Legal and institutional Aspects of the international Monetary System

5 The Relationship Between the International Monetary Fund and the World Bank

International Monetary Fund
Published Date:
December 1984
  • ShareShare
Show Summary Details

Distribution and Reconciliation of International Economic Jurisdiction

The Articles of Agreement of the International Monetary Fund (Fund) and of the International Bank for Reconstruction and Development or World Bank (Bank) emerged from the international negotiations that culminated in the Bretton Woods Conference of July 1 to 22, 1944. The two treaties, which became effective on December 27, 1945, were conceived as elements in an ambitious plan for an international economic order that would be established after World War II.

Resolution VII of the Final Act of the Conference recognized that it would not be possible to achieve all the purposes of the Fund and certain broader objectives of economic policy without further measures. Among these measures were the reduction of obstacles to international trade and the promotion of beneficial commercial relations.1 It was assumed, therefore, that an international trade organization would be created. Discussions on postwar commercial policy and on a Commercial Union were being conducted within the British and the U.S. administrations, and between the two, as early as 1941.2 Strenuous efforts were made to create the third of a trinity of comparable institutions, the International Trade Organization (ITO), but these efforts failed once the wartime zeal that had produced the other two institutions had ebbed. The negotiations led, not to an ITO, but to the more limited, although still important, General Agreement on Tariffs and Trade (GATT).3

The Fund and the trade organization were seen to be complementary, not only because the jurisdiction of the Fund is confined to monetary matters and does not apply to trade but also because commercial policies and practices can frustrate the policies of the Fund within its field. If, for example, the Fund refuses to approve the restrictions on payments and transfers for certain trade transactions that a member country wishes to impose,4 the member could achieve a similar effect by restrictions on the import transactions themselves, over which the Fund has no power of approval or disapproval.

The complementary character of the two jurisdictions is recognized in various ways. The jurisdiction of the Contracting Parties to the GATT (CPs) is defined with precision in order to avoid an overlapping jurisdiction to the maximum extent possible. A more obvious safeguard is the provision of the GATT that prohibits the CPs from taking exchange action that frustrates the intent of the provisions of the GATT or from taking any action that frustrates the intent of the provisions of the Fund’s Articles.5 Under more specific provisions, the CPs, when considering or dealing with problems within their sphere concerning monetary reserves, balances of payments, or foreign exchange arrangements, must consult fully with the Fund, and must accept all findings of statistical and other facts presented by the Fund relating to these matters. Moreover, the CPs, in reaching certain decisions, must accept determinations by the Fund as to what constitutes a serious decline in a contracting party’s monetary reserves, a very low level of its monetary reserves, or a reasonable rate of increase in its monetary reserves, and on the financial aspects of other matters.

The specific provisions, in particular, are a safeguard against conflicting decisions by the Fund and the CPs. The safeguard takes the form of giving the Fund authority to make decisions not only on questions of fact in monetary matters but also on mixed questions of fact and compatibility with legal standards.6

The legal and operational relations between the Fund and the CPs have been cited to make the point that clear-cut divisions of competence in international economic organization are difficult and perhaps impossible. The Fund and the Bank are often described as the Bretton Woods twins, sisters, or cousins. These familial terms reflect the common origin of the two organizations, their complementary functions, and occasional behavior of the kind that psychologists explain as sibling rivalry. Notwithstanding the common origin of the organizations, the negotiators did not attempt to draft special provisions to prevent overlapping jurisdiction or conflicting decisions similar to the safeguards later incorporated in the GATT. The negotiators formulated the purposes and the field of competence of each organization and expected that the Fund and the Bank would work together in harmony.

Competence of Fund

The field of competence of the Fund can be described as matters relating to the balance of payments of its members and the external value of their currencies. The Fund is concerned, in the broadest sense, with the stability of currencies. The U.S. prenatal plan referred to a Stabilization Fund in proposing what was to become the International Monetary Fund.7 The Articles are inspired by the realization that the balance of payments and an exchange rate between currencies are concepts of international relationship and by the belief, therefore, that these relationships are suitable subjects for international collaboration. To make collaboration effective, members have agreed to undertake certain obligations of conduct and to make the Fund the administrator of this code and also of the resources that the Fund holds in order to facilitate observance of the code.

