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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1971
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Excerpts from an address by Robert S. McMamara, President of the World Bank Group, to the United Nations Economic and Social Council (ECOSOC), United Nations, New York, on November 13, 1970.

“During this past year, the Pearson Commission Report has received world-wide attention. Its chief value lies, I believe, in the nonpartisan and objective view it takes of the leading issues in the development scene—both in the aid-providing and in the aid-receiving nations. It brings us face to face with the principal problems which all must deal with and solve.

“Among the most important recommendations of the Pearson Commission were those dealing with the organization of the international development community as a whole. The common thread that runs through these is that the past 20 years have witnessed the emergence of an almost bewildering number of bilateral and multilateral organizations that in one way or another are concerned with international development. While recognizing the value of these instrumentalities—and of the specialized experience they have accumulated—the Commission pointed out that the framework which has evolved suffers from four basic shortcomings:

  • It lacks a process for joint and authoritative monitoring and review of what is being done.

  • The multiplicity of assistance agencies is not matched by an effective mechanism to integrate their work.

  • There is, for the most part, a failure to relate development assistance policies to policies concerned with trade and monetary problems.

  • And, finally, the system does not project sufficient unity of purpose and of approach to make it a rallying point for public support in the industrialized countries.

“The Commission recommended that the President of the World Bank call an international conference on this matter this year. But clearly it would be inappropriate for the Bank to do so, for within the United Nations system it is this body-ECOSOC itself—which has the prime responsibility for dealing with this problem.

“Meanwhile, I believe that the World Bank, consistent with its aims and purposes, can contribute substantially toward making the international development effort more rational and cohesive. There are three principal lines of action, which we propose to follow, to which I would like to refer:

“We propose to establish working relationships with other international agencies that will make our common efforts in the development field complementary rather than overlapping. We have been working away at this without much fanfare and are beginning to build a pattern of interagency cooperation which I believe is impressive, although I suspect it is not widely known outside the institutions concerned. We are establishing a series of cooperative understandings with our sister agencies under which we will work together toward a more efficient division of labor that will both economize scarce resources of professional talent and will provide our member countries with more coherent and effective development assistance.

“Our closest relationships, of course, are with the International Monetary Fund. In February 1970 the Managing Director of the Fund and I signed a joint memorandum stating our intention ‘for the Fund and the Bank to complement each other as they work to achieve their common objective, for each to make the fullest possible use of the expertise and information of the other, to reduce to a minimum the risk of inconsistent policy advice, and to minimize the duplication of requests for information to member governments.’

“Next only to the Fund, our closest institutional relationships are with the UNDP. Both the UNDP and the World Bank Group have been going through a period of rapid expansion of their activities in the developing world. During this period, the Administrator and I have maintained the closest relationship and, building on experience, the two institutions have worked out a division of labor designed to make them complementary in fact as well as in concept. The Bank considers the UNDP to be the primary organ of the UN family for the financing of pre-investment studies. Consequently, the Bank looks to the UNDP to finance this kind of activity and will do so itself only in those rare instances when the UNDP is for some reason unable to meet a priority need.

“On the other hand, when requested to do so by a member government, the Bank acts as Executing Agency for UNDP preinvestment projects. Moreover, at the request of the UNDP, our technical staff reviews all preinvestment projects being seriously considered by the UNDP for financing. In this way we have been able to help UNDP and its other Executing Agencies to formulate preinvestment projects so that the results of the studies will provide a sound basis for future investment—even though it may not necessarily be future investment by the World Bank Group.

“With the UN Secretariat itself, we are developing close day-to-day working relationships dealing with a wide range of matters of mutual concern, including economic planning, population, housing, and urbanization. Through an established Liaison Committee, we are attempting not only to avoid duplication but also to mesh our activities so as to make them mutually reinforcing.

“With respect to the sectoral agencies within the UN system, the Bank, as you know, has formal agreements with the Food and Agriculture Organization (FAO) and the United Nations Educational, Scientific and Cultural Organization (UNESCO) under which special units in those two agencies provide expert assistance in the identification and preparation of projects for Bank Group financing. These agencies also give frequent staff support for Bank economic missions concerned with the education and agricultural sectors. These two agreements are the most visible evidence of the Bank’s determination to rely on expert services available elsewhere in the UN system, rather than attempting to meet all requirements by duplicating such expertise on its own staff. But they are not the only evidence.

