Human rights and macroeconomic stability are far from incompatible. Rather, they both play crucial roles in the fight against poverty. By supporting sound economic policies and encouraging constructive dialogue within civil society, the IMF contributes to human rights.[1]

It is generally an acceptable principle that international trade eliminates poverty.  A progressive definition of poverty has been given in the World Bank’s World Development Report 2000/2001: Attacking Poverty. Poverty, according to the report, is “more than inadequate income or human development—it is also vulnerability and lack of voice, power, and representation.” [2] Hence for the purpose of eradication of poverty the international institutions have adopted a new approach to ensure an enhanced participation of poor in the area of trade & business.

But what exactly is a human rights-based development strategy? At the risk of oversimplification, one could define a rights-based approach to growth and poverty reduction as comprising six elements: (1) active protection of civil and political liberties; (2) pro-poor budgets and growth strategies; (3) policies geared toward ensuring that people receive adequate food, education, and health care; (4) broad participation in policy design; (5) environmental and social awareness; and (6) efforts to combat discrimination[3].

IMF and Human Rights

One of the most important matrixes of human rights is poverty and IMF stresses upon the eliminations of poverty by way of ensuring the free flow of trade & business. The legal regime of IMF regulates the currency & exchange which is the media of all trade and businesses. The purpose of the IMF is to prevent any kind or exchange distortion or manipulations to ensure a smooth functioning of trade. The Article 1 of the IMF provides –

The purposes of the International Monetary Fund are:

(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

(v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.

Hence reading the purposes of the IMF we may conclude that IMF works in furtherance to increase monetary cooperation among the member nations and promotes an orderly exchange rate. It also facilitates a balanced growth of the trade and business by reducing the macroscopic imbalances and thereby infuses prosperity and harmony in the world. In actuality all the activities undertaken by the IMF is taken in the direction of reduction of economic imbalances which has the impact of reducing poverty also. The economic imbalances may adversely impact upon the welfare of poverty. For example, in case of inflation all the classes of society suffers from the price rise, though the wealthy class has something to gain considering the fact their assets value also increases. But in case of inflation the poor are the net looser. Since 1999, IMF has put special emphasis on human rights and poverty and encouraged its member nations to evolve special policies taking human rights development into account.[4]

Currency manipulations and Poverty

Currency manipulation is antithesis of fair trade and ultimately it hampers growth and development of the global economy. The legal regime of the international Monetary Fund provides the rules & regulations regarding the prevention of currency manipulations.

Currency manipulation occurs when a government buys or sells foreign currency to push the exchange rate of its currency away from its equilibrium value or to prevent the exchange rate from moving toward its equilibrium value[5]. Recently after the devaluation of currency by China there is again a widespread fear that such competitive devaluation can trigger a currency war among the exporter countries. A competitive devaluation is undertaken by a party of the international trade in order to attain an unfair advantage at the cost of other participants of trade. Such unfair advantage comes to the manipulator in two ways, one in the form of cheaper exports to the other nations and simultaneously such devaluation causes the imports in the manipulator country to become costlier. Such business strategy is helpful for the business of a particular country to grow but such growth is harms the business of the other country. Such a trade policy will be very dangerous for the international trade regime as other countries could also resort to the competitive devaluation which gives rise to a situation which is known as ‘currency war’.

The overall impact of the currency manipulation is that it distorts the trade & business environment and creates economic imbalances. If a country artificially reduces the value of its currency it has an adverse impact on the trade activities of the trading partner. The exports of the manipulating country become cheaper in the other countries and imports in the domestic market of the manipulating country become costlier. Hence a currency manipulation impacts the overall market scenario of the trade partners of the manipulating countries. Besides creating the trade and economic imbalances it also creates joblessness and poverty in the other countries. US – China Economic and Security Review Commission has specifically noted with regards to artificial devaluation of currency by China and its fallout on US trade and business –

Meanwhile, China’s economic imbalances—both external and internal—continue to burden the U.S. and global economies. China’s dependence on exports for growth, a policy supported by an undervalued currency, has resulted in China’s accumulation of record foreign currency reserves, and contributes to global trade imbalances. Despite China’s economic slowdown, its exports continue to grow, and China in 2014 sustained its global trade surplus. In the first eight months of 2014, the U.S.-China trade deficit increased by 4.1 percent year-on-year to a total of $216 billion. Domestically, the government’s failure to shift the economy toward a more consumption-based growth model maintains China’s overdependence on exports and investment and limits opportunities for U.S. exports to China.

