The Fund and the Bank were created in 1944 with the common objective of promoting international economic cooperation as a means of fostering the economic prosperity of individual member countries. To attain this general objective, distinct responsibilities were assigned to each institution.
The Fund was to promote international monetary cooperation, facilitate the expansion of balanced growth of international trade, promote exchange stability and maintain orderly exchange arrangements, promote the establishment of a multilateral payments system, and shorten the duration and lessen the degree of balance of payments disequilibria. To carry out these multiple functions, the Fund was given jurisdiction over members’ compliance with their obligations in respect of exchange arrangements and the exchange rate system, and to make its resources available temporarily to members to help them correct balance of payments problems without resorting to measures destructive of national or international prosperity. At a later date procedures were established for the Fund to conduct periodic consultations with members on their macroeconomic policies.
The Bank was to facilitate investment for the reconstruction of economies destroyed by the war and for the development of productive resources in developing countries, promote private foreign investment, and ensure that the most useful and urgent projects would be adequately undertaken. Its function was to provide long-term finance for productive purposes when private capital was not available under reasonable terms; such loans or guarantees were, except in special circumstances, to be for specific projects of reconstruction or development.
As is evident from the complementary nature of the two institutions, reflected in their respective Articles of Agreement, the founding fathers at the Bretton Woods conference expected that the Fund and the Bank would work closely together. Indeed, at the time, the case for creating a single agency was explored. This was rejected because, as stated in an early version of the “White Plan” (one of the blueprints for creating the Fund), “an international economic institution can operate more effectively if it is not burdened with diverse duties of a specialized character.” Thus, each institution was given separate resources, distinct responsibilities, and different criteria for action, with the expectation that through specialization and complementary action, the two would bear more ample fruit than a single agency or two institutions acting in isolation. It is in the area of extending financial assistance that Fund-Bank collaboration was to acquire particular importance.
Collaboration in practice
During their initial years of operation, collaboration between the Fund and the Bank was close. The Fund staff often provided assistance to their Bank counterparts as the Bank’s lending operations became quickly established, mainly for reconstruction of European countries. The Fund staff assisted in the preparation of the Bank’s first loan to France, in the negotiation of a program loan for Denmark, and in the first economic survey mission to Colombia.
By the mid-1950s both institutions had become fully operational. From then until the beginning of the 1970s, the Fund tended to concentrate its country work on the achievement of monetary and exchange stability. Balance of payments problems were largely temporary in nature, often reflecting excess demand pressures. The Bank, on the other hand, adhered closely to project lending, mostly for large capital-intensive projects. The staff of the two institutions concentrated their activities in their respective areas of primary responsibility, that is, the Bank in the preparation and appraisal of development projects, including evaluation of development priorities, and the Fund on exchange rates and exchange restrictions, adjustment of temporary balance of payments disequilibria, and assistance to members in framing stabilization programs.
The staff of the two institutions maintained close contact and exchanged information as necessary. They attempted to minimize duplication of work and avoid communication of inconsistent advice to member countries. Staff members of one institution participated in the missions of the other, or missions overlapped in the field if this was thought necessary and the country concerned agreed. On those rare occasions when one institution felt that the other was encroaching upon its area of responsibility, or it was feared that conflicting advice might be given to member countries, differences were generally resolved.
As the Bank gained experience in project lending in a large number of developing countries over an extended period, it became apparent that there were circumstances in which a country could not obtain the external resources required to support a development program by borrowing only for specific projects, even if it had a satisfactory development program and was following sound economic and financial policies. In 1971, the Bank’s Executive Directors concluded that program lending was appropriate in such circumstances. Program loans were to be extended in support of development programs, taking into account the underlying economic and financial policies, and were to finance imports of specific categories of commodities.
In the Fund, policy dialogue with developing countries led to the recognition that the economies of these members were often characterized by structural imbalances, widespread cost-price distortions, and a narrow productive base often highly dependent on a few export commodities. In such situations the correction of serious imbalances in the balance of payments, or the strengthening of an inherently weak external payments position that hampered development efforts, would take time. Accordingly, the Fund established its extended facility in 1974 to provide longer-term financing (with repayments spread over eight years) in support of policies to address these problems.