“We have recently begun discussions with the World Health Organization (WHO), looking toward a similar agreement. Under ad hoc arrangements, WHO experts have been assisting us in the preparation of water supply and sewerage projects. Both WHO and we believe that expanded activities in this area now warrant a more formal cooperative agreement. In addition, WHO and the Bank have been cooperating closely, on a case-by-case basis, in connection with population problems. We are also increasing our contacts with the International Labor Office (ILO), and each of us has provided staff help to the other in connection with country missions. Experts from the United Nations Industrial Development Organization (UNIDO) have participated in several Bank missions recently, and I expect that our growing involvement in industrial financing will lead to further cooperative ventures with UNIDO. Indeed, it is my intention that, wherever we can identify a resource of professional expertise in the UN system which can be drawn upon in support of our lending program, the Bank should approach the agency in questions and request its assistance.

“The three major regional development banks, the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank, are at different stages in the growth of their own activities, and the operational relationships between them and the World Bank Group differ accordingly. However, we have frequent contacts with all three of these institutions. While in the nature of things there can be no clear line of demarcation between the kinds of projects financed by the regional banks and those financed by the World Bank Group, our consultations and exchanges of information are designed to enable us to avoid overlapping or undesirable competition and to assist in the formation of a more consistent policy approach to our common members. We have also established informal but effective working relations with other regional organizations such as the European Investment Bank and the European Development Fund, the latter being a particularly important source of concessional finance for many of our member countries in Africa.

“Finally, in this connection, I want to mention the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD) which, although not a UN organization, is playing an increasingly important role in coordination of the development assistance policies of the major capital-exporting countries. The Bank maintains very close contact with the work of the OECD Development Assistance Committee (DAC). One aspect of this work to which I attach particular importance at present is the effort of the DAC to work out a general agreement among donor countries for the untying of official development loans. The Bank is actively supporting this endeavor.

“A second way in which the Bank Group is seeking to contribute to rationalization of the international development effort is through its expanded program of country economic missions. The basic purpose of this program, in addition to meeting our own operational requirements, is to produce current, comprehensive, and objective data and analyses concerning each of our developing member countries. The program is designed, on the one hand, to assist the government of the country in planning and implementing its own national development strategy, and, on the other, to help interested multilateral and bilateral aid agencies to tailor their assistance to the requirements of that strategy.

“Let me sketch for you specifically what these economic missions and their reports will deal with:

  • An evaluation of the situation and prospects of the economy.

  • An analysis of the country’s development objectives and of the major obstacles in the way of achieving them.

  • An assessment of domestic and external financing requirements and of the possibilities of meeting them.

  • An analysis of the principal pre-investment surveys and studies required to carry out the development program and of the relative priorities of those requirements.

  • An appraisal of the available machinery for planning and for the formulation of economic and financial policy.

  • An analysis of the problems of investment and resource mobilization and allocation, of external debt prospects, of appropriate borrowing terms, and of creditworthiness.

  • An evaluation of the country’s population problem and program.

  • And an appraisal of the ‘quality’ as well as the ‘quantity’ of economic development, including analyses of income distribution, nutrition, literacy levels, life expectancy, and trends in unemployment.

“These economic missions will not be staffed by World Bank Group personnel alone. At my request, the Administrator of the UNDP has promised to associate his Resident Representatives with the work of these missions, and they will play a leading role in the areas of technical assistance and pre-investment. The other UN specialized agencies are also cooperating. In the first half of 1970 alone, for example, experts from FAO, ILO, UNESCO, UNIDO, and WHO participated in more than a dozen Bank missions. And this collaboration will grow even greater.

“Our expectation is that the end result of this effort will be to facilitate the adoption of realistic development strategies by our developing member countries, which can then serve as the basis for effective operational coordination of aid from all the various sources of development assistance.

“This brings me to the third of our activities designed to contribute to a more coherent international development endeavor—namely, the organization of aid coordination groups providing for regular consultations between each major developing country and the various development assistance agencies interested in helping it. It is through the mechanism of such consultation that a country’s program and policies can be reviewed, and a common understanding can be reached on the financial and technical asssistance requirements of a satisfactory development effort.

“There are, at present, some 14 formal aid coordination groups organized to hold consultations of this kind. The Bank acts as chairman of 12 of these groups, it participates actively in the others, and it plays an active supporting role in the somewhat similar consultations on the Latin American countries organized by the Inter-American Committee on the Alliance for Progress (CIAP).