The purposes of the Fund are spelled out in Article I of its Articles. This provision was drafted with great difficulty and almost every word reflects nuances of economic policy and political compromise, so that it would be dangerous to paraphrase the provision.

The purposes of the Fund are formulated as follows:

  • (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’s resources result mainly from the subscriptions of members, which are equal to their quotas as adjusted from time to time,8 and from borrowing.9 The transactions referred to in purpose (v) take the form of the sale to a member of the currencies of other members,10 in return for the purchasing member’s own currency, if the member is in difficulty in its balance of payments or if the reserves it holds to support the external value of its currency, or to maintain confidence in it, are inadequate.11 As the transaction by its nature is to provide temporary assistance, outstanding use of the Fund’s resources must be terminated within maximum periods ranging from five to ten years according to the policy under which the transaction is carried out.12 Use is terminated either by the purchasing member’s repurchase of the amount of its own currency that it paid for the resources or by the Fund’s sale of that amount of the currency to other members in need. It will be apparent that the subscribed resources of the Fund can be considered its revolving capital. To qualify for a transaction under the Fund’s basic policy, a member must present to the Fund a program that will achieve or maintain the stability of its balance of payments without detrimental effects on national or international prosperity. A successful program promotes the Fund’s purposes, permits observance of the code of conduct, and ensures that use of the Fund’s resources will not be unduly prolonged. Conditionality is the word used to describe the subject matter of the Fund’s policies on what constitutes a satisfactory program.13

The First Amendment of the Articles, which became effective on July 28, 1969, created what is really a new purpose, even though it is not included in Article I because of the tendency to regard that provision as Holy Writ. The new purpose is to meet the global need, as and when it arises, for a supplement to the existing reserve assets of members by allocating to them a new reserve asset called the special drawing right (SDR), which members can use at will in support of their currencies and without the necessity for conditionality. It was hoped that the Fund would be able, through the mechanism of the SDR, to influence the liquidity available to members and to avoid widespread deflation and inflation. An objective of the Second Amendment, which took effect on April 1, 1978, is that the SDR will become the principal reserve asset in the international monetary system.14

The Second Amendment was adopted as a result of the breakdown of the par value system of the original Articles, under which members established, with the concurrence of the Fund, fixed but adjustable values for their currencies in terms of gold. The present Articles spell out what is meant by stability in conditions in which a system of exchange rates fixed in terms of a common denominator with international endorsement is impracticable. This form of stability is expressed in the following language:

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.15

The Fund is directed to oversee the international monetary system, in order to ensure its effective operation, and the compliance of members with their obligations whatever may be their present or future exchange arrangements.16

Competence of Bank

The purposes of the Bank are set forth as follows in Article I of the Bank’s Articles:

  • (i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries.

  • (ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.

  • (iii) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories.

  • (iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first.

  • (v) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate postwar years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.

The main emphasis in the purposes of the Bank that go beyond the period of postwar reconstruction is on investment for development, and therefore on particular projects in contrast to the balance of payments. The emphasis on specific projects of reconstruction or development is made explicit in another provision.17 The tendency of the Bank has been to establish new international organizations, with structures tied to the structure of the Bank, when new purposes have been undertaken, rather than to amend the Articles of the Bank.18

Each member of the Bank subscribes to shares of its capital stock, which may be increased when the Bank deems it advisable.19 A modest proportion of subscriptions is subject to call as needed by the Bank in its general operations.20 The rest of the subscriptions is subject to call only when required to meet obligations of the Bank to its bondholders.21 These obligations result from borrowings by the Bank for the purpose of making or participating in direct loans or from guarantees by the Bank of loans made by private investors through the usual investment channels.22 The bulk of subscribed capital, therefore, is on call for the purpose of guaranteeing performance of specified obligations of the Bank in contrast to subscriptions to the Fund, all of which are paid in and are not subject to call. For this reason, Keynes thought that the names Fund and Bank for the two institutions should have been exchanged.