In 2014, Chinese direct investment flows into the United States exceeded U.S. investment into China for the first time as foreign firms faced an increasingly hostile investment climate in China. According to data from China’s Ministry of Commerce, foreign direct investment (FDI) into China declined 1.8 percent in the first eight months of 2014 compared to the same period in 2013. China ramped up use of its Anti-Monopoly Law against foreign firms in what appears to be unequal enforcement in order to create favorable market conditions for Chinese competitors. China used the Anti-Monopoly Law to investigate foreign firms in sectors designated by the government as ‘‘strategic and emerging,’’ including automobiles and information technology. In addition, uneven enforcement of Chinese laws, lack of transparency, and state-run media attacks on foreign firms contributed to further deterioration of the foreign investment climate in China. At the same time, China accelerated its 2001 ‘‘go out’’ policy, which encourages Chinese firms to expand their global presence. In the United States, stock of Chinese FDI grew from $1.9 billion in 2007 to $17 billion in 2012.[6]

USA which heavily suffered from such alleged currency manipulations by losing its market shares of import in the emerging markets like China, has called such artificial devaluation of currency as subsidy –

Because trade remedies are often inaccessible, they are effectively useless to smaller U.S. companies that cannot afford to pursue cases and to companies that cannot muster the threshold industry support. Available trade remedies remain inadequate and fail to account for the interests of other affected constituents, such as workers and communities; China’s undervaluation of its currency, for example, continues to function as a de facto subsidy for its exports, and U.S. law still does not provide a sufficient remedy to this problem for private parties. The Administration has not been effective in getting China to change its policies.[7]

The most notable point in the above mentioned policy brief is that United States calls such artificial devaluation as an export subsidy. Under the WTO legal regime export subsidies are prohibited as it distorts the world trade. Like currency manipulations the export subsidy is also an antithesis of growth and development and thereby creates poverty[8].

Currency Manipulations: Law & Remedies

As discussed above, a case of currency manipulations gives rise to joblessness and poverty in the world as it is antithesis of growth and fair competition. It has been experienced that no economic policy can be successful without the widespread currency manipulations. The recent competitive devaluation of currency by China is merely an example of such manipulation[9]. In the arena of international trade the incidences of currency manipulations are so rampant that it impacts the currency flow of billions of dollars every year causing poverty and joblessness. It has been estimated by the U.S. Peterson Institute that US alone lost around 1 to 5 million jobs due to currency manipulations.[10] But ironically despite of having so many cases of currency manipulations till yet no country has been declared as the manipulator. Hence there is an urgent need to address the issue of currency manipulations. At the same it is also required that certain modification in laws should be done so that such a wide spread practice of manipulating the currency could be curbed.

Currency Manipulations and Articles of Agreement (IMF): Legal Mandates of Article IV of IMF –

The present form of the Article IV of IMF was introduced in 1978 by the Second Amendment of Articles of Agreement of IMF after the collapse of the par value[11] system.

The Article IV of the Articles of Agreement, International Monetary Fund deals with the issue of currency manipulations. The Article IV, Section 1 of the IMF can be divided into three parts – Preamble, General Obligations and Specific Obligations[12].

The first part of the Section 1 of Article IV of IMF provides the “essential purpose” and “principle objective” of IMF. The preamble part of Section 1 acts in the broader interest of the growth and development of the international trade and sets out the purpose and objective to achieve such goals[13]. The “essential purpose” of the international monetary system is identified as “providing a framework that facilitates the exchange of goods, services and capital among countries and sustains sound economic growth”.[14]

The Preamble part (or even the Section 1 of the Article) is not obligatory in nature. It merely provides the essential guidelines which are to be observed by the member nations while doing the trade with each other.

The Article IV of IMF provides a general as well as four other specific obligations for the parties. The (preamble and) general obligations of the parties under Article IV provides –

“Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates”.

The International Monetary Fund provides the following four specific obligations under Section 1 –

(i)      Endeavour to direct its economic and financial policies towards the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

(ii)     Seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

(iii)    Avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and

(iv)    Follow exchange rate policies compatible with the undertakings under this Section.

The phrase “In particular, each member shall:” in Article IV bridges the gap between the general obligations of the members with the particular obligations. The phrase also indicates that the list of four specific obligations is not exhaustive and the general obligations are broader than the specific obligations. Secondly, even though the preamble of the Article IV of IMF does not set out the purpose of Article IV but still it provides a tool in the hands of the lawmaker to interpret the obligations of the members which are set forth in Art. IV in the light of the preamble.