“But more needs to be done in this field. New groups should be formed where the need exists. To this end, in consultation with the governments concerned, the Bank is currently organizing new groups for the Republic of Congo, Ethiopia, and the Philippines, and is reactivating the groups for Thailand and Nigeria.

“And finally, local coordinating mechanisms at the country level need to be established—or, in some cases where they already exist, need to be strengthened—preferably under the chairmanship of the host government, for the purpose of coordinating the specific details of project financing and technical assistance. We in the Bank intend to encourage the creation or strengthening of such local coordinating bodies where they are needed. And, where appropriate, we will be happy to provide such staff services as may be requested by the local coordinating bodies.

“What is likely to be the result of all this collaboration, which is admittedly time-consuming and often difficult? As I see it, we can reasonably expect results of four different kinds:

  • Everyone working in the development field will have up-to-date socioeconomic information and analyses of the problem of the developing countries.

  • It will become possible to look at all of the interrelated aspects of development together rather than one at a time. Governments should thus be able to make more rational decisions on priorities and the international community should be in a better position to help governments by illuminating the choices open to them.

  • It will become easier to avoid inconsistent approaches by different aid agencies.

  • It should become possible to curb an inordinate growth in the number of separate missions with which governments have to deal as the international development effort expands.”

Excerpts from an address by Pierre-Paul Schweitzer, Managing Director of the International Monetary Fund, to the Los Angeles World Affairs Council, Los Angeles, California, U.S.A., on December 4, 1970.

“During 1972, a new decision about the allocation of special drawing rights for the second basic period will have to be made. The considerations that have to be brought to bear on this decision are laid down in the Articles of Agreement which provide that ‘the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.’ This means that allocations are to be decided in accordance with the global need for reserve supplementation rather than the reserve needs of any particular country and that the dominant weight in making the decision must be given to the underlying long-term tendencies of the world economy rather than to transitory conditions existing at the time of the decision. It is also clear that this provision lays upon the international community, acting through its representatives in the Fund, the obligation to allocate an amount of special drawing rights that, in its collective judgment, will cause the world economy to progress on a stable course and to avoid, so far as that can be done through reserve management, the dangers of world-wide recession in economic activity as well as those of world inflation. In addition, the amount to be allocated must also be conducive to the achievement of the other purposes of the Fund, including the promotion of exchange stability and the elimination of exchange restrictions.

“This is indeed a formidable task, the more so since the various objectives that have to be pursued may at times conflict. It would not be difficult, for instance, to imagine a situation in which world-wide upward pressure on price levels coincided with increasing trade and payments restrictions in the world. It would then be necessary to arrive at a judgment on the extent to which either of these phenomena would respond to a change in the degree of reserve ease or tightness in the world and to arrive at a suitable compromise among conflicting objectives.

“The avoidance of the need for such compromises depends on the continued pursuit and successful implementation of appropriate national economic policies, both domestic and foreign. It would indeed be most unfortunate if widespread protectionism, inflationary domestic policies, and retrogressive aid policies were allowed to continue unchecked. For the new SDR facility has put into the hands of the international community an instrument for the deliberate management of the global level of reserves. The world economy need not henceforth depend for its liquidity on the vagaries of gold production and hoarding and the uncertain incidence of balance of payments deficits of the countries that supply the world’s reserve currencies.

“This basic improvement in the international monetary system has given us a tool which can create the kind of economic climate that fosters balanced growth of the world economy, orderly balance of payments adjustment among countries, reduction of trade and payments restrictions, and augmentation of foreign aid to developing countries. But SDRs are no more than a tool. If the maximum benefit is to be derived from the new asset, it must, like any tool, be properly used. The realization of the full potential of the new facility is one of the major challenges facing the international monetary system in the decade ahead. As SDRs form a growing element of global reserves, the management of international liquidity will become increasingly a matter of international economic cooperation; this should lead in turn to a strengthening of international cooperation in general. And this is, of course, the ultimate purpose of the International Monetary Fund, as of any international organization.”

Excerpts from an address by Baron Ansiaux. Governor of the National Bank of Belgium, to the Société Royale d’Economie Politique in Brussels, on November 5, 1970.

“A year or two ago, the monetary unification of the European Economic Community (EEC) was little more than a vague idea. Today it is the subject of a concrete plan submitted for approval to the EEC Council of Ministers. The authors of the plan, the Werner Committee, believe that economic and monetary union is a goal that can be achieved in the course of this decade, provided the political will is there.