The total amount of the Bank’s outstanding guarantees, participations in loans, and direct loans may not exceed 100 percent of the Bank’s unimpaired subscribed capital, reserves, and surplus.23 No comparable limit for the benefit of lenders to the Fund is placed on the Fund’s financial activities by its Articles.24

The period for the repayment of loans by the Bank is not prescribed by the Articles but is left to determination by the Bank.25 In determining the period, the Bank has been guided by the life of the project financed by a loan. Typical terms for infrastructure projects have involved a 4-year grace period and a final maturity of about 17 years.26

Structural Relationship Between Fund and Bank

It will be convenient, before the subject of competence is discussed further, to deal with aspects of the structural relationship between the two organizations. The Fund and the Bank are separate international organizations, each with its own legal personality, and each governed by its own Articles of Agreement, although many of the provisions negotiated first for the Fund at Bretton Woods were then incorporated, with necessary adaptations, in the Bank’s Articles during the later stages of the Conference.

A structural tie of a legal character is that the Articles of the Bank restrict membership to countries that have become members of the Fund.27 If a member of the Bank ceases to be a member of the Fund, membership in the Bank ceases after three months unless the Bank by three fourths of the total voting power agrees to permit membership in the Bank to be maintained.28 No corresponding provision is included in the Articles of the Fund, so that no country entering the Fund is required to apply for membership in the Bank.29 The provision in the Bank’s Articles gives expression to the desirability of requiring members to accept the regulatory jurisdiction of the Fund in matters of the balance of payments and exchange rates if they wish to have the benefit of development assistance by the Bank. This requirement would help to ensure the repayment of loans by the Bank, although this consideration may not have been the main purpose of the provision.30

The original provisions of the two Agreements established separate organs for the institutions, but the organs were to be composed according to the same principles.31 In the Executive Board, the organ in continuous session, each of the five members having the largest quotas in the Fund, and the largest numbers of shares in the Bank, was entitled to appoint an Executive Director. All other members elected seven Executive Directors or such larger number of them as the Board of Governors might decide.32 The purpose of corresponding provisions was to increase the prospect that there would be parallel or complementary decisions by the two organizations when they were desirable.

To give further effect to this purpose, a policy was followed for some years of maintaining a roughly similar hierarchy of quotas in the Fund and subscriptions in the Bank. The Fund’s policies on the use of its resources have been defined in terms of quota, but loans by the Bank are not related to subscriptions. A member might wish to increase its quota in the Fund without any similar eagerness to increase its subscription in the Bank. For a number of years, the Fund, at the request of the Bank, informed members for which increases in quotas were proposed that they were “expected” to apply for comparable increases in their subscriptions in the Bank,33 even though there could be no legal compulsion. The policy has now lapsed.

The provisions of the two Agreements on the composition of the Executive Boards are now dissimilar in important respects because the Fund took the opportunity of the Second Amendment to modernize its provisions.34 The two Agreements continue to provide for the appointment of Executive Directors by each of the five members with the largest quotas or numbers of shares. For some time there was a tendency on the part of some of the five members, which were the same in the two organizations, to appoint the same person as Executive Director in both Boards. These so-called dual Executive Directors were an important channel of communication between the executive organs of the Fund and the Bank. Each organ could know what action the other was contemplating, and why, whenever parallel or complementary action was desirable. The Agreements do not require the appointment of dual Executive Directors, and on June 1, 1981, there were only 3 among the 22 Executive Directors of the Fund and the 21 of the Bank.35

There are no joint meetings of the Executive Directors 36 of the two institutions, but an official of one institution is permitted to attend meetings of the Executive Board of the other institution when certain matters of common interest are on the agenda. In matters of administration, there are a number of common services. With modest exceptions, separate staffs are maintained for both substantive and administrative functions.37 Only rarely have joint studies been prepared.38 Annual Meetings of the two Boards of Governors are held jointly.