By the mid-1970s, the external economic environment for non-oil developing countries had worsened considerably as oil prices rose sharply and, subsequently, a number of commodity prices fell precipitously. The external imbalances of a large number of developing countries grew sharply, and it became evident that major structural changes were needed in a number of countries to overcome the balance of payments difficulties. In its assistance to members facing these difficulties, the Fund paid increasingly close attention to structural issues and supply-oriented policies. Recognizing that balance of payments constraints had become a major impediment to development, the Bank in 1980 introduced its structural adjustment lending, providing long-term balance of payments financing in support of policies to promote structural changes.
Areas of responsibility
The division of labor between the two institutions is guided by principles enunciated in 1966. These stipulate that “the Bank was recognized as having primary responsibility for the composition and appropriateness of development programs and evaluation, including development priorities” whereas the Fund had “primary responsibility for exchange rates and restrictive systems, for adjustment of temporary balance of payments disequilibria, and for evaluating and assisting members to work out stabilization programs as a sound basis for economic advance.” In between these two clear-cut areas of responsibility, there was a broad range of matters of common interest which included “the structure and functioning of financial institutions, the adequacy of money and capital markets, the actual and potential capacity of a member to generate domestic savings, the financial implications of economic development programs both for the internal financial position of a country and for its external position, foreign debt problems, and so on.”
The expansion in the scope of the lending activities of the Bank and the Fund brought the two institutions closer to each other. The key role of structural and supply-oriented policies in the Fund’s extended facility and the greater emphasis on these policies in its other facilities made it indispensable for the Fund staff to draw on the expertise of the Bank staff and to consult with them on the appropriateness of the policies proposed by member countries in support of using the Fund’s resources. At the same time, the Bank required a monitorable program of policy actions as a condition for its structural adjustment lending. It thus became necessary to coordinate the country programs supported by the resources of the institutions so as to seek complementarity and avoid conflicting advice. In view of this, the Executive Boards of the Fund and of the Bank in 1980 reaffirmed the need for closer collaboration and emphasized that while the two institutions continued to have separate identities, functions, and responsibilities, they should ensure that the country programs they supported with their resources were complementary, with the common objective of promoting the well-being of member countries.
The 1980s and debt problems
During the first half of the 1980s the number of countries experiencing debt-servicing difficulties and the severity of such difficulties increased sharply. As a consequence, real income declined in a number of countries and their development efforts suffered a serious setback. These developments made it abundantly clear that growth cannot be sustained unless resources are used efficiently, that macroeconomic and financial stability are inseparable from economic development, and that balance of payments stability is a prerequisite for the pursuit of long-term growth. As a reflection of this, the Bank has been placing greater emphasis on its lending in support of structural or sectoral adjustment programs.
Because of the weight of the debt-servicing burden, debt rescheduling and the provision of exceptional financing (from both official and private creditors) have become a requirement for a viable adjustment program in many heavily indebted countries. The Fund has played a key role in mobilizing such financing and the Bank has also become gradually more involved in this process. Commercial banks have frequently made disbursements of their credit, or the implementation of their debt rescheduling agreements, dependent on adherence by debtor countries to the terms of the arrangements they had separately concluded with the Fund and the Bank. This has added a new and important dimension to the collaboration between the two institutions.
In October 1985 the Secretary of the US Treasury launched an initiative to strengthen the strategy to overcome debt problems. To help highly indebted middle-income countries resume growth and achieve adjustment toward a sustainable debt position, he called on (1) commercial banks, the World Bank, and other multilateral development banks to increase lending to these countries and (2) the borrowing countries to undertake major reforms of macroeconomic and structural policies to promote growth and adjustment over the medium term. He recommended that the Fund and the Bank work closely in developing medium-term policy programs. The President of the World Bank and the Managing Director of the Fund expressed their strong support for the initiative and stated that it should be translated into positive and concrete actions as soon as possible. Efforts to develop medium-term policy programs are at a fairly advanced stage for some of the middle-income countries in the initial list put forward by the US Treasury.
A further step to strengthen Fund-Bank collaboration was taken in March 1986 when the Fund established a structural adjustment facility. This facility provides concessional loans to low-income countries in support of macroeconomic and structural medium-term policies to promote growth and adjustment toward a viable balance of payments position. The broad objectives and the thrust of such policies will be presented in a policy framework paper for each borrowing country that will provide a basis for a program of policies in support of which use of resources will be granted. The policy framework paper will be prepared by the authorities with the joint assistance of Bank and Fund staff and will be reviewed by the Executive Boards of both institutions. It is hoped that IDA’s resources will be augmented sufficiently to allow it to provide additional funds matching those of the Fund’s SAF.
