time.
If possible, members try to reach agreement in the meeting on two questions:
(1) whether there are relevant mandates for the countries discussed and (2)
whether the opportunity available is an appropriate one to pursue the
mandate. According to Treasury officials, some mandates that are directive
in nature must be applied in all cases, regardless of country circumstances.

Once agreement is reached on whether to pursue a mandate, Treasury country
officers collaborate with U. S. Executive Director staff and functional
specialists where appropriate on drafting a policy position for the U. S.
Executive Director. This can be in the form of input for a written

statement or talking points for an oral statement to the Executive Board.
The policy position may undergo several revisions until country officers,
functional specialists, and U. S. Executive Director staff reach agreement.

Although the task force helps facilitate coordination among Treasury
officials and with the U. S. Executive Director, it is not the final arbiter
for determining the U. S. policy position toward the IMF on any given issue.
The task force is not a review or approval mechanism to give Treasury's
sanction to pursue individual mandates. Instead, it is a forum to discuss
and debate the merits of how mandates fit into the macroeconomic focus of
the IMF, whether certain mandates apply to individual countries, and what
the best opportunities are to pursue various mandates. When members disagree
on the best approach for pursuing a mandate and are not able to reach
agreement in discussions that continue after a task force meeting, the
matter is forwarded to Treasury's senior management for a

policy decision.

U. S. Policy on Sound Banking Principles at the

Appendi x I II

IMF In 1998, Congress passed legislation that encourages the U. S. Executive
Director at the IMF to work to strengthen the financial systems of IMF
member countries and encourage them to adopt sound banking principles and
practices. Over the last 5 years, the promotion of sound banking practices
have come to be regarded as a core mission of the IMF. As a result, there is
general agreement in the IMF that it is appropriate for the IMF to advance
sound banking policies and practices in member countries. In addition, IMF
members generally agree on the steps that need to be taken to implement
banking reform in member countries. For example, executive directors
generally agree on the details of how to strengthen members' banking systems
when countries have financial arrangements with the IMF. They also agree on
the need for members that do not have financial arrangements to adhere to
international banking standards. The

U. S. Executive Director has been a strong advocate of encouraging the IMF
to increase its emphasis on the stability of the banking sector and pushing
banking reforms in member countries. However, the general support of other
IMF members for sound banking principles makes it hard to discern

the U. S. ' unique influence within the IMF. Background The U. S. policy
concerning sound banking principles and practices toward the IMF, as laid
out in federal law, 1 requires that Treasury instruct the U. S. Executive
Director to vigorously promote policies to increase the effectiveness of the
IMF in strengthening financial systems in developing countries and
encouraging the adoption of sound banking principles and practices. This
requirement includes encouraging the development of laws and regulations
that will help to ensure that domestic financial institutions meet strong
standards regarding capital reserves, 2 regulatory oversight, and
transparency. To assess whether Treasury and the U. S. Executive Director
have been able to influence IMF operations and other members' policy
positions regarding

the adoption of sound banking principles and practices, we reviewed the
financial assistance arrangements and economic program reviews for five
countries: India, Mexico, Romania, South Africa, and Thailand. We selected

1 U. S. policy on banking issues is set forth in section 22 U. S. C. 262o- 2
(Oct. 21, 1998). 2 Standards involving capital reserves concern the ability
of a bank to absorb operating losses or shrinkage in asset values.

these countries, in part because of banking sector issues, geographic
location, and type of IMF arrangement, where applicable. Sound Banking

Before the mandate was implemented, the international financial Practices
Have institutions, particularly the IMF, had already begun to focus their
attention

on what constitutes sound banking practices and how sound banking Become
Part of the practices could be put in place in the banking systems of member
IMF's Core Mission countries. Focusing on sound banking systems has become
more important in recent years because many financial crises in emerging
markets have

either been precipitated or exacerbated by problems in banking systems. The
financial crises of the 1990s, specifically the 1994- 95 Mexico and the 1997
Asia crises, led the IMF to intensify its focus on members' banking sectors.
In early 1996, the Executive Board of the IMF began to examine the
relationship between banking system soundness and macroeconomic and
structural policies, as well as the ways in which issues of bank soundness
could be incorporated into the IMF's periodic economic reviews, financial
assistance programs, and technical assistance. The IMF's efforts were
focused on where there was a possibility that financial system problems

could have systemic implications, not only domestically, but also by
affecting the financial systems of other countries. According to Treasury
and IMF officials, by the time the U. S. mandate was implemented, sound
banking had come to be considered a core mission of the IMF. As such, the
IMF's and the U. S. Executive Director's efforts to strengthen member
countries' banking systems and promote sound banking practices would have
been pursued by the IMF irrespective of whether the U. S. sound banking
mandate had come into being. IMF

members and staff had already realized the importance of countries having
and maintaining sound financial systems and had begun to increase their
emphasis on the stability of members' banking systems.

IMF Staff and As an accepted part of the IMF's core mission, the IMF pursued
sound

Executive Board banking practices and policies in both its financial
assistance arrangements and its periodic economic reviews. Generally, the
executive directors agree Generally Agree on on the steps that countries
need to take in order to make necessary reforms How to Implement

in their banking sectors. Executive directors told us that directors may
Banking Reform in disagree over the pace for implementing reforms, mostly
due to concerns about countries' abilities to implement reforms quickly.
However, Member Countries

executive directors said that within the IMF's Board there is general

agreement on the content of a country's financial arrangement regarding
banking reform, including the diagnosis of the problem facing a country and
the reforms needed to fix the problems. The same is generally true for
suggestions the IMF Executive Board makes to member countries during the
periodic economic review. In reviewing IMF financial assistance
arrangements, executive directors focus on the specific banking situation of
each country seeking financial assistance from the IMF. For example, when
Thailand sought financial assistance from the IMF during its financial
crisis in 1997, there were numerous banking sector problems that had to be
addressed, such as weak

licensing requirements, lax banking supervision, and no formal deposit
insurance. The IMF's financial assistance to Thailand was conditioned upon
Thailand's undertaking a set of actions that would address those and other
issues that were specific to Thailand's banking sector.

The IMF has also sought ways to focus on sound banking practices in its
economic reviews. The IMF holds annual consultations with most member
countries as a part of its economic reviews to discuss, among other things,

the country's banking sector practices and policies. During the last few
years, the IMF has implemented a number of voluntary assessments that member
countries can undertake to help the IMF assess the stability of

members' financial systems and encourage members to implement
internationally accepted banking standards. For example, IMF members can
volunteer to participate in the Financial Sector Assessment Program. This
joint World Bank- Fund program provides a diagnosis of financial sector
vulnerabilities and development needs. It is used by the IMF as a basis for
its Financial System Stability Assessments, which focus on examining the
soundness and operation of a country's financial sector and its link to the
country's macroeconomic performance. The IMF staff prepares Financial System
Stability Assessment reports during the periodic economic review process,
and these reports become a part of the IMF staff papers presented to the IMF
Executive Board. In addition to the Financial

System Stability Assessment program, the IMF, in cooperation with the Basel
Committee on Banking Supervision, has been undertaking assessments of
countries' compliance with the Basel Core Principles for

Effective Banking Supervision. 3 In many instances, these assessments are
published as Reports on the Observance of Standards and Codes modules. The
IMF has used the Basel core principles assessments to identify specific

gaps in a country's regulatory or supervisory framework and to develop an
appropriate focus for reforms. Similar to the Financial System Stability
Assessments, the Basel core principle assessments are also to be included in
the IMF's economic reviews.

We reviewed how the IMF and the U. S. Executive Director worked together in
promoting sound banking principles in five countries- India, Mexico,
Romania, South Africa, and Thailand (see table 3 for examples of IMF and U.
S. Executive Director proposed banking reforms in these five countries). The
U. S. Executive Director generally agreed with the focus of the IMF

Executive Board in the three countries that had an IMF arrangement (Mexico,
Romania, and Thailand) and in the two countries that were not under an IMF
arrangement (India and South Africa). Table 3 provides an

analysis of examples of reforms promoted by the U. S. Executive Director and
the IMF in the five countries we reviewed.

