Current Legal Issues Affecting Central Banks, Volume IV.
Chapter

1B. The Relationship Between the International Monetary Fund and the United Nations

Author(s):
Robert Effros
Published Date:
April 1997
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Author(s)
WILLIAM E. HOLDER

Introduction

It is timely to review the present relationship between the International Monetary Fund and the United Nations, for several reasons. First, the number of intergovernmental entities continues to increase, with, for example, the recent establishment of the World Trade Organization and the Global Environmental Facility; thus, issues arise concerning the additional level of interaction between the old and the new structures. Second, existing organizations grow in both functions and scope, evolving to respond to new circumstances and challenges. Accordingly, there arises the reality of overlapping functions between organizations. Not surprisingly, therefore, there are calls for rationalization of resources, the division of labor,” and coordination of policies and activities. With the fiftieth anniversary of the drafting of the charters of the Fund and the World Bank (the Bretton Woods institutions), those calls are likely to increase, from official and unofficial sources. Finally, given the maturity of the Fund-UN relationship, it might be useful to restate the essence of the existing relationship and, in so doing, to seek to remedy some common misunderstandings.

Institutions

The United Nations and the Fund were created as international public organizations. Each has its own charter or constitutional document: in the case of the UN, the Charter of the United Nations; and in the case of the Fund, the Articles of Agreement. Each charter was negotiated separately; that is, the Fund terms were not negotiated as part of the United Nations, although the motivation for the creation of both was to bring postwar order to the world upon the cessation of World War II.

The Fund

The Fund is a creation of the Articles of Agreement and is controlled by the Articles. Accordingly, the Fund has specified purposes, functions, and powers. To these ends, it has its own resources, organs, and membership. Moreover, under the Articles, members enjoy a range of rights and privileges, and, reciprocally, are subject to various obligations and powers.

The United Nations

As with the Articles of the Fund, the UN Charter was finalized toward the end of World War II. By this treaty, the “United Nations” laid down lofty goals, both in the preamble and Article 1. By its explicit purposes, the UN is “to maintain international peace and security,” including through the taking of collective measures and the peaceful settlement of disputes; to develop friendly international relations; “to achieve international co-operation in solving international problems of an economic, social, cultural, or humanitarian character,” together with respect for human rights; and to harmonize national action in these respects.1

Concept of “Specialized Agencies”

Both the UN and the Fund are subjects of international law, with explicitly conferred legal personality (“full juridical personality” in the case of the Fund, “such legal capacity as may be necessary” in the case of the UN).2 Accordingly, each can enter into agreements with other subjects of international law.

Agreements inter se, however, are contemplated by the respective charters. First, by Article X of the Fund’s Articles, the Fund is to cooperate “with any general international organization,” as well as with public international organizations with related fields of specialized responsibilities. Two qualifications apply: first, such cooperation will be “within the terms of this Agreement”; second, were a modification of the terms of the Articles involved, the effectiveness must await an amendment of the Articles.3 Clearly, reference to cooperation “with any general international organization” was in anticipation of the UN, although express reference could not be made because the UN Charter followed the drafting of the Fund’s Articles.

In the case of the UN, it was contemplated that those specialized agencies having wide international responsibilities “shall be brought into relationship with the United Nations” pursuant to the provisions of Article 63.4 In turn, Article 63 prescribes that the relevant organ for entering into such agreements shall be the Economic and Social Council (ECOSOC), “subject to approval by the General Assembly.” Finally, Article 57, paragraph 2 states that “[s]uch agencies thus brought into relationship with the United Nations are hereinafter referred to as specialized agencies.”

In the light of these provisions, a comment on the term “specialized agencies” may be in order. Article 57 begins factually by referring to existing (or future) specialized agencies. It follows that the entering into of a relationship agreement does not generate the status of a specialized agency; rather, that status is a prerequisite of entering into agreement. Moreover, this is the case notwithstanding that Article 57, paragraph 2, goes on to refer to specialized agencies as agencies that have entered into a relationship agreement. Finally, the negotiating record makes clear that, despite the acceptance of Article 57, paragraph 2, there was an express understanding that the relationship between the UN and the Fund was one of mutual association between independent entities.