Essence of collaboration
As the foregoing historical review shows, collaboration between the Bank and the Fund has deepened over the years as they have sought to assist members with their economic policies and to provide financial assistance. The collaborative process is not always a smooth one; differences of view often emerge at the operational level, reflecting the different mandates and perspectives of the two institutions. It is only natural—and even productive—that such differences arise within this close working relationship. The process of resolving differences, though time-consuming, serves to re-examine and improve the economic analyses and policy prescriptions of each institution. What is important is that member countries receive consistent advice from the two institutions that reflects the fruit of this cooperation and consensus. The principal forms of the collaboration are discussed in greater detail below.
An illustration of Fund-Bank cooperation
Fund and Bank staff often consult on the relationship between trade measures and a country’s demand management and exchange rate policies, as well as the possible implications of trade measures for the exchange rate system. An example, taken from a country that was negotiating with both the Fund and the Bank, illustrates the nature of the cooperation and its results:
The Fund-supported program in the member country included specific measures for a phased liberalization of import restrictions. A Bank industrial and trade policy loan to the same country, negotiated soon after the arrangement with the Fund, called for a reduction of import duties to lower the effective rate of protection. The revenue implications of this measure were inconsistent with the budgetary targets in the Fund-supported program. Consultations with the Fund resulted in a modification of those targets so that the country could agree on the Bank’s program measures. But the Bank’s measures were designed to obtain an implicit exchange rate that was different from the one implied in the Fund-supported program. Since this program had already been negotiated, the Bank amended its program to conform to the Fund’s exchange rate targets. A complete overhaul of the country’s direct and indirect tax structure was undertaken with Fund assistance, in parallel with the Fund and the Bank programs. The overall result of this cooperation was to provide effective support for the adjustment effort of the country through mutually consistent and feasible advice from both the Bank and the Fund.
Channels of communication. The bedrock of collaboration between the Fund and the Bank is the regular and frequent interaction of economists and loan officers who work on the same country. Such interaction brings together different perspectives and helps deepen understanding of social and economic conditions of the country concerned. Bank staff have a long-term horizon and are well acquainted with characteristics of the economy and its structural problems. They often spend considerable periods in the member country talking to a large number of ministries, as well as to farmers and manufacturers both in the capital and in provinces. Fund staff, on the other hand, approach the economy from the perspective of macroeconomic stability and balance of payments viability. Their visits to the member country are for shorter periods and concentrate primarily on discussions with officials of the Finance Ministry, the Central Bank, and a few other key ministries. Having different contacts and focus, the staff of each institution have much to offer to the other.
Contacts between the two staffs take a variety of forms, ranging from informal discussions to exchanges of official documents. The staff of one institution brief and seek the reactions of their counterparts in the other before and after country missions. Comments are exchanged on drafts of reports each institution prepares for its Executive Board. Often, Fund and Bank missions are scheduled to overlap in the field, or a staff member of one institution joins a mission of the other. Discussions of policy framework papers for SAF programs are normally undertaken by joint missions. Joint seminars are held from time to time, attended by management and senior staff members of both institutions. Finally, staff members of one institution will attend Executive Board meetings of the other when the topics for discussion are related to countries in which both institutions are actively involved.
Through these contacts, the staff of each institution is kept abreast of the activities of the other and of their views on various issues of common interest. While the two staffs generally agree on issues of common interest, views can differ at the operational level. Such differences sometimes arise in assessing the medium-term economic prospects and external financing requirements of member countries, and in appraising the size of public sector investment programs. The Bank staff approach these matters from a developmental perspective, and tend to view a current account deficit of the balance of payments as a constraint on the achievement of a given target for economic growth. The Fund, on the other hand, starts from the possibilities of financing the current account deficit, stressing that higher economic growth can be achieved by policies aimed at improving the efficiency of existing productive resources and of new investments, and creating conditions conducive to capital inflows and a reversal of flight capital. Most of the differences of views are resolved through extensive discussions, sometimes involving the managements of both institutions.