A few joint committees, to perform either ad hoc or standing functions, have been established. The most interesting of these committees is the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries, which was established by parallel resolutions of the two Boards of Governors in October 1974.39 The initiative to establish the Committee was taken by the United States, perhaps to placate developing countries because agreement had not been reached on certain proposals 40 in which these countries had been interested in the negotiations on reform of the international monetary system that were concluded in June 1974 41 and because developing countries were pressing in the United Nations for an increased flow of resources to them.

The idea that inspired creation of the Committee was that the interests of developing countries could be fostered if the heads, or their delegates, of all financial and economic organizations involved with development could be gathered together in one body with the ministerial representatives of developed and developing countries. The Bank and the Fund were convenient institutions in which to place such a body because, like the Matterhorn, they were there. Developing countries welcomed association of the Committee with the Fund, even though the main interest of the Committee would be development, because they hoped that ministers of finance, who often are Governors of the Fund, would become more intimately concerned with development assistance. Nevertheless, provisions were introduced into the two resolutions as safeguards against too great an influence of the Fund and the Bank in the deliberations of the Committee. Now, however, the President of the Bank, the Managing Director of the Fund, and the Executive Boards of the two institutions collaborate in order to exercise closer control over the activities of the Committee.

Fund and Development: An Early Issue of Competence

Two early episodes, one involving the Fund and the other the Bank, have a bearing on the competence of the organizations. The outcome was restrictive for the Fund but expansionary for the Bank. At Bretton Woods, the delegation of India, supported by the delegations of some other developing countries, made a stubborn effort to insert a reference to development or developing countries in purpose (ii) of Article I of the Fund’s Articles. Developed countries resisted this attempt because they feared that it might lead to an overlapping jurisdiction for the Bank and the Fund.

The core of the final compromise is the word “thereby,” which implies that the purpose relating to trade should produce certain beneficial consequences, including the “development of … productive resources,” without making development itself a purpose. As a further concession, these consequences are recognized as “primary objectives of economic policy.” In the other scale of the balance, however, is the reference to development of the productive resources of “all members” and not developing members only.42

The caution that led to the formulation of purpose (ii) was responsible also for the absence of any mention of developing countries elsewhere in the original Articles of the Fund. The regulatory, supervisory, and financial authority of the Fund was to apply uniformly to all members. Circumstances were different when the Second Amendment was drafted: developing countries were more numerous, they were more unified in their strategy, and some of them had financial power. References to developing countries were incorporated in the Articles as members deserving special consideration in some respects 43 but without adding development to the purposes of the Articles. Moreover, the language quoted earlier on stability 44 mentions “sound economic growth,” although once again it is not confined to developing members.

Bank and Stabilization: An Early Issue of Competence

The third purpose in the Bank’s Articles is formulated in a way that resembles the technique followed in drafting the Fund’s second purpose. The “maintenance of equilibrium in balances of payments” is mentioned but is to be achieved “by encouraging international investment for the development of the productive resources of members.” This is not the only relevant language, however, because another provision declares that “Loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development.” 45 What, then, is the explanation of the “except” clause?

It is the remnant of a proposal at Bretton Woods that the Bank, acting in agreement with the Fund, should be authorized to make or guarantee long-term loans to stabilize currencies.46 The more obscure language was adopted when it was asserted that the U.S. Congress would not accept such authority for the Bank. As it turned out, Congress insisted on this authority. Some critics in the United States, including the influential American Bankers Association, were suspicious that the Fund might make long-term and unsound loans under the guise of monetary reconstruction. The Bank, staffed with bankers, would be better equipped to deal with requests for loans that were alleged to be of this character, and the Fund would find it easier to divert dubious requests to the Bank. Furthermore, a long-term loan to the United Kingdom was in the air, and perhaps Congress feared that the U.S. Administration was considering other such loans. It would be useful, therefore, to equip the Bank to provide loans of this kind.47