More specifically, the Fund negotiators agreed to the statement that “[t]he Fund is a specialized agency established by agreement among its member governments. . . .”5 This statement reflected the idea that, once the relationship agreement was concluded, the Fund would become a specialized agency within the meaning of the UN Charter. This wording, however, has to be read in the light of the following statement, which was placed on the record:

It was understood … that the statement in Article I, paragraph 2, that the Bank (Fund) is a Specialized Agency established by agreement among its member governments carries with it no implication that the relationship between the United Nations and the Bank (Fund) is one of principal and agent.6

In conclusion, therefore, while the Fund is a specialized agency as referred to in the UN Charter, it is not a specialized “agency” (or agent) of the United Nations.

The Fund as an Independent Organization

The Agreement Between the United Nations and the International Monetary Fund (the Relationship Agreement), as well as the Agreement Between the United Nations and the International Bank for Reconstruction and Development, came into force on November 15, 1947 following a vigorous negotiation between the UN and, jointly, the Fund and the World Bank.7 The two resulting Agreements are the same, except for an additional clause in the World Bank Agreement on loans (Article IV, paragraph 3; see below).8

Independence of the Fund

The negotiation of the Relationship Agreement had to bridge a considerable difference of orientation between the two sides. From the point of view of the UN, even if the Fund and the World Bank were in a special position, the UN had the duty under its Charter to coordinate the actions of specialized agencies and had to follow the mandatory character of certain Charter provisions. On the side of the Fund and the World Bank, the independent character of the institutions, stemming from their basic documents, the terms and the conditions under which they were executed, and their responsibilities, were emphasized strongly. Moreover, influence on their decisions by political bodies could not be tolerated.

Within the day, the original draft provision regarding the relationship of the UN with the Fund, instead of being weakened, was strengthened somewhat. Article I, paragraph 2 of the Relationship Agreement, after reciting that the Fund is a specialized agency within the meaning of Article 57 of the Charter, asserts the independence of the Fund:

By reason of the nature of its international responsibilities and the terms of its Articles of Agreement, the Fund is, and is required to function as, an independent international organization.

This provision manifests the independence of the Fund under its Articles, whereby certain functions are vested in its organs, and, therefore, that the competence conferred cannot be delegated to, or subject to, another organization or body external to the institution.

As previously mentioned, the UN-World Bank Agreement contains a clause on the loan process; this provision is also designed to protect the independence of the World Bank. Specifically, Article IV, paragraph 3 of the World Bank Agreement states:

The United Nations recognizes that the action to be taken by the Bank on any loan is a matter to be determined by the independent exercise of the Bank’s own judgment in accordance with the Bank’s Articles of Agreement. The United Nations recognizes, therefore, that it would be sound policy to refrain from making recommendations to the Bank with respect to particular loans or with respect to terms and conditions of financing by the Bank. The Bank recognizes that the United Nations and its organs may appropriately make recommendations with respect to the technical aspects of reconstruction or development plans, programmes or projects.

Does the lack of such a clause indicate a different result for the Fund? In fact, the explanation lies in the aspect of the operation of the Fund: not only did the Fund not make loans, but the use of Fund resources was a matter of entitlement. Thus, the report of the Negotiating Committee states:

It was further agreed that Article IV, paragraph 3, was omitted from the Agreement with the Fund only because the Fund does not make loans. It was agreed that the philosophy underlying this paragraph applied to the relationship between the United Nations and the Fund as well as the relationship between the United Nations and the Bank.9

Case of South Africa

At times, this independence of the Fund has been put to the test, in particular, concerning the Fund’s relations with South Africa. From 1964, the United Nations, primarily through the General Assembly, but at times by decision of the Security Council, adopted resolutions attacking apartheid in South Africa and requesting the specialized agencies to take appropriate supportive steps. Following the normal practice for the treatment of such resolutions, these resolutions, when received by the Fund, were distributed to Executive Directors, without further action, and with a brief acknowledgement to the UN. In so doing, Article IV, paragraph 2 of the Relationship Agreement played a part: thereby, each organization undertakes to consider as soon as possible any “formal recommendations,” but only after “reasonable prior consultation with regard thereto.” In fact, there had been no such prior consultation.