“Clearly, an economic and monetary union implies that the most important decisions will be taken, not by the various national authorities, but by Community bodies. The Werner Report considers it essential for two bodies of this type to be set up. The first such body would be a Decision Center for Economic Policy. It would determine the major guidelines to be followed in the Community in such fields as economic growth, budget and fiscal policy, foreign trade, prices, and wages and salaries. A second Community body would be a Community Central Bank System. This body, composed in principle of the central bank Governors, would fix the main guidelines for monetary policy, in particular interest rates, volume of liquidity, exchange rate policy, and credits to the public and private sectors; the execution of decisions at the national level would be entrusted to the individual member central banks grouped in the System.

“In this way the member countries, in the course of this decade, would be accepting a limitation of their sovereignty in the form of a progressive surrender of certain of their present responsibilities to Community bodies.

“The Werner Committee was faced with the alternative of either waiting for economic union to be completed before making any move toward monetary unification, or of trying to achieve monetary unification pari passu with economic unification. It chose the second solution. However, if this approach is to yield the desired results, it will be essential to maintain a constant parallelism between developments in the economic field and those in the monetary field. A monetary unification that was not supported by adequate economic unification would not only be utterly useless but even positively harmful. Thus, the speed with which progress can be achieved on the monetary plane will be largely determined by the rate of progress toward economic union.

“The reinforcement of intra-Community links in monetary matters would be taken care of by the Institution of a European Monetary Cooperation Fund, if possible in the course of the first stage toward unification, and in any case during the second; at the final stage, this Fund would be integrated into the Community Central Bank System. Internally, the Fund would work as the mechanism channeling reciprocal credit between member countries; it would have to be at least equivalent to the short-term monetary support mechanism already in force and the medium-term support mechanism envisaged. Externally, the Fund would take the necessary decisions with regard to dollar balances accumulated in consequence of any external surpluses the EEC might record.

“It has been said that one of the advantages of economic and monetary unification of the EEC would be that it would make the Community independent of the United States, particularly in monetary matters. While basically correct, this opinion runs the risk of being misunderstood. It would be wrong to assume that, once ‘independence’ has been achieved, the Community would become an inward-looking autarkic bloc. On the contrary, it would be very much in its interest to develop its exchanges of all kinds—goods, capital, people, enterprise, ideas—with the United States and other countries. Indeed, one can look forward to an ever closer “interdependence” between the Community and other countries, particularly the United States—a development that would be to the advantage of all concerned.

“Should the United Kingdom join the EEC, the existence of the sterling balances and a posible reduction in them would not–as is sometimes feared—weaken the Community’s monetary position. In absolute and, above all, in relative terms, the sterling balances have greatly lost importance. Between December 31, 1945 and December 31, 1969 they fell from £3.6 billion to £1.8 billion. Expressed as a percentage of the U.K. gross national product, they came down from some 40 per cent in 1945 to less than 5 per cent in 1969. Furthermore, there already exists a mechanism-the Basle Agreement of September 1968—to cope with the consequences of a reduction of the sterling balances held by sterling-area countries and to make such an eventuality less likely. Finally, once the United Kingdom has joined the EEC, the latter’s total resources would help to sustain confidence in the pound sterling.”

NOTES ON THE MECHANICS OF GROWTH AND DEBT

by Benjamin B. King

In assessing the net growth-producing effect of a loan, the borrowing country must consider the interest payments of all outstanding loans as well as the positive effects of the creation of new savings, which provide the springboard for investment and expansion. If the marginal savings ratio is related to gross domestic product, its behavior is different from that when it is related to gross national product-i.e., after payment of interest-with some odd theoretical results. This issue in growth model-building appears not to have been raised before. The paper shows that more than an accounting difference is involved. The author also develops a simplifying notation for the kind of expressions which occur in debt-cum-growth models. This notation may prove a useful addition to tools of calculation in this and other fields.

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THE STAND-BY ARRANGEMENTS OF THE INTERNATIONAL MONETARY FUND

A Commentary on Their Formal, Legal, and Financial Aspects

by JOSEPH GOLD

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This is the first comprehensive examination of the formal, legal, and financial characteristics of stand-by arrangements. It describes the relation of this novel technique to the law and policies governing the use by members of the Fund’s financial resources. Illustrative stand-by documents, consisting of the stand-by arrangement itself and the member’s letter of intent which is annexed to it, are provided and analyzed paragraph by paragraph in detail.

The book concludes with much reference material relating to stand-by arrangements and the use of the Fund’s resources. The author is General Counsel of the Fund and Director of the Legal Department.

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