Congress inserted Section 12 in the U.S. Bretton Woods Agreements Act,48 under which the Governor and Executive Director appointed by the United States for the Bank were directed to obtain an authoritative interpretation by the Bank on the question whether it was empowered to make or guarantee loans for programs of economic reconstruction and the reconstruction of monetary systems, including long-term stabilization loans. If the answer was negative, the Governor and Executive Director were to propose an amendment of the Articles to establish the power. The Bank affirmed the existence of authority to make the loans in question.49

On the basis of this interpretation, the Bank has made “program loans.” 50 These loans are not for the purpose of financing a specific project but are intended to provide foreign exchange for the importation of commodities that are important for development and are used in particular sectors or areas or for developing the economy as a whole. The loans are designed to finance a particular kind of foreign exchange deficit, namely, the deficit represented by the excess of foreign exchange expenditures planned for a national development program over the foreign exchange prospectively available for this purpose.51 Only limited categories of “special circumstances” have been recognized. Program loans, which have been relatively few, have been made in circumstances in which prompt disbursement has been required.

Collaboration: 1966

Program lending has been criticized sometimes as balance of payments support that should be left to the Fund.52 Even project lending, however, can blur the distinction between the basic tasks of the two organizations. The Bank wants its project loans to promote development and creditworthiness, but the Bank is interested also in an improved balance of payments as a means of promoting development. The Bank’s interest in a member’s economic and financial policies has been broad enough, therefore, to justify the description of it as “encyclopedic,” 53 with the result that the policies that the Bank may recommend can include some that fall within the Fund’s competence as well.

It is obvious why the principle of collaboration between the two organizations and the need for the coordination of their policies have never been challenged. Moreover, the Articles of each organization provide that it “shall cooperate,” within the terms of the Articles, with any general international organization and with public international organizations having specialized responsibilities in related fields.54

Nevertheless, for a variety of reasons that have been explained in the published histories of the Bank and the Fund, relations have not always been close, so that at times in the past the word independence was more apt than collaboration to describe the relationship.55 The dissatisfaction caused by activities that appeared to be trespasses beyond the border between the organizations was aggravated when conflicting advice was given to a member. From time to time, therefore, consultation has taken place between officials of the organizations in order to avoid or limit what one organization regarded as trespass by the other and in order to improve collaboration. For the international lawyer, it is interesting that the results of these consultations do not take the form of an agreement between the two organizations.56 They are presented to the two Executive Boards in parallel documents or statements by the Managing Director of the Fund and the President of the Bank, formulated after consultation between them, that set forth the policies of the one organization on collaboration with the other. The Executive Boards approve the policies, sometimes with amendments by one Executive Board when only the practice of its organization is affected.

Modern collaboration began with two couples of parallel memoranda in 1966. A duo of January 1966 dealt mainly with procedures for collaboration. The memoranda confirmed the necessity for close and continuous contact between the two staffs at all levels, the interchange of information, and the avoidance of evaluations communicated to a country by one institution that are not acceptable to the other. The memoranda dealt also with collaboration in the field by attaching staff officials of one institution to missions of the other or by concurrent missions, provided always that the authorities of the country to be visited consented to these procedures.

Dual memoranda of December 1966 dealt with competence, but more with the purported intention of emphasizing common interests than of drawing sharp boundaries. The aim was to achieve, as far as possible, consistent views, and to provide consistent advice to countries, on matters of economic and financial policy. The memoranda recognized that both institutions were concerned with all aspects of the economic and financial structure and the progress of their members. Moreover, although there were areas of primary responsibility for each institution, there was a much broader range of matters in which both had responsibilities.

The two crucial paragraphs on matters of primary responsibility not only sketched the areas of that responsibility but also provided that one organization would not express views without the acquiescence of the other on matters within that other’s field of primary responsibility. The paragraphs read as follows:

4. As between the two institutions, the Bank is recognized as having primary responsibility for the composition and appropriateness of development programs and project evaluation, including development priorities. On those matters, the Fund, and particularly the field missions of the Fund, should inform themselves of the established views and positions of the Bank and adopt those views as a working basis for their own work. This does not preclude discussions between the Bank and the Fund as to those matters, but it does mean that the Fund (and Fund missions) will not engage in a critical review of those matters with member countries unless it is done with the prior consent of the Bank.