Analyzing economic problems. One of the major tasks of the Fund is to analyze the economic situation of member countries, assess their prospects, and advise them on policy requirements that would contribute to enhancing national and international economic prosperity. This task is performed in the context of Article IV consultations and in the discussions associated with the provision of financial assistance. The Bank staff engage in similar analysis when preparing Country Economic Memoranda or when the Bank extends adjustment loans. The Fund and the Bank staff assist each other in economic analysis and in the formulation of policy recommendations, and such assistance is particularly close when financing is involved.
Fund resources are made available to member countries in support of a program of economic adjustment. The Fund staff assist members in preparing such programs, which normally include demand management, pricing and exchange rate policies, as well as supply-oriented and structural measures. They rely on the Bank staff for matters within the area of the latter’s primary responsibility and competence, which includes issues of economic efficiency in selected sectors, development priorities, and investment programs. Thus, in most countries with which the Fund has a financial arrangement, the Bank staff assist their Fund counterparts in assessing the efficacy of the public sector expenditure program and appraising investment priorities. The Bank staffs advice is sought also in analyzing the efficiency of public enterprise operations; pricing of transport, energy, and other important commodities; sectoral analyses to raise productivity; and examinations of public expenditure policy.
While the bulk of the Bank’s lending is still for specific investment projects, the Bank, as already indicated, has placed increasing emphasis on structural adjustment lending. Resources under these loans are disbursed upon the implementation of a program of policy actions prepared by member governments in collaboration with the Bank staff. In addition to sector-specific measures, such as adjustments of tariffs, these programs often contain macroeconomic policy provisions. More generally, the Bank staff examine macroeconomic issues for an assessment of the creditworthiness of the country concerned, which is required for Executive Board appraisal of all loan applications. In these instances, the Fund staff assist the Bank staff in balance of payments and other macroeconomic analysis as well as pricing policies and, where appropriate, import liberalization.
Financial assistance. The Fund and the Bank often coordinate their financial assistance to members. Such coordination is thought desirable because (1) it augments the financial resources available and (2) the Bank’s adjustment lending provides vital policy backing for Fund-supported programs, while these programs in turn support the Bank’s efforts by promoting macroeconomic stability. Programs supported by the Fund generally incorporate policies to improve sectoral efficiency and take into account the Bank staffs assessment in the preparation and review of performance under the programs. Similarly, the Bank staff take into account the Fund staff’s assessment of macroeconomic performance in its review of the implementation of sectoral or structural adjustment programs.
Financial assistance has been coordinated closely in a large number of countries. In 1985, Fund-supported stand-by or extended arrangements were in place or under discussion with nearly 50 members; Bank structural or sector adjustment loans had been approved or were under discussion in about three fourths of these countries. The Bank’s Executive Board approved structural or sector adjustment, or both, for 15 countries in 1985, and in over three fourths of these a Fund stand-by or extended arrangement was in place or under discussion at the time of the Bank Board approval.
Some joint services
The Joint Fund-Bank Library is a principal research facility of the two organizations and the International Finance Corporation. The collection, which is for the use of staff, concentrates on economics, public policy, international and government finance, trade, development issues, and the economic situations of the countries of the world. Considered among the world’s best libraries on these subjects, it contains over 165,000 volumes, including published texts, reports, and statistical publications from governments and other bodies; over 4,000 periodicals and newspapers; and research and working papers from more than 400 organizations. The Joint Library also manages a computerized network of 14 smaller libraries distributed throughout the Fund and the Bank.
The Bank-Fund Conferences Office organizes the Joint Annual Meetings of the two institutions, the associated meetings of the G-10 and G-24, and the meetings of the Interim Committee and the Development Committee. The Annual Meetings involve roughly 11,000 participants, visitors, and special guests. For most of the year the Office has eight staff of the Bank and Fund working side by side; for the Annual Meetings it expands to about 500, with staff seconded from the two institutions and with outside contractual help.
Finance & Development is published jointly by the Bank and the Fund to enhance understanding of the work and policies of the two institutions and of economic and financial questions generally. The journal started publication in 1964 and is now published quarterly in seven languages. It has a print run of about 138,000 and an estimated half a million readers.