In 1981–82, however, in the context of possible use of Fund resources by South Africa, the dialogue became more intense. On December 17, 1981, the General Assembly expressed concern that the Fund (and the World Bank) had not taken steps to terminate assistance to South Africa, requested them to do so, and called for consultations with the Fund and the World Bank on the matter.10 A further General Assembly resolution repeated the requests on October 21, 1982 in essentially the same terms.11 Shortly thereafter, the Managing Director of the Fund met with a delegation from the United Nations Special Committee Against Apartheid. On November 3, 1982, the Executive Board of the Fund approved the use of Fund resources by South Africa, pursuant to a standby arrangement and under the Compensatory Financing Facility.12

In its deliberations and communications, the Fund took the approach that all organs of the Fund were required to adhere to the Articles of Agreement, and that, under the Articles, the rights of a member must be respected, including the member’s entitlement to use Fund resources, in accordance with Fund policies on the use of Fund resources, subject to the final decision of the Executive Board. Moreover, the UN was reminded that these principles were reflected in the Relationship Agreement, in that the Fund is to act as an independent institution.

Situation of a Binding Security Council Resolution

In the event of a Security Council resolution, which by its terms binds members under Article 48 of the UN Charter, there is need for elaboration.13 In this contingency, the Relationship Agreement contains a specific provision. Article VI, paragraph 1, reads:

1. The Fund takes note of the obligation assumed, under paragraph 2 of Article 48 of the United Nations Charter, by such of its members as are also Members of the United Nations, to carry out the decisions of the Security Council through their action in the appropriate specialized agencies of which they are members, and will, in the conduct of its activities, have due regard for decisions of the Security Council under Articles 41 and 42 of the United Nations Charter.

This provision presents a quite different balance to that put forward by the UN initially, which would have imposed an obligation impacting more directly on the organization.14

Under this provision of the Relationship Agreement, a Security Council resolution would not be binding on the Fund itself. First, the binding obligation stemming from a Security Council resolution is directed at “members” of the UN. The Fund, while a subject of international law, is not a member; meanwhile, most decisions of the Fund are taken by the Fund’s competent organs, not by its members. Second, the obligation of the Fund, in turn, is to “have due regard” to Security Council resolutions. Such an obligation could be respected by the Fund’s competent organs while still taking independent action. Finally, there is the question of whether, with the obligation of Security Council resolutions falling on members of the UN, those members who are also members of the Fund must instruct Executive Directors appointed or elected by them to take appropriate action at the Executive Board. In the view of the Fund, however, under the Articles of the Fund, the Executive Directors serve as “officials” of the Fund, not as “representatives” of the members appointing or electing them. Thus, an Executive Director would not be under an obligation to carry out the obligations of members that are also members of the UN. On the contrary, the Executive Director would, as an official of the Fund, have to act in the Fund’s interests, including the adherence to its Articles and the protection of the Fund’s assets.

As a result, the competent organs of the Fund are in a position to act independently under the provisions of the Articles and other policies of the Fund. Thus, in the case of embargoes and the freezing of assets that are imposed by the UN on its members, the consistency of the action of a Fund member with the Articles is still to be assessed, on the Fund’s side, by the Fund standards. In the same way, the Fund itself is entitled to engage in financial transactions with a member that is the object of the UN embargo and, in particular, to recover amounts due from the member (if, indeed, national law does not prevent it).

Budget

Another element of the Fund’s independence might be mentioned: UN competence to review the Fund’s budget. Under Article 17, paragraph 3, of the UN Charter,

3. The General Assembly shall consider and approve any financial and budgetary arrangements with specialized agencies referred to in Article 57 and shall examine the administrative budgets of such specialized agencies with a view to making recommendations to the agencies concerned.

For the specialized agencies other than the Fund and the Bank, the relationship agreements reflect this mandate; their budgets are thus submitted to the UN for General Assembly examination and recommendation.15

Yet the UN does not “consider and approve” the Fund’s budget. Again, the Relationship Agreement addressed the point. Article X, paragraph 3, second sentence, states:

The United Nations agrees that, in the interpretation of paragraph 3 of Article 17 of the United Nations Charter it will take into consideration that the Fund does not rely for its annual budget upon contributions from its members, and that the appropriate authorities of the Fund enjoy full autonomy in deciding the form and content of such budget.

This provision thus exempts the Fund from the general supervision of Article 17, paragraph 3, of the UN Charter. During the negotiation of the clause, it was accepted that, as the Fund and the Bank do not rely on the contributions of its members for their financing, the General Assembly lacked a rationale for its normal involvement. Furthermore, while the Relationship Agreement posits that the Fund’s Annual Report and quarterly financial statements are to be furnished to the UN,16 the understanding remained that no recommendations were to be made by the UN.

Cooperation

While admitting that the relationship of the UN and the Fund is one between separate, independent organizations, the Relationship Agreement posits a wide variety of points of interaction and mutual cooperation.