5. As between the two institutions, the Fund is recognized as having 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. On these matters, the Bank, and particularly the field missions of the Bank, should inform themselves of the established views and positions of the Fund and adopt those views as a working basis for their own work. This does not preclude discussion between the Bank and the Fund as to those matters but it does mean that the Bank (and Bank missions) will not engage in a critical review of those matters with member countries unless it is done with the prior consent of the Fund.

The sixth paragraph dealt with matters of overlapping responsibility and gave numerous examples of them.57 The seventh and last paragraph recognized that full uniformity of views or judgments could not be expected in these matters, but it was an objective to be pursued.

The understandings of 1966 were not designed for the sole purpose of protecting the jurisdiction of each organization. They were intended also to insulate members from the confusion of contradictory advice and the inconvenience of requests by both organizations for the same information.

A further memorandum of February 1970, entitled for the first time a “joint memorandum” of the Managing Director and the President, was designed to elaborate and extend the policy of January 1966 without touching paragraphs 4 to 7 of the December 1966 memorandum. The new policy was intended to produce closer collaboration at headquarters before and after missions went into the field and between missions in the field. The memorandum was a more detailed document, largely because of the growing activities and greater experience of the two institutions.58

Collaboration: 1980–81

The improvement and extension of collaboration have continued to be a normal preoccupation after 1970. The stages of the further history of the subject can be left to the historian, but the current position cannot be neglected here. First, however, a specific problem of increasing gravity on which collaboration has grown in recent years must be noticed. This problem is the burden of official indebtedness and the need for renegotiation. Normally, the purpose of the multilateral renegotiation of external debt in which the two organizations have had a role has been to alleviate the weight of debt service on the balance of payments, but on some occasions this purpose has been combined with the objective of enabling a country to proceed with the execution of its development plan. Both Fund and Bank, therefore, have had ample interest in these negotiations and an obvious need to collaborate.59

The dimensions of collaboration have been expanded as the result of three recent policies of the Fund and the Bank that have emerged in response to the more acute difficulties of current conditions, including those caused by inflation, the cost of energy, and slow growth in industrial countries. These policies can be understood as movements of the Fund and the Bank closer to what has been considered the traditional border between them.

The first of the policies is a decision of the Fund of September 1976 to establish a so-called extended facility.60 This policy, like the establishment of the Development Committee, was a consequence of the negotiations on reform of the international monetary system in which it was accepted that developing countries should receive more beneficial treatment. The new facility was designed to assist countries with economies suffering serious imbalances in their international payments because of structural maladjustments in production and trade, or countries with economies characterized by slow growth and an inherently weak balance of payments position that prevented pursuit of an active development policy. The emphasis of the policy was still on the balance of payments but in circumstances in which weakness in it was closely related to deficiencies in development. Countries in this position often needed not merely to strengthen existing policies but also to adopt new instruments of policy and make institutional changes. The Fund’s facility was an “extended” one because it provided for stabilization over a period longer than had been normal, a larger volume of resources, and a longer period for the outstanding use of them. This period was at first eight years but was later prolonged to ten.61

The policy moved the Fund closer to the border not only because of its explicit relationship to development but also because the period of permitted use of resources went some distance toward the period of the Bank’s loans for development. The sense of proximity to the Bank has been sharpened further by the fact that developing countries are the beneficiaries of this policy and the borrowers to which the Bank lends. At the present time, developing members are the major users of the Fund’s resources under its policies as a whole in contrast to former periods when developed members were responsible for a larger volume of use.