While the advantages of close coordination in financial assistance are well recognized, such coordination has given rise to concerns that each institution may to some extent lose its independence in this process, or that borrowing countries may have to deal with two institutions to obtain a loan from one. In addressing these concerns on “cross-conditionality” both Executive Boards have declared that the lending activities of each institution are undertaken in accordance with the standards laid down in its respective Articles of Agreement and by its Executive Board, and that a decision of one institution is in no way subject to veto by the other. Executive Board approval of requests for the use of Fund resources has not been dependent on approval by the Bank Board of its lending program or of performance under such a program, nor has approval by the Bank’s Executive Board of its lending been contingent on an approval by the Fund of its financial assistance.
Mobilizing resources. The Fund and the Bank play a central role in mobilizing official and commercial bank resources to member countries experiencing debt-servicing difficulties, and in promoting efforts to restore balance of payments viability over the medium term. The two institutions work together to help member countries prepare policy action programs and identify the financing required to make such programs viable. They then encourage official and private creditors to provide financing in support of the programs. In providing such financing, commercial banks frequently associate the availability of their funds with satisfactory performance by the borrower under its program with the Bank and with the Fund.
This sometimes creates complex three-way relations. For example, in one case all disbursements of a commercial bank package required satisfactory performance under a program monitored by the Fund, an important element of which was the liberalization of the trading system; other aspects of trade liberalization were featured in the program under the Bank’s Trade Sector and Export Diversification Loan. Disbursements of commercial bank loans were also tied to the satisfactory completion of a review by the Bank which included, inter alia, a favorable assessment of macroeconomic policies; the Bank staff were to take into account Fund staff views in making such assessments. In another case, commercial bank participation in a new money package was contingent on the extension of guarantees by the Bank; disbursements of the package were tied to drawings from the Fund and drawings under the Bank’s structural adjustment lending program.
As regards official creditors, the Bank organizes and chairs donor meetings for its members with a view to obtaining pledges of financial assistance and coordinating aid activities among various donors. For countries experiencing acute payments difficulties, the donor meetings assume additional importance in securing balance of payments assistance necessary to close the financing gap, which is often required to make a Fund-supported program viable. In donor meetings, the Fund staff assist the Bank by providing an assessment of the overall economic situation and balance of payments prospects, and by reporting, where applicable, the status of standby or extended arrangements.
Promoting efficient resource use
A large number of developing countries have recently encountered debt-servicing difficulties. While the deterioration in the terms of trade and high interest rates were important contributing factors, the difficulties would have been considerably less severe—perhaps manageable in many cases—had resources been used more efficiently. To restore growth and re-establish balance of payments viability in these countries, it will be critical to ensure an efficient use of productive resources in a setting of macroeconomic stability. Fostering efficiency is an objective common to both the Bank and the Fund, and the two institutions need to work closely together in pursuit of this objective.
The relationship, and the process of collaboration, between the two institutions has evolved with events over the past four decades. In particular, developments in the international economy during the last decade and the response that they evoked from the two institutions have brought their financial operations closer. The Fund is focusing more and more on structural issues and on the medium term, while the Bank is paying increasing attention to macroeconomic policy issues. The overlap in the coverage of the respective lending programs and, more generally, in the analytic work undertaken has increased, and the operational division of areas of responsibility has tended to become blurred.
To help member countries deal better with their structural and macroeconomic problems, the staffs of the Bank and the Fund should further develop their expertise, particularly in areas that are mutually reinforcing, and strengthen the internal procedures for giving each other assistance and for avoiding duplication of work. This approach will ensure that (1) visiting Fund and Bank missions in member countries complement each other’s work; (2)negotiations between member countries and the Fund and the Bank, in connection with their respective lending arrangements, concentrate on well-defined policy issues; and (3) where debt rescheduling or commercial bank financing are being sought, the working relationships between the country, the Bank, and the Fund are appropriately flexible. To assist members to make their economies more efficient, Fund-Bank collaboration, too, must continue to be based on the principle of efficiency.
World Economic Outlook, October 1986
by the Staff of the International Monetary Fund
This study updates the April 1986 short-to-medium-term prospects for the world economy by the staff of the Fund. The report includes individual country and global analysis, and a comprehensive statistical appendix.
The World Economic Outlook, October 1986, is published as part of the Fund’s World Economic and Financial Surveys series.
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Price: US$10.00 (US$6.00 to university libraries, faculty, and students).
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Available from Publications Unit • Box A-863
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