3 In 1996, the Basel Committee on Banking Supervision- a committee of
banking supervisory authorities, which was established in 1974 by the
central bank governors of the Group of Ten countries (Belgium, Canada,
France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom,
and the United States)- issued core principles for banking supervision that
were intended to serve as standards against which countries may evaluate the
adequacy of their supervisory systems as well as guidance to countries
changing their systems. The core principles provide operational guidance for
(1) preconditions for banking supervision, (2) licensing and structure, (3)
prudential regulations and requirements, (4) methods of ongoing banking
supervision, (5) information requirements, (6) formal powers of supervisors,
and (7) cross- border banking.

Table 3: Examples of Banking Sector Reforms Promoted by the IMF and the U.
S. Executive Director in India, Mexico, Romania, South Africa, and Thailand
Since 1998 Current IMF arrangement as of November 2000 Examples of reforms
promoted by U. S. Executive Director

India No ? Encouraged India to strengthen supervision, regulation, and the
oversight of nonbank financial institutions

? Stressed the need for India to withdraw from public ownership of banks
Mexico Yes ? Urged Mexico to further strengthen its bankruptcy procedures

? Urged Mexico to aggressively implement its plans to recapitalize a banks,
establish a suitable legal framework for bank lending, and bring regulatory
capital b standards closer to international standards

Romania Yes ? Encouraged the license withdrawal of a major state- owned bank
and stressed that the privatization of banks would help to restore healthier
financial markets

? Encouraged the aggressive implementation of supervisory and prudential
elements in the financial sector as being critical both for the viability of
Romania's financial institutions and for rebuilding public confidence in the
country's currency and financial institutions South Africa No ? Agreed with
the findings of the IMF's staff in the consultation process and commented on
the Financial System Stability Assessment

Thailand No ? Cautioned against a large state role in the bank
recapitalization process

? Encouraged Thai officials to focus on financial conditions of banks and
the high level of nonperforming c loans, especially of those banks that had
intervention programs

? Encouraged foreign investment

? Promoted bankruptcy statute and related corporate laws

Examples of reforms promoted by the IMF Discussion

? Supported India's efforts to tighten its regulatory regime, improve Both
the IMF and the U. S. Executive Director encouraged India to bank
supervision, and reduce directed lending and domination by keep making
banking sector reforms. India had volunteered for the its public sector
banks

Financial System Stability Assessment program and a Basel core

? Commented on India's compliance with Basel core principles principles
assessment. Both the IMF and the U. S. Executive

Director supported India's efforts to assess its banking sector. India had
embarked on a broad- based reform in the early 1990s to open the economy and
foster private sector activity. By the late 1990s, India had made a number
of changes. ? Promoted strengthening and consolidating the banking system

The U. S. Executive Director had supported the IMF's financial

? Pushed for improving the capitalization of Mexican banks, issuing
arrangement for Mexico and directed its comments on urging

new loan classification d rules, and changing capital requirements Mexico to
continue to make progress in areas Mexico was trying to

? Wanted the role of the Bank Savings Protection Institute to be change,
such as bankruptcy reform, and also supporting Mexico as clarified and for
Mexico to specify actions for banks in distress

it met IMF targets. As a result of its program, Mexico adopted important
measures to strengthen the operating environment of the banking system and
improve the soundness of its banks.

? Required Romania to reduce public enterprise losses through The IMF
arrangement for Romania was conditioned upon accelerating the restructuring
and privatization of state banks and

Romania's privatizing a large, state- owned bank. The U. S. enterprises
Executive Director's focus was also on the privatization of ? Required the
liquidation of a large, state- owned bank and state- owned banks. As a
result of its program, Romania privatization of other banks

successfully closed a large, insolvent, state- owned bank. ? ? Encouraged
South Africa's central bank to have a more active role

Both the U. S. Executive Director and the IMF agreed with the IMF's in on-
site examinations, bring limits on large credit exposures e staff assessment
that South Africa had a sound banking sector and more in line with
international best practices, and adopt a formal that a few changes could be
made in order to further strengthen framework to govern the government's
strategy for removing itself South Africa's system. South Africa had also
participated in the from involvement in a bank in which it had previously
intervened

Financial System Stability Assessment program, and both the U. S. Executive
Director and the IMF agreed with the findings of the assessment. However,
the Financial System Stability Assessment caused the U. S. Executive
Director to question South Africa's efforts to stimulate credit to small-
and medium- sized enterprises, since the assessment revealed that those
efforts were not benefiting those enterprises. ? Required Thailand to
prepare restructuring f and privatization

The IMF and the U. S. Executive Director were in agreement about strategies
for recently intervened banks

Thailand's program and the changes Thailand needed to make. The

? Required Thailand to review the Financial Institution and U. S. Executive
Director focused its comments on the issues that Development Fund policies
and operations, and finalize a plan for Thailand was to address to meet its
program targets, congratulating the introduction of a deposit insurance
scheme to replace the Thailand when targets were met but also raising issues
that could current system by Dec. 1998 come up and/ or worsen. ? Required
Thailand to assist banks in reducing nonperforming loans

? Required Thailand to finalize recapitalization plans for all banks and
finance companies

a Recapitalization refers to any restructuring of a troubled bank assisted
by a deposit insurance fund, as in a bailout of a failing bank, where the
insurance fund pays the acquiring bank the difference between

the book value of a troubled bank's assets and the estimated market value of
the assets. The insurance fund may also take an equity position in the
restructured bank. b Capital refers to the funds invested in a bank. Banking
supervisory agencies generally require banks to maintain certain capital
levels to meet the claims of creditors and depositors.

c Non- performing loans are loans that are not performing according to the
borrower's original loan agreement. d Loans are usually classified by
different categories such as maturity, industry, security, and type of
borrower. e Exposure limits are the total amounts of credit a bank can
extend to one borrower.

f Restructuring refers to a condition where a lender grants a concession to
a borrower in financial difficulty. Typically, the lender negotiates a
workout agreement with the borrower to modify the original credit terms
rather than initiate foreclosure proceedings against the delinquent
borrower.

Source: GAO analysis of IMF documents.

U. S. Executive Director Has The U. S. Executive Director told us that the
United States was already Been a Strong Advocate of

promoting the importance of the IMF's focus on banking sector reform,
Banking Reform prior to the implementation of the banking mandate. The U. S.
Executive Director's emphasis has been on two factors that the IMF should be
concerned with regarding sound banking and financial system stability. The
first factor was to determine the vulnerability of countries' financial
systems in order to prevent a financial crisis. The second factor was to
focus greater attention on establishing efficient financial intermediation-

the process of transferring funds from savers to borrowers. According to the
U. S. Executive Director, the most critical piece in determining the
vulnerability of members' financial systems was assessing the health of each
member's banking system. In addition, the U. S. Executive Director stated
that the IMF's main role in the financial sector agenda was surveillance-
the job of alerting members to the weaknesses in their banking systems and
supervisory regimes, and monitoring a member's progress to that end. Over
the last 3 years, the U. S. Executive Director has

supported the IMF's efforts to incorporate Financial System Stability
Assessment reports into the IMF's surveillance efforts and has actively
supported the adoption and monitoring of the Basel core principles by member
countries and assessments of countries' progress.

Other executive directors have said that the U. S. Executive Director was a
driving force in focusing the IMF's attention on sound banking practices.
However, it is difficult to discern the extent of the U. S. Executive
Director's influence in relation to other executive directors in promoting
sound

banking practices in member countries, because the IMF generally operates on
a consensus decision- making basis. In addition, there is broad

agreement among IMF members that pursuing sound banking principles and
policies in member countries is an important part of the IMF's work.

Appendi x V I U. S. Policy on Labor Issues at the IMF Since 1994, Congress
has enacted two provisions of law that set forth U. S. policy on
internationally recognized core labor standards and worker rights in the
context of International Monetary Fund programs. However, the predominant
view at the IMF is that a country's adherence to those standards is usually
not relevant to its macroeconomic condition and thus not directly relevant
to the IMF's mission. Therefore, although U. S. officials have taken several
different approaches to actively promote U. S. policy on core labor
standards in an effort to garner support for the inclusion of this policy
within the IMF's dialogue with borrowing countries, they have not

had much success in influencing the IMF on this issue. Background Under U.
S. mandates concerning labor issues at the IMF, 1 the Secretary of

the Treasury must instruct the U. S. Executive Director to urge the IMF, as
an institution, to encourage countries to guarantee internationally
recognized core labor standards and worker rights. The five internationally
recognized core labor standards advanced by Treasury and the U. S. Executive
Director are

? the freedom of workers to associate with one another, ? the right to
organize and bargain collectively, ? the prohibition of exploitative child
labor, ? the prohibition of forced or compulsory labor, and ? the
prohibition against employment discrimination. 2

1 U. S. policy on labor issues at the IMF is codified in 22 U. S. C. 262o- 2
and 22 U. S. C. 262p- 4p. 2 Federal law also sets forth that the U. S.
Executive Director shall urge the IMF to encourage borrowing countries to
guarantee five internationally recognized worker rights. The first four
rights specified in the law are the same as the first four core labor
standards, but the fifth right specified- acceptable conditions of work with
respect to minimum wages, hours of work, and occupational safety and health-
differs from the fifth core labor standard

concerning employment discrimination. According to Treasury officials,
Treasury and the U. S. Executive Director focus their efforts more on the
five core labor standards because they have widespread recognition, but
added that Treasury and the U. S. Executive Director also take into account
the fifth internationally recognized worker right specified in federal law.
Because Treasury and the U. S. Executive Director focus their efforts more
on core labor standards, we refer to this aspect of labor policy as core
labor standards.

Through the International Labor Organization (ILO), the international
community has codified these core labor standards in eight international
treaties, or conventions. 3 At the ILO's 1998 conference, ILO members

adopted the “ILO Declaration on Fundamental Principles and Rights at
Work,” which renewed all ILO members' commitment to respect, promote,
and realize these core labor standards. The Department of the Treasury and
the U. S. Executive Director collaborate to formulate and actively advance
their objectives concerning labor policies at the IMF. To advance U. S.
policy on core labor standards, the U. S. Executive Director urges the IMF
to consider the implications of its programs on borrowing countries'
adherence to these standards. To illustrate the influence that Treasury and
the U. S. Executive Director have

had on IMF policies and practices with respect to labor issues, we reviewed
their efforts to affect IMF programs for Argentina, Ghana, Kazakhstan,
Mexico, and Thailand. We selected these countries, in part, because of the
range of labor issues in each country, especially as they related to the

economic challenges the countries have faced. General information on the
countries and a summary of our findings are presented in table 4.

3 The eight relevant conventions are the Freedom of Association and
Protection of the Right to Organize Convention (no. 87); the Right to
Organize and Collective Bargaining Convention (no. 98); the Minimum Age
Convention (no. 138); the Worst Forms of Child Labor Convention (no. 182);
the Forced Labor Convention (no. 29); the Abolition of Forced Labor
Convention (no. 105); the Discrimination (Employment and Occupation)
Convention (no. 111); and the Equal Remuneration Convention (no. 100).

Table 4: Labor Issues in Argentina, Ghana, Kazakhstan, Mexico, and Thailand
Since 1998 Argentina Ghana

Level of economic development a Developing Heavily Indebted Poor Country GDP
per capita (US$, 1998) $8,253 $406 Adherence to core labor standards b

Right to associate c ? Constitutionally provided and generally ? Legally
provided and generally respected respected Right to organize and bargain

? Constitutionally provided and generally ? Legally provided and generally
respected collectively d respected Prohibition of exploitative child labor e
? Prohibited, but some illegal child labor

? Prohibited, but illegal child labor is occurs widespread Prohibition of
forced or compulsory labor f ? Effectively prohibited ? Prohibited, but
occurs as part of rural or religious customs Prohibition of employment
discrimination g ? Constitutionally prohibited, but ? Constitutionally
prohibited, but discrimination occurs discrimination occurs Treasury and
USED's efforts to advance

? While expressing support for flexibility ? Supported the government's
proposed U. S. policy on core labor standards issues enhancing labor market
reforms, asked

labor code reform, noting that it conformed IMF staff to comment on
consistency of

with ILO standards collective bargaining reform with ILO convention on this
issue

IMF efforts on core labor standards issues ? Discussed reforms to enhance
labor

? Discussed labor issues such as minimum market flexibility with Ministry of
Labor

wage and civil service wage structure with officials and representatives
from labor Ghanaian government, but did not raise unions but did not raise
adherence to core

adherence to core labor standards labor standards

? Core labor standards not part of program

? Core labor standards not part of program

Kazakhstan Mexico Thailand

Transitional Developing Developing $1, 410 $4, 106 $1, 819

? Legally provided, but government infringes ? Legally provided, but
government has

? Legally provided, except for state interfered enterprise employees until
recently

? Right to organize legally provided, but right ? Legally provided, but
government has

? Legally provided, except for state to bargain collectively is not
interfered enterprise employees until recently

? Government has imposed significant limits on both

? Effectively prohibited ? Prohibited, but common in small ? Prohibited, but
a problem in agricultural companies, agriculture, and informal and informal
sectors sector

? Effectively prohibited ? Effectively prohibited ? Prohibited, but occurs
in informal sector

? Prohibited, but discrimination occurs ? Constitutionally prohibited, but ?
Constitutionally prohibited, but discrimination occurs discrimination occurs

? In response to proposed Kazakhstani ? Raised concerns for freedom of ?
Raised concerns about progress of reforms that would dismantle old

association, collective bargaining, gender reforms to allow state enterprise
workers

Soviet- based labor code, urged discrimination, and the treatment of the
right to associate, organize, and

government to make further reforms so workers in export processing zones
bargain collectively

labor code would be consistent with core

? Raised concerns for implications of labor standards and to consult with
ILO proposed labor reforms on core labor standards

? Encouraged IMF staff to consult with ILO and labor leaders in Mexico

? Discussed labor issues such as wage ? Discussed increasing labor mobility
and

? Monitored progress of reforms to allow arrears and the minimum wage but
did not labor participation in developing reforms, state enterprise workers
the right to raise adherence to core labor standards

but did not raise adherence to core labor associate, organize, and bargain ?
Core labor standards not part of program

standards collectively but did not discuss in terms of

? Staff included an appendix on labor market adherence to core labor
standards

reforms in a report to the Executive Board

? Core labor standards not part of program

? Core labor standards not part of program Legend GDP = gross domestic
product. USED = U. S. Executive Director. a According to the IMF's World
Economic Outlook: A Survey by the Staff of the International Monetary Fund
(Washington, D. C.: International Monetary Fund, Sept. 2000).

b According to the Department of State's Human Rights Report for each
country, which describe the countries' adherence to each core labor
standard. c The right of association is the right of workers to establish
and join organizations of their choosing without prior authorization.

d The right to organize and bargain collectively is the right of workers to
organize unions without employer reprisals, and government promotion, where
necessary and appropriate, of measures to encourage voluntary collective
bargaining to establish wages, hours, and working conditions. e The
prohibition of exploitative child labor states that children should not be
forced to work under abusive conditions. Consideration is made for work on
family farms, in family businesses, and light work that does not interfere
with schooling.

f The prohibition against forced labor states that persons should not be
forced to work, except in certain defined circumstances, such as compulsory
military service or when imposed through conviction in a court of law. g The
prohibition against employment discrimination proscribes that employers
shall not discriminate

against workers because of their race, gender, ethnicity, or religion in
terms of their pay, working conditions, or performance standards.

Sources: GAO analysis of data from the IMF, World Bank, Department of State,
and Department of the Treasury.

IMF Members Have The IMF does not regularly pursue adherence to core labor
standards with Not Embraced U. S. borrowing countries. According to IMF
officials, while the IMF supports core labor standards in principle, the IMF
has not found that the degree to

Policy on Core Labor which a country has adhered to core labor standards is
directly related to Standards

the country's macroeconomic difficulties. Therefore, IMF members and staff
do not consider the issue to be within the IMF's core mandate and have not
addressed this issue in the IMF's country programs. Also, the IMF's staff
lacks expertise in this complex and sensitive policy area. Our analysis of
five borrowing countries found no evidence that IMF staff had

incorporated the countries' adherence to core labor standards issues into
the countries' performance criteria or structural benchmarks.

According to Treasury officials, the IMF's reluctance to consider core labor
standards within the scope of its work is due in part to conflicting
academic literature on whether certain labor standards have beneficial or
detrimental effects on economic growth. Conventional economic theory treats
certain social policies, such as labor and environmental standards, as

government interventions that can inhibit the efficient operation of markets
and, in turn, overall economic growth. According to Treasury officials,
since most IMF staff and country representatives are trained as economists,
they are reluctant to pursue policies that their training tells them could
be counter to the IMF's goal of encouraging economic growth.

As one Executive Director at the IMF expressed, the implication of promoting
stronger social standards in a country is higher unemployment. If the choice
is between workers being employed under less than ideal labor conditions or
not having them work at all, this Executive Director favored having the
workers be employed and earning income.

Other IMF members are also reluctant to have the IMF include consideration
of these standards because it is a policy area where the IMF does not
currently have expertise or institutional knowledge. Some executive
directors with whom we spoke noted that other institutions, particularly the
ILO, are better placed to address labor standards. In addition, some
executive directors noted that the World Bank also has

some expertise and institutional knowledge to help countries address core
labor standards. Executive directors also noted that they would be agreeable
to IMF staff consulting with the ILO or the World Bank on labor issues in
borrowing countries if the staff found that labor issues were relevant to
the country's program. 4 Furthermore, one Executive Director noted that
there is concern that a country's adherence to core labor standards is
primarily a political issue, and as such the IMF is prohibited from
addressing them by its charter. As another Executive Director noted, the
issues embodied in the core labor standards are complex and must be handled
with careful regard for various cultural and political factors facing

borrowing countries. Treasury and the U. S. Since other IMF members and IMF
staff have not widely embraced U. S. Executive Director policy on the
relevance of core labor standards to the IMF's work, Treasury and the U. S.
Executive Director have made special efforts to advance this Actively
Promote U. S. policy at the IMF. Nevertheless, they have not had much
success in Policy on Core Labor

influencing the IMF to consider core labor standards in its programs. In
Standards

certain circumstances, Treasury and the U. S. Executive Director's staff
have had difficulty reaching consensus on how adherence to core labor
standards best fits into the IMF's work and how to effectively advance U. S.
policy on labor issues at the Fund. As part of its efforts to reach
consensus, Treasury, with input from the U. S. Executive Director, has
completed two documents since April 2000. The first document circulated
within Treasury presents economic arguments for the relevance of core labor
standards to the macroeconomic focus of the IMF's work. The second document,
which

was finalized in November 2000, sets out guidelines for Treasury officials
as they pursue U. S. objectives on core labor standards and try to build
support for U. S. policy among other IMF members. These guidelines clarify
U. S.

4 In the past few years, the ILO and the IMF have been increasing the level
of cooperation and collaboration between them. The ILO has official observer
status at the IMF's International Monetary and Financial Committee and IMF-
World Bank annual meetings and joint Development Committee. The ILO is also
involved in ongoing IMF- World Bank poverty reduction efforts.

policy objectives and legislative obligations concerning labor standards to
facilitate Treasury's efforts to provide the U. S. Executive Director with
timely and effective input.

Engaging the IMF on the Treasury and the U. S. Executive Director are
simultaneously following two

Relevance of Core Labor approaches to change the thinking of other IMF
members, IMF staff, and

Standards IMF management on this issue. The first approach is to engage
other

executive directors and IMF staff on the relevance of core labor standards
to the IMF's mission. Treasury and the U. S. Executive Director have argued
that the IMF should not develop programs that may negatively impact
countries' adherence to core labor standards without taking those impacts
into consideration. Treasury officials have also taken advantage of other

forums to promote U. S. policy on the relevance of core labor standards to
the IMF's mission. For example, Treasury officials have promoted U. S.
policy at meetings with government officials of the Group of Eight, 5
through personal contact with other countries' officials, and at IMF annual
meetings. In addition, Treasury and the U. S. Executive Director organized a

seminar on core labor standards for the IMF and the World Bank's 1999 annual
meeting in cooperation with the IMF, the World Bank, and the American
Federation of Labor- Congress of Industrial Organizations (AFL- CIO). 6
Senior officials from these institutions, as well as a Minister of Finance
from Chile and a noted academic, presented their views on the role of core
labor standards at the IMF and the World Bank.

5 The Group of Eight, or G- 8, refers to the governments of the eight major
industrial democracies: Canada, France, Germany, Italy, Japan, Russia, the
United Kingdom, and the United States.

6 The AFL- CIO is a voluntary federation of 68 U. S. unions that promotes
their concerns on labor issues at the national and international level.

Treasury and the U. S. Executive Director's second approach has been to
pursue the best examples of countries where they believe that adherence to
core labor standards is deficient and that the IMF should consider core
labor standards as relevant to their macroeconomic stability. Treasury and
the U. S. Executive Director can then use these examples as successful
precedents to urge the IMF to advance core labor standards in other
countries and at the broader level. According to Treasury officials,
countries that make the best cases are those where the conditions of its

IMF program will clearly have implications for the labor market. For
example, the IMF and the Argentine government agreed that to stimulate
economic growth, Argentina would need to increase labor market flexibility
through various reforms, including legally decentralizing union collective
bargaining. 7 While Treasury and the U. S. Executive Director agreed with
Argentina's need to increase labor market flexibility, they also recognized
that some of the reforms discussed would have implications for Argentina's
adherence to the core labor standard concerning collective

bargaining. Therefore, they monitored the progress of these reforms and
asked IMF staff to clarify whether the reform proposed to decentralize union
collective bargaining would be consistent with the ILO Right to Organize and
Collective Bargaining Convention (no. 98).

The U. S. Executive Director also tries to set precedents by pursuing labor
policy with IMF management and staff in advance of an IMF mission to a
member country as part of a program or general economic review. For example,
Treasury and the U. S. Executive Director became aware that the IMF and the
Mexican government were exploring a possible financial

arrangement at the end of 1998. Officials from Treasury and the U. S.
Executive Director's office collaborated to determine whether the U. S.
labor mandates were relevant to the proposed IMF program in Mexico. Based on
their analysis, they became concerned that reforms the Mexican government
was proposing to increase labor market flexibility and modernize the labor
relations system could have negative implications for the rights of workers
to organize and bargain collectively. The U. S. Executive Director therefore
sent a memo to the Managing Director of the

IMF, urging the IMF's mission team to, among other things, (1) incorporate 7
Collective bargaining can occur at various levels, from highly centralized,
such as between all of the workers and employers in an industry at once, to
highly decentralized, such as between a particular group of workers in one
factory and their common employer. While there is no consensus among labor
policy specialists on the most appropriate level of collective bargaining,
it is agreed that generally, the more centralized the level of collective
bargaining, the more strength organized labor holds.

the discussion of core labor standards into their policy dialogue with
Mexican authorities in the context of any discussion of broader labor market
reforms and (2) survey labor market policies and practices in Mexico and
recommend policy initiatives that will help ensure the maintenance or
improvement of core labor standards. As part of another means for
establishing precedents, the U. S. Executive Director encourages IMF staff
and borrowing country governments to consult with the ILO when labor issues
come up in a country or when a country's program may have implications for
the country's adherence to core labor standards. For example, in commenting
on Kazakhstan's 1999

request for a new arrangement at an Executive Board meeting, the U. S.
Executive Director encouraged the Kazakhstani government to consult with the
ILO concerning proposed reforms to Kazakhstan's labor code. In doing so,
Kazahstan could ensure that these reforms were not only better suited to the
market economy that it is trying to develop, but also consistent with core
labor standards. Officials at Treasury and U. S. Executive Director's office
do not often advance core labor standards with two groups of countries-
advanced industrial economies and the poorest countries- because they
believe that these countries do not make good precedents. According to
Treasury

officials, they do not pursue these issues with advanced industrial
economies, such as France, Germany, or Japan, because their adherence to
core labor standards is generally high. In reviewing the poorest countries,
Treasury officials have found that they also do not generally make good
cases because they do not have a sufficiently large industrial base for the
core labor standards of freedom of association and freedom to organize and
bargain collectively to be important issues relative to the other

challenges facing these countries. Moreover, although child labor can be a
concern in these countries, Treasury officials noted that the root of the
problem is in the high level of poverty, cultural and societal norms, and
lack of opportunities for the children. In addition, concerns that Treasury
might have about forced labor or gender inequality in these countries are
more closely related to human rights issues than to core labor standards.
Therefore, according to Treasury officials, they address these issues in
that

context. For example, according to Treasury officials, Ghana's adherence to
each of the core labor standards could be improved, but since Ghana has a
pressing need to address poverty, and most of its labor force is engaged in
agriculture, Treasury did not urge the U. S. Executive Director to comment
on core labor standards in Ghana until recently.

To enhance Treasury's and the U. S. Executive Director's efforts to advance
U. S. policy on core labor standards, Treasury hired a labor policy
specialist in 1998 to provide background information and policy guidance on
core labor standards issues to other Treasury officials and the U. S.
Executive Director. The labor specialist is responsible for reviewing the
labor

situation in each IMF member country as it comes before the IMF's Executive
Board as part of a program request, a review of an existing program, or the
IMF's periodic reviews of the country's economic conditions. For each
country, the specialist determines whether there are concerns for that
country's adherence to core labor standards and coordinates with Treasury's
country desk officers to provide the U. S. Executive Director with input for
an oral or written statement to the IMF's Executive Board.

Although U. S. officials have been targeting their efforts to pursue core
labor standards, two executive directors noted that some developing
countries do not support U. S. policy on core labor standards because these
countries do not believe that U. S. motives are altruistic. Rather, they
view U. S. promotion of core labor standards as a trade protectionist
measure meant to increase labor costs in developing countries, thereby
potentially averting the relocation of U. S. firms and the loss of U. S.
jobs. Despite this resistance, officials at Treasury and the U. S. Executive
Director's office

note that they have seen signs that their efforts to advance U. S. policy
are being heard. For example, in response to U. S. interest on labor issues
in Mexico, IMF staff included an appendix concerning Mexico's efforts to

modernize labor markets and improve their efficiency in their 1999 report on
Mexico's request for an arrangement. 8 In addition, during visits to
Argentina to discuss its ongoing arrangement, IMF staff consulted with union
officials on a variety of labor issues related to the flexibility of its
labor markets.

8 “Mexico- Request for Stand- By Arrangement” (Washington, D.
C.: International Monetary Fund, June 18, 1999).

U. S. Policy on Audits of Military Expenditures

Appendi x V

at the IMF In 1996, Congress enacted the audits of military expenditures
legislation, 1 which includes a specific directed voting provision that
requires the U. S. executive directors at international financial
institutions to oppose nonbasic human needs assistance to countries that do
not conduct and report regular audits of their military spending to civilian
authorities. In the five cases we reviewed, we determined that the United
States has achieved

some success in advancing this mandate at the IMF and in convincing some
borrowing countries to conduct audits of military spending. The U. S.
Executive Director's effectiveness in advancing this particular mandate at
the IMF is due in part to a widespread view in the international community
that good governance, transparency of budgets, unproductive spending,

and military spending are economic issues that could impact the
effectiveness of a country's macroeconomic reform effort. Nevertheless, the
pursuit of this mandate has had an uncertain impact on the broader U. S.
influence at the IMF. While there is strong IMF support for the intent of
the legislation, U. S. and IMF officials emphasized that the military audit
mandate sometimes competes with countries' priorities and that U. S.

officials have limited discretion on when to advance the mandate for
countries deemed out of compliance. As a result, U. S. and IMF officials
believe that the limited discretion that U. S. officials have in advancing
this mandate runs counter to the consensus decision- making approach of the
Fund and could negatively impact U. S. influence at the IMF.

1 Foreign Operations, Export Financing, and Related Programs Appropriations
Act, 1997 (P. L. 104- 208, title V, sec. 576, 22 U. S. C. 262k- 1), as
amended by section 572, Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 1998 (P. L. 105- 118).

Background Congress has been concerned that military expenditures by some
developing countries are excessive and an unproductive drain on their

limited resources. Congress was also concerned that public information on
military expenditures for some countries is generally characterized by
incompleteness, lack of transparency, and inaccuracy. 2 Partly in response
to these concerns, in 1996 Congress passed the audits of military
expenditures legislation. The legislation states that the U. S. Executive
Director is to use its voice and vote to oppose the use of funds, other than
those to address basic human needs, for any government that does not have in
place a functioning system for reporting audits of military

expenditures to civilian authorities or has not provided such information to
any institution that requests it. 3 The U. S. Treasury was given a 3- year
window to develop an implementation approach, with the voting requirement
taking effect on October 1, 1999. After that date, the U. S. Executive
Director was instructed to oppose approval of IMF arrangements for countries
deemed not in compliance with the standards set forth in the mandate. On
October 18, 1999, 22 countries were deemed noncompliant with the standards
of the mandate, but by November 9, 2000, this number had declined to 17
countries. 4 In 1999, Treasury formed an Interagency Policy Group to assess
countries' compliance with the military audit legislation. The group is
comprised of the Treasury, the Department of State, the Department of
Defense, the U. S. Agency for International Development, the National
Security Council, and

the Office of Management and Budget. The Policy Group developed the
following interpretation and definitional guidance for the legislation:

? A country must be routinely conducting a post- expenditure examination,
verification of accuracy, and reconciliation of irregularities 2 Four
separate pieces of legislation have been passed since 1992 requiring the
United States to consider a country's military spending when making
decisions on providing international financial institution assistance.
Descriptions of these legislative mandates are provided in appendix I. 3 For
the purposes of this legislation, international financial institutions are
the International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the Asian Development
Fund, the African Development Bank, the African Development Fund, the
International Monetary Fund, the North American Development Bank, and the
European Bank for Reconstruction and Development.

4 According to Treasury, the list of noncompliant countries is not publicly
disclosed.

of receipts that fund the military (annually, though a 2- year completion
lag is acceptable). ? Results of the audit must be reported to a nonmilitary
entity. ? Significant off- budget or commercial revenue (defined as greater
than

5 percent of the total defense budget) that funds the military must also be
audited and reported to a civilian authority.

Treasury has taken several steps to advance the military audit mandate at
the IMF, including working with the State Department to inform IMF member
countries of the legislation through U. S. embassies and providing

information to the U. S. Executive Director on the countries that are
noncompliant with the mandate. The U. S. Executive Director's office also
informed IMF management and staff of the importance it attached to the

mandate and the compliance requirements. The Process for Registering

When a country is found to be not in compliance by the Policy Group, the
Opposition to IMF Programs

U. S. Executive Director is directed to oppose the use of IMF resources. The
process for registering opposition to the use of IMF resources is as
follows: ? The Policy Group recommends to the Secretary of the Treasury that
the U. S. Executive Director oppose the use of Fund resources to that
country. ? The Secretary of the Treasury then instructs the U. S. Executive
Director

to oppose the use of Fund resources to that country. ? The U. S. Executive
Director then states in an oral or written statement

to the Executive Board that the United States wants to record its opposition
to that country's program. ? The Secretary of the IMF's Executive Board
records U. S. opposition in the Board minutes.

The Policy Group has determined that the reference in the legislation for
the U. S. Executive Director to “oppose” provides flexibility to
either abstain or vote no. The use of a “no” vote versus
“abstain” would be the Secretary's determination, based on
interagency consultation on a case- by- case basis. The Policy Group has
also determined that in cases where the only reason for opposing the use of
IMF resources is a lack of compliance with the military audit legislation,
the U. S. Executive Director should abstain. In addition, in cases where
countries are actively engaged in making necessary changes to become
compliant, the U. S. Executive Director would include strongly supportive
comments in Board statements

accompanying the directed vote. The U. S. Executive Director has never

voted no under the military audit mandate but has abstained 3 times, as of
September 30, 2000. Regardless of whether the United States chooses to
abstain or vote no, its actions alone are not sufficient to veto a country's
access to IMF resources because approval of a country's arrangement requires
support from a majority of the Executive Board. Although the United States
has the largest voting share of any member (17 percent), this is
insufficient to unilaterally block access to IMF resources.

The decision by the United States to record its opposition to a country's
program is considered by the Secretary to the Board to be a vote (and
recorded as such in the minutes). However, other members do not have to
formally vote in response. Formal votes are rarely taken at IMF Board
meetings, but any executive director may require a formal vote to be held.
According to an IMF official, Board decisions are expected to reflect the
consensus of Board members, with the views expressed as part of the overall
discussion. Over the course of the meeting, the Secretary keeps track of
each executive director's position. While directors in almost all

cases support IMF programs on the whole, they may express differences of
views with programmatic details or broader issues regarding the quality of
the program. However, if there is evidence of widespread opposition, the
Chairman or an individual member may request a poll of members' views. Such
a poll is not considered a “vote” by the Board but a tool for
accurately gauging the views of Board members. An analysis of the U. S.
Executive

Director's voting record for the period of October 1997 through September
2000, shows that the U. S. Executive Director voted against or abstained
from voting a total of 21 times. 5 Of these 21 votes, 3 were related to
abstentions under the military audit mandate. 5 The U. S. Executive Director
voted against a proposed decision 11 times, abstained 9 times, and in 1
situation it was uncertain as to whether the U. S. Executive Director had
abstained

or voted against the decision. In seven instances, the U. S. Executive
Director's actions were related to the IMF's administrative and personnel
matters, and in the other cases, the actions taken were related to specific
country programs.

U. S. Efforts to Advance The United States has been actively advancing the
military audit mandate the Military Audit

and has been successful in the majority of the cases we analyzed. The U. S.
Executive Director has emphasized issues of fiscal controls and budget
Directed Vote Mandate transparency in U. S. country statements to the Board,
in attempting to Have Been Successful integrate the military audit mandate
within the IMF's own operating guidelines and institutional processes.
According to the U. S. Executive Director, the military audit mandate is
easier to advance than, for example, the labor mandate, because it fits well
within the Fund's efforts to promote good governance, fiscal transparency,
and the control of unproductive spending. 6 While the IMF does not generally
require audits of military spending as a condition for the use of its
resources, the IMF has asserted that its staff may need information about
the level of and trend in military

expenditures and related transactions in order to permit a full and
internally consistent assessment of the member's economic position and
policies. In addition, IMF members we spoke with generally agreed that the
auditing and transparency mechanisms promoted by the mandate could
potentially bring important information regarding military spending to the
attention of donors.

We reviewed five countries that were included on the October 1999 list of 22
noncompliant countries established by the U. S. Treasury (Burkina Faso,
Guinea- Bissau, Indonesia, Kazakhstan, and Rwanda). 7 Of these five
countries, as of November 9, 2000, only Guinea- Bissau is not in compliance
with the military audit mandate (see table 5).

6 Various mechanisms in the IMF and other international financial
institutions have contributed to the United States effectively advancing the
military audit legislation. These mechanisms include The IMF's Annual Survey
of World Military Spending, Public Expenditure Reviews, Performance- based
Lending Criteria, and Advance Budget Commitments. In addition, the IMF, with
strong U. S. encouragement, established the Code of Good Practices on Fiscal
Transparency in 1998 that promotes budget, expenditure, and auditing
standards.

7 The directed vote aspect of the mandate is only pertinent to countries
under an IMF financial arrangement. Of the original 22 countries that were
deemed noncompliant, these 5 countries were the only ones under such an
arrangement since the mandate went into effect and thus were suitable as
case studies. Although the United States pursued the mandate at some of the
other 17 countries, none faced the prospect of U. S. opposition to their
program at the IMF, and only 1 of these 17 countries has become compliant as
of November 9, 2000.

Table 5: The United States, the IMF, and Five Countries' Efforts to Conform
to the U. S. Audits of Military Expenditures Mandate, as of November 30,
2000

Burkina Faso Guinea- Bissau Indonesia Kazakhstan Rwanda

Arrangement July 10, 2000 January 7, 2000 February 4, 2000 December 13, 1999
November 19, 1999, approved after

and July 31, 2000 September 30, 1999

U. S. Treasury's Noncompliant Noncompliant Noncompliant Noncompliant
Noncompliant

determination as of October 18, 1999

U. S. Treasury's Worked indirectly Worked with U. S. High- level Treasury
Worked with U. S. Worked with U. S. efforts through the IMF embassy in
Senegal and U. S. embassy

embassy to obtain embassy and IMF

Country Director and to apprise

officials conducted information on the staff to obtain

directly through U. S. Guinea- Bissau of its several meetings audit process
for information on audit embassy.

noncompliant status with top Indonesian military spending. system and status
of

and to advance the officials and military audit.

mandate. advanced mandate.

U. S. Executive Fund program Fund program U. S. Executive

On October 19, Abstained:

Director's efforts reviewed on reviewed on Director voiced 1999, U. S.
Executive November 19, 1999 using its voice/ vote a

September 10, 1999, September 14, 1999, several concerns Director at the
Abstained: July 31, prior to mandate prior to mandate about unaudited, off
European Bank for

2000 becoming effective. becoming effective. budget revenue that

Reconstruction and Authorities had not The U. S. Executive

The U. S. Executive funds the military and Development

begun an audit of the Director's statement Director's statement actively
pursued with abstained on a Defense Ministry. voiced concerns encouraged
annual IMF staff.

project. No action regarding the

audits of military was necessary by absence of annual spending. Abstained:
the U. S. Executive audits of Defense

January 7, 2000 Director at the IMF

Ministry. on December 13, 1999.

IMF efforts IMF mission officers The audit and control

IMF staff worked with No action was Urged the authorities discussed the of
military Indonesian necessary by IMF

to give priority to the mandate and U. S. expenditures is a key authorities
to commit staff because audits of key Executive Director's

aspect under an in the Letter of Intent b country was deemed ministries,
including concerns with upcoming IMF to audits of compliant by U. S.
Defense. IMF country officials.

arrangement and the off- budget revenues Treasury after the believes that

IMF- World Bank that fund the military. U. S. abstention at the authorities'
portion of the Heavily European Bank for

commitment were Indebted Poor Reconstruction and strengthened with Countries
Initiative Development.

assistance from the debt relief. Canadian, Dutch, and Swedish governments

(Continued From Previous Page)

Burkina Faso Guinea- Bissau Indonesia Kazakhstan Rwanda

Country's efforts President issued a Audit of the Defense

Authorities agree Authorities provided Authorities agreed to

decree in April 2000 Ministry has not been with intent of information that
give a high priority to

calling for annual initiated but is mandate and have indicates a the audit
of the audit of Defense

anticipated. initiated steps to functioning audit

Defense Ministry. Ministry.

account for all system, including

off- budget funds in its Defense Ministry. audits of public institutions,
including the Defense Ministry.

Current country Compliant Noncompliant Compliant

Compliant Compliant status June 29, 2000 January 6, 2000 February 3, 2000
November 29, 1999 September 13, 2000

a Vote = abstain or vote “no.” Voice = stating U. S. position
without a vote. A formal vote is never actually taken. The U. S. Executive
Director provides a written statement for the record. b The Letter of Intent
describes the policies that a country intends to implement in the context of
its request for financial support from the IMF. Sources: GAO analysis of
data from the Department of the Treasury, U. S. Executive Director at the
IMF, and IMF.

According to the U. S. Executive Director, U. S. success in advancing the
audits of military expenditures mandate was aided by two factors: acceptance
by the IMF of the merits of the issue, and the possibility that the United
States would oppose a country's use of IMF resources. There is a widespread
view in the international community, including at the IMF, that good
governance, transparency of budgets, unproductive spending, and

military spending are economic issues that could impact the effectiveness of
a country's macroeconomic reform effort. Therefore, IMF staff consider it
appropriate to raise concerns about military expenditures in the context

of their efforts to assist countries. As shown in table 5, IMF staff
encouraged the countries' authorities to audit government accounts,
including military receipts and expenditures. In the case of Kazakhstan, IMF
support was unnecessary because the country was already compliant. In these
cases, the changes encouraged by the IMF also helped the country in its
efforts to comply with the U. S. mandate. For example, in the case of
Indonesia, IMF staff strongly encouraged Indonesian officials to include a

commitment to audit off- budget military expenditures as part of its Letter
of Intent to the IMF. The inclusion of this commitment within the Indonesian
Letter of Intent was a contributing factor in the U. S. decision to remove
Indonesia from the list of noncompliant countries.

Based on our review of country documents and discussions with Treasury, U.
S. Executive Director, and IMF officials, we have determined that the
success of the mandate was also aided by countries' desire to avoid having
the United States oppose their receipt of resources under their IMF
arrangements. 8 As our military audit mandate case study revealed, certain
countries have agreed to undertake military audits as a response to U. S.
pressure. According to Treasury and U. S. Executive Director's officials,
because of the key role of the U. S. government in the IMF and the donor
community, recipient countries do not like having the United States oppose

their IMF program. Although U. S. opposition is not sufficient to veto a
country's access to IMF resources, according to U. S. and country officials,
the U. S. position raised the priority of this issue and motivated some of
the countries on the noncompliant list to become compliant more rapidly. For
example, according to Treasury, because the United States was threatening to
oppose debt relief to Burkina Faso, the authorities agreed to initiate an
audit of military spending earlier than they otherwise would have. In the
case of Guinea- Bissau and Rwanda, despite their efforts to become

compliant with the audits of military expenditures mandate, the U. S.
Executive Director opposed their receipt of IMF resources because at the
time of the review of their IMF arrangement, they were not compliant with
the criteria established by the Policy Group. Both countries continued to
address U. S. concerns following their reviews; Rwanda became compliant in
September 2000, and Treasury believes the government of Guinea- Bissau

is beginning to take steps to audit government expenditures, including the
military. According to a Treasury representative, the Treasury is working
with U. S. embassy representatives to ensure that Guinea- Bissau understands
U. S. legislative criteria requiring the reporting of its military audit to
civilian authority.

8 It should not be concluded that U. S. leverage is always this evident when
a mandate requires a directed vote. The U. S. Executive Director at the
World Bank routinely opposes loans to countries due to several additional
directed vote mandates, including those pertaining to human rights, the
environment, and nuclear nonproliferation. According to an official from the
World Bank's U. S. Executive Director's office, the routine nature of the U.
S. opposition has blunted its impact and has not necessarily led to any
change in countries' policies.

The Impact of the The impact of pursuing the military audit mandate on the
broader U. S.

Military Audit Mandate influence on IMF policy is uncertain. Based on our
discussions with U. S.

and IMF officials, we have determined that the directed nature of the on
Broader U. S. mandate has worked to advance U. S. policy goals;
nevertheless, it may also Influence at the IMF

limit U. S. credibility with other IMF members. There is widespread support
by IMF members with the intent of the legislation, meaning that countries
should strive to control their level of military spending and have in place
a system that provides accurate and reliable information to the public. As
our military audit mandate case study revealed, certain countries have
agreed to undertake military audits in response to U. S. pressure. However,
other IMF members we spoke with questioned whether the United States may

have promoted the military audit issue in certain countries simply because
it is a legislatively mandated directed vote and not necessarily because it
was in the best interest of the country at the time. Therefore, while U. S.

officials are pleased with the progress realized through their pursuit of
the mandate, they see a risk to U. S. credibility when they must emphasize
one issue over other more pressing matters that a country may be
confronting.

The mandate does not give the U. S. Executive Director the discretion to
determine when to pursue the military audit issue. As a result, the U. S.
Executive Director is compelled to advance the mandate with country
authorities and with IMF staff regardless of whether the U. S. Executive
Director believes it is an appropriate time to pursue the mandate with a

given country. Treasury staff and all of the executive directors we
interviewed at the IMF expressed concern with the inflexibility of the law.
The executive directors believe that the U. S. Executive Director has been

very effective in advancing the military audit mandate but, due to the
inflexibility of the mandate, has at times been too aggressive in this
pursuit.

The constraints imposed by the directed nature of the military audit mandate
were evident in our case study analyses. For example, as a result of a
severe economic crisis and the subsequent collapse of 30 years of military
dictatorship, Indonesia has been faced with many competing priorities.
Numerous Treasury and IMF documents and Board meeting agendas over the past
3 years indicate that the major priorities of the IMF Board for Indonesia
centered on issues such as banking and corporate restructuring, bankruptcy
law, and social safety net issues. Annual audits of

off- budget revenues that fund the military were not one of these major
priorities. According to IMF staff, while the new democratic government of
Indonesia is receptive to the military audit mandate, discussions with
authorities on this issue were highly complex. For example, according to

IMF staff, the auditing capacity in Indonesia is limited, and it has been a
challenge getting the overall fiscal accounts under control, especially when
it requires the cooperation of the military. In addition, according to IMF
staff, the time frame needed to achieve transparency in military
expenditures is quite burdensome, and there are many immediate, more urgent
issues to address. IMF staff also believe that the Letter of Intent
commitment to audit off- budget sources that fund the military was ambitious
and should be recognized as such. IMF staff expressed concern about having
U. S. officials overemphasize this issue at this point. Similarly, Rwanda,
as a post- conflict country, has several major priorities,

including government and macroeconomic stability, building administrative
capacity, and satisfying the requirements of the Heavily Indebted Poor
Countries Initiative. 9 Based on issues before the IMF Board, an audit of
its military spending was only one of a large number of important
priorities. According to the U. S. Executive Director, as of July 2000
Rwanda continued to face very difficult humanitarian and economic problems
that require the utmost resolve and determination to effectively address. In
addition, according to the U. S. Executive Director's representative, when
the United States abstained from voting on Rwanda's program in July 2000, it
required the U. S. Executive Director to raise as the

first priority an issue that was just one of the necessary steps to address
the country's many problems. The U. S. Executive Director was compelled to
abstain from voting to make a financial disbursement for Rwanda's program
because Rwanda was not yet in full compliance with the military audit
mandate's requirements. This occurred despite the administration's knowledge
that Rwanda would become compliant with the mandate shortly and, in its
judgment, was making good progress in implementing economic reforms and
improving fiscal transparency.

IMF Board members understand that in certain cases the U. S. Executive
Director advanced military audit concerns because of the legislative
requirements and not necessarily because a focus on military audits was
among the most important issues confronting that country. These Board
members noted that the Executive Board generally makes decisions on a
consensus basis and that limitations on an executive director's discretion
runs counter to this practice. Therefore, while U. S. officials agree with
the

9 The Heavily Indebted Poor Countries Initiative is a framework developed
jointly by the IMF and the World Bank to address the external debt problems
of the heavily indebted poor countries.

intent of the mandate, they believe that there is a risk to U. S.
credibility at the IMF when the U. S. Executive Director must emphasize an
issue over other, more pressing priorities for a borrowing country.

Appendi x VI

Objectives, Scope, and Methodology The Consolidated Appropriations Act for
Fiscal Year 2000 (P. L. 106- 113 sec. 504 (e)) requires GAO to report on the
extent to which Fund practices are consistent with U. S. policies set forth
in federal law. In order to address this requirement, we (1) identified how
the U. S. Treasury and the U. S. Executive Director promote U. S. policies
mandated by Congress for the Fund and (2) assessed whether Treasury and the
Executive Director have been able to influence Fund operations and other
members' policy

positions in a direction that would be consistent with U. S. policy as set
forth in law. 1 To help answer these objectives, we analyzed the process by
which Treasury pursues its legislative mandates and conducted case studies
of specific U. S. policies and Treasury's efforts to promote them for
individual countries' Fund arrangements from 1998 through 2000.

To identify how the U. S. Treasury and the U. S. Executive Director of the
International Monetary Fund promote U. S. policies mandated by Congress for
the Fund, we analyzed the process by which Treasury pursues

legislative mandates. Specifically, we reviewed Treasury documents,
including internal correspondence, concerning the creation in 1999 of
Treasury's Task Force on Implementation of U. S. Policy and Reforms in the

International Monetary Fund, its operations, and the challenges that
Treasury has faced in implementing its process for addressing legislative
mandates. We also reviewed examples of Treasury officials' draft policy
position input to the U. S. Executive Director for oral and written
statements to the Executive Board. In addition, we interviewed officials
within all 10 Treasury offices 2 who are responsible for developing the U.
S. policy position toward the Fund, including members' Fund arrangements. 3
Further, in July 2000 we attended one task force meeting to observe

Treasury's efforts to address legislative mandates. We also reviewed U. S. 1
Recognizing that influence by any member of the Fund is hard to discern in
an organization that generally operates by consensus, for the purposes of
this report we defined “influence” as the ability of the United
States to affect Fund policies as contained in Fund programs, as well as the
actions of countries using Fund resources.

2 Specifically, we interviewed Treasury officials within the following
offices: the Office of African Nations; the Office of Middle East and South
Asian Nations; the Office of Central and Southeastern Europe; the Office of
Russia, Eastern Europe, and Central Asia; the Office of Latin American and
the Caribbean Nations; the Office of East Asian Nations; the Office of
International Monetary Policy, the Office of International Banking and
Securities Markets, the Office of Development Finance, and the Office of
International Trade.

3 We also interviewed Treasury officials within the office of Multilateral
Development Banks to compare how legislative mandates concerning other
international financial institutions, such as the World Bank, are pursued.

statements to the Executive Board and internal U. S. Executive Director
documents from 1998 to 2000 regarding U. S. Executive Director efforts to
pursue legislative mandates. Finally, we interviewed the U. S. Executive
Director and all of the staff in that office who monitor country and policy
developments concerning the Fund, as well as numerous Fund staff and other
Executive Board members.

To assess whether Treasury and the U. S. Executive Director have been able
to influence Fund operations and other members' policy positions in a
direction that would be consistent with U. S. policy as set forth in law, we
conducted case studies of specific U. S. policies and Treasury's efforts to
pursue them for individual countries' Fund arrangements. To select these
case studies, we identified legislative mandates concerning U. S. policy
objectives with respect to the Fund, using our own legal analysis
supplemented with documentation obtained from Treasury. We used two criteria
as the basis for identifying the relevant laws for this review. We defined
these criteria as (1) any current law that explicitly directs the U. S.
Executive Director to use the U. S. vote at the Fund to achieve a policy
goal and (2) any current law that seeks to have the U. S. Executive Director
use

the U. S. voice at the Fund to promote a U. S. policy or make a policy
change. We selected sound banking principles, labor policies, and audits of
military expenditures as the U. S. policy focus for our case studies. We
chose these policies because they represent a range of types of legislative
provisions, or mandates, that are set forth in federal law, including both
voice and directed vote provisions. We also chose these policies on the
basis of our preliminary analysis, which suggested that the U. S. ' ability
to impact Fund practice was related to whether policies encompassed issues
that were viewed as central to the traditional focus of the Fund's mission.
For each policy issue, we reviewed Fund practices with respect to five
member countries that we selected based on a number of factors, including

geographic diversity, level of economic development, type of Fund
arrangement, and range of issues connected to the policy concern. For the
labor policies and audits of military expenditures case studies, we selected

only countries that have a financial arrangement with the Fund because the
language in their corresponding mandates is expressly directed at those
countries. Specifically, we selected the following countries for each case
study: (1) for sound banking principles, India, Mexico, Romania, South

Africa, and Thailand; (2) for labor policies, Argentina, Ghana, Kazakhstan,
Mexico, and Thailand; and (3) for audits of military expenditures, Burkina
Faso, Guinea- Bissau, Indonesia, Kazakhstan, and Rwanda. We limited our

review to the activities of the Treasury, the U. S. Executive Director, and
the Fund for the last 3 years; that is, the period from January 1998 through
November 2000. Since we focused primarily on the Fund rather than on country
practices, we did not travel to any of these countries as part of this
review. However, we interviewed Fund officials who monitor

developments in these countries as well as seven other executive directors
of the Fund's Executive Board in Washington, D. C. Our basis for selecting
these executive directors to speak with is discussed below.

We reviewed numerous internal Treasury and U. S. Executive Director
documents dating from 1998 to 2000 to answer our second objective. These
documents included internal correspondence among officials within Treasury
and the U. S. Executive Director's office concerning their deliberations to
develop U. S. policy positions with respect to both general mandate issues
as well as the case study policies. We also reviewed Treasury's policy
position input to the U. S. Executive Director and all U. S. statements to
the Fund's Executive Board for each country covered for our case studies. In
addition, we interviewed Treasury and U. S. Executive Director officials who
monitor sound banking, labor, and military audit

issues as well as those who monitor the country developments and are charged
with formulating and implementing the U. S. policy position for each country
with respect to the Fund. We also reviewed all Fund staff documents provided
to the Executive Board concerning these countries for

their program and economic policy reviews. These included Fund staff reports
concerning countries' requests for arrangements, reviews of ongoing
arrangements, and countries' periodic economic reviews, as well as staff
summaries of Executive Board meetings. In addition, we interviewed numerous
officials at the Fund to answer our second objective. Specifically, we
interviewed staff at the Fund who monitor each of the countries under our
review, except for Fund staff who monitor developments in Burkina Faso, who
were not available to meet with us. For the other countries, we discussed
with Fund staff how they set priorities in negotiating arrangements with
these countries and how our

case study policies fit into these priorities. We also met with officials
from the Fund's Policy Development and Review Department to discuss how the
Fund pursues labor and military audit issues and we met with the Fund's
Monetary and Exchange Affairs Department to discuss how the Fund pursues
strengthening sound banking principles in countries. In addition, we met
with 7 of the 23 non- U. S. Executive Board directors and discussed their
views of these policies and the impact of U. S. influence at the Fund.
Specifically, we met with the appointed executive directors of France,

Germany, Japan, and the United Kingdom, and the elected representative
executive directors from Gabon, Mexico, and Thailand. We selected these
executive directors to speak with because (1) they represent the largest
donor countries and a mix of borrower countries at the Fund and (2) the
elected executive directors represent several of the countries we reviewed

in our case studies. Finally, we also interviewed the Assistant Secretary of
the Fund's Executive Board and the Deputy General Counsel of the Fund to
obtain information on the Board's process for voting and how often voting
occurs. For comparison purposes, we interviewed an official within the U. S.
Executive Director's office at the World Bank about the voting process in
that institution as well.

We conducted our work from March through November 2000 in accordance with
generally accepted government auditing standards.

Comments From the Department of the

Appendi x VII Treasury

Appendi x VI II

GAO Contact and Staff Acknowledgments GAO Contact Thomas Melito (202) 512-
9601 Acknowledgments In addition to the person named above, Carolyn Black-
Bagdoyan, Tamara Cross, Barbara Shields, Val�rie Leman Nowak, Rona
Mendelsohn, Mark Speight, Mary Moutsos, and Mark Dowling made key
contributions to this report.

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Contents

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Appendix I

Appendix I U. S. Legislative Policy Mandates Concerning the International
Monetary Fund

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Appendix I U. S. Legislative Policy Mandates Concerning the International
Monetary Fund

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Appendix I U. S. Legislative Policy Mandates Concerning the International
Monetary Fund

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Appendix I U. S. Legislative Policy Mandates Concerning the International
Monetary Fund

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Appendix I U. S. Legislative Policy Mandates Concerning the International
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Appendix I U. S. Legislative Policy Mandates Concerning the International
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Appendix I U. S. Legislative Policy Mandates Concerning the International
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Appendix I U. S. Legislative Policy Mandates Concerning the International
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Appendix I U. S. Legislative Policy Mandates Concerning the International
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Appendix II

Appendix II Treasury's Process for Pursuing IMF Legislative Mandates

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Appendix II Treasury's Process for Pursuing IMF Legislative Mandates

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Appendix II Treasury's Process for Pursuing IMF Legislative Mandates

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Appendix II Treasury's Process for Pursuing IMF Legislative Mandates

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Appendix II Treasury's Process for Pursuing IMF Legislative Mandates

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Appendix III

Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix III U. S. Policy on Sound Banking Principles at the IMF

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Appendix IV

Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix IV U. S. Policy on Labor Issues at the IMF

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Appendix V

Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix V U. S. Policy on Audits of Military Expenditures at the IMF

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Appendix VI

Appendix VI Objectives, Scope, and Methodology

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Appendix VI Objectives, Scope, and Methodology

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Appendix VI Objectives, Scope, and Methodology

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Appendix VII

Appendix VII Comments From the Department of the Treasury

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Appendix VIII

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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