A second policy of the Fund that responds to current conditions is the greater attention it gives to savings, investment, and production in the programs that it supports with its resources. In the past, most balance of payments problems were seen to be the consequence of excess demand. The Fund concentrated, therefore, on the necessity for countries to control demand. Now, however, the problems of many members are caused, or intensified, by the increased costs of oil and other imports. These problems are not caused by the neglect or inadequacy of policies, but the problems must be solved nevertheless. The Fund now pays increased attention to programs designed to adjust the balance of payments by policies relating to supply as part of a longer-term strategy for fostering investment and economic growth, which are within the field of the Bank’s primary responsibility.62

The third policy is the Bank’s policy of lending for structural adjustment.63 Under this policy, which is an adaptation of program lending, the Bank can provide longer-term finance than is available from the Fund or commercial banks. The object of the policy is to reduce deficits in the current account of the balance of payments of developing countries so that deficits do not jeopardize current investment programs and activities that produce foreign exchange. A postulate on which the policy rests is that the conditions to which developing countries must accommodate themselves will be prolonged in duration, or even permanent, and, therefore, resources to meet their deficits must be accompanied by structural adjustments in their economies.64 Structural adjustment loans, in contrast to many of the program loans of the past, concentrate on longer-term structural problems rather than on the immediate consequences of crises, and contemplate a series of programs and supporting loans over a period of years. The agreements provide for a grace period and a final maturity for most loans that falls within a range of 17 to 20 years.

The Bank’s policy on structural lending was particularly influential in bringing about a review of collaboration in mid-1980. In both the Fund and the Bank it was concluded that there was no need to revise the text of any of the documents on collaboration but that current conditions, including the evolving policies of the two organizations, made the effectiveness of collaboration more essential than ever. It was not to be forgotten, however, that as the two organizations move toward each other, they do so from the different directions charted by their Articles. The Fund’s path is adjustment of the balance of payments, while the Bank’s is investment and production.

The programs supported by the Fund and the Bank must be complementary and consistent. For this purpose, relations between the two staffs must be closer than ever. The Fund’s interest in investment and production does not mean that it will endorse particular investments or productive activities but it will want to know the Bank’s views on these physical aspects of a country’s economy, and it will take these views into account in discussing the balance of payments.

A stabilization program supported by the Fund is not a legal condition of a structural adjustment loan by the Bank. Nor is it necessary that a member must qualify for assistance under the Bank’s criteria before the Fund will make its resources available. Consultation between the two staffs on a country is normal, however, and each will know the views of the other before financial arrangements are entered into and during the life of the arrangements. Nevertheless, neither arrangement includes terms that resemble provisions for cross-defaults.65


The Fund and the Bank are legally distinct as international organizations and they continue to cherish a tradition of exclusive authority. Neither exercises a veto over, or control of, the activities of the other. Discussions between them of their relationship are almost invariably prefaced by some reference to the uniqueness of the purposes, functions, and operations of each. It is understandable, therefore, that a distinction between the Fund and the Bank is expressed sometimes in aphoristic terms: The balance of payments is the business of the Fund; development is the business of the Bank. The Fund’s financial activities are short- to-medium term; the Bank’s are longer term. The Fund’s policies are concerned with fitting demand to supply; the Bank’s policies with changing the source and pattern of supply. The Fund concentrates on the macroeconomic policies of its members; the Bank on policies of narrower scope. The Fund deals with the “financial” economy; the Bank with the “real” or “physical” economy.

These distinctions are acceptable but only as the beginning of thought about the institutions. Although conditions have drawn the two closer to each other, it is not a recent discovery that the macroeconomic policies of members that are the primary concern of the Fund—such as monetary and fiscal policies, exchange rates, and external borrowing—can affect the availability of resources for development. These policies can have a major impact on the Bank’s primary concern with the size and composition of investment programs, priorities for development, and the efficient use of resources. An improved balance of payments can increase creditworthiness and enable a member to service a larger volume of foreign debt incurred for development. Conversely, the policies of members involving the physical economy that are the primary concern of the Bank—such as the improvement of agricultural productivity, export promotion, the development of sources of energy, and the conservation of energy—can determine whether a balance of payments program will succeed.

Legal independence and functional interdependence inevitably require that the parallel lines of the two organizations must meet this side of infinity. The road to collaboration has been obstructed at times by the perception each organization has had of its predominance in international financial affairs.66 The Bank became active in the first period following Bretton Woods, while the Fund