Reciprocal Representation (Article II). The UN is entitled to attend the meetings of the Fund’s Board of Governors. As for the Executive Board, the UN is to be invited to attend “meetings especially called by the Fund for the particular purpose of considering the United Nations point of view in matters of concern to the United Nations.”17 Conversely, the Fund shall be entitled to attend the General Assembly, ECOSOC, and the Trusteeship Council.

Agenda Items (Article III). The Agreement envisages consideration for inclusion of agenda items, on the one hand, for the meetings of the Fund’s Board of Governors, and, on the other hand, for ECOSOC and its commissions.

Consultations and Recommendations (Article IV). Under Article IV, paragraph 1, “[t]he United Nations and the Fund shall consult together and exchange views on matters of mutual interest.” As a qualification, however, it is provided that one of the organizations shall not present “formal recommendations” to the other “without reasonable consultation with regard thereto.”18

Exchange of Information (Article V). The Agreement calls for the exchange of information “to the fullest extent practicable,” including publications, special reports, and studies. To this exchange, an important qualification is attached: it is accepted that confidential information furnished by respective members is to be respected.19

Statistical Services (Article IX). While the special interests of each organization are accepted, the organizations are to cooperate for common purposes and to avoid duplication.

Administrative Relationships (Article X). Specifically, the UN and the Fund are to consult periodically “concerning personnel and administrative matters of mutual interest,” toward the end of uniformity and efficiency. Consistently, the Fund agrees to participate in the work of the Coordination Committee and its subsidiary bodies.

Conclusion

The relationship between the Fund and the UN has been controlled by the Relationship Agreement for close to 50 years. It has survived intact during that time. By its terms, the purposes of the Agreement may be subject to supplementary agreements.20 The Relationship Agreement also contemplates the possibility of revision.21 Alternatively, it may be terminated by either side upon six months’ written notice.22

The resulting relationship, however, has attracted considerable criticism (as evidenced, for example, in the South African saga). In the nominal coordination with the UN, some see a contradiction in the light of the assertion of independence of the Fund, both in theory and practice. Others accept the present situation, but call for reform.

In recent years, the topic has been quite active, especially in connection with the review of the structure of the UN itself, focusing on the economic area. In particular, the General Assembly called for reforms so that ECOSOC can

discharge the responsibilities entrusted to it by the Charter by enhancing its role as a central forum for major economic, social and related issues and policies and its co-ordinating functions relating to the United Nations system in the economic, social and related fields.23

Since then, work has continued and ideas have proliferated.

In 1993, at the request of the Secretary-General, a special report was issued to the Administrative Committee on Coordination (ACC) by a consultant, Mr. Francis Blanchard (former Director-General of the International Labor Organization).24 The report covers considerable ground concerning the relationship of the Fund (and the World Bank) and the UN. In essence, even though the ACC was set up to deal with administrative matters, the suggestion is that the ACC be used to coordinate the substantive policies of the participating institutions, including, specifically, the international financial institutions.

The time has come for ACC to move from its administrative function, which still remains important, to a ‘policy’ function required by the new realities of the international situation. That is my recommendation, by which I do not mean that ACC should substitute itself to the deliberative organs of the United Nations or its specialized agencies. The intention is to turn ACC into a body which would provide impetus and effective direction under the chairmanship of the Secretary-General. This change from an administrative to a ‘policy’ function will not require any lengthy and uncertain process of amending constitutional and other texts. It presupposes however the commitment of the members of ACC. They are the personal advisers of the Secretary-General on all issues relating to the economic, social and humanitarian fields. They are his aides in the preparatory work leading to the adoption of decisions by the General Assembly and the Economic and Social Council, as well as by the deliberative organs of the specialized agencies or of the major Programmes which participate in the work of ACC. Under the leadership of the Secretary-General, they have an individual and collective responsibility, in the areas falling within the mandates of their respective organizations, for following up decisions taken by the General Assembly and the Economic and Social Council,* in the preparation of which their organizations are invited to participate.25

The proposal, from the point of view of the Fund, raises several issues of substance, extending to the legal nature and structure of the Fund, and the need to review the existing Relationship Agreement. The report, however, fails to grapple with issues of implementation; it fails, in fact, to mention the Relationship Agreement at all.

*

Hence the importance which attaches to the success of the reform of the Economic and Social Council and the Second and Third Committees of the General Assembly. The overall performance of ACC will depend to a great extent on the relationship between it and the Economic and Social Council. Members of ACC should support and assist this reform process.

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