The general obligations of the members, to “collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates”, is connected with the four specific obligations of the members of the fund. Out of these four specific obligations two relate to the domestic policies whereas the other two relate to the external policies.[15]

FUND SURVEILLANCE

One of the tools to sort out the issues of currency and exchange rate is fund surveillance. It is the duty of the (“shall” is used in constructing the wordings of section 3(a) of Article IV) fund to ensure an effective operation.

Section 3 (a) of Article IV provides –

Section 3.  Surveillance over exchange arrangements

• The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.

Section 3 (b) of Article IV further imposes a positive obligations on the members to cooperate with the Fund in its duty of surveillance. In order to help the fund to carry on its task of firm surveillance it shall be the duty of the members to provide the necessary information and shall also discuss its exchange rate policies with the Fund (the member’s exchange rate policies and value of the currency to be consistent with the broader scope of Section 1 of the Article IV of Articles of Agreement). After the due consultation the Fund may also advise the member nations to bring certain modifications in their exchange rate policies. Such surveillance is carried out by the team of the Fund staff on the basis of the broad spectrum of the economic information which is obtained from the of the member nation, such as fiscal deficit, interest rates, foreign exchange reserve etc. On the basis of these broad parameters the Fund may advise certain policy changes and if the member nation agrees with these changes the findings and observation of the IMF mission is said to be adopted.

Conclusion

Currency manipulations distort trade and destroy the harmony between the nations in the area of international trade. A currency culture which is free from any kind of manipulation will ensure free flow of trade and thereby it will help eliminating poverty in the world. But it can be concluded from the abovementioned discussion that even if the currency manipulation is a very sensitive legal issue for the international trade, the IMF provisions relating to the currency manipulation can be at best said to be a piece of ‘soft law’ considering the fact it does not provide either the definition or penalty of currency manipulations. Many experts[16] have adopted the view that the currency manipulations are in the nature of export subsidy under the GATT/WTO regime and as per the provisions of GATT/WTO the other party has the right to impose countervailing duties against any act of currency manipulation. Though this is a highly debatable issue and the policy makers are highly divided on this issue. Hence it is far from becoming a rule of law under the WTO legal regime and until it becomes a Law there is no end of currency manipulation.

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[1] Sérgio Pereira Leite, Human Rights and the IMF, Finance & Development, A quarterly magazine of the IMF December 2001, Volume 38, Number 4, available at  http://www.imf.org/external/pubs/ft/fandd/2001/12/leite.htm

[2] Supre Note 1

[3] Supra note 1, at 1.

[4] Supra note 4.

[5] Policy Brief, NUMBER PB12-19, Page 1, Peterson Institute for International Economies.

[6] November 2014 REPORT TO CONGRESS of the U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION, Chapter 1: U.S.-China Economic and Trade Relations, pp1-2.

[7] Ibid at 5.

[8] Even though the alleged Chinese currency manipulation has been treated as the export subsidy by US it is highly debatable and a matter of research whether the instances of currency manipulations constitute export subsidy, See e.g. Brayan Mercurio & Celine SZE Ning Leung, Is China a “Currency Manipulator”?: The Legitimacy of China’s Exchange Regime Under the Current International Legal Framework, The International Lawyer, pp.  Fall 2009, Volume 43, Number 3. See Also Eric Denters, Manipulation of Exchange Rates in International Law: The Chinese Yuan, ASIL INSIGHTS (Nov. 2003), available at http://www.asil.org/insigh118.cfm.

[9] See the reports on recent Chinese currency devaluation, e.g. Could China’s Yuan Devaluation Spark a New Financial Crisis? Available at http://www.bloomberg.com/news/articles/2015-08-23/china-led-emerging-market-turmoil-evokes-worrisome-1994-parallel

[10] http://www.forbes.com/sites/realspin/2015/01/20/currency-manipulation-and-its-impact-on-free-trade/

[11] After the collapse of par value system the floating exchange rate was adopted by the developed countries. In the par value system the exchange rate had fixed regime and US dollar was measured in terms of fixed amount of gold.

[12] IMF, Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework, p.7,  Legal Department, In consultation with the Policy Development and Review Department (2006)

[13] See Id.

[14] Ibid at 7-8.

[15] Supra note 12 at 9.

[16] Policy Brief, NUMBER PB12-19, Page 1, Peterson Institute for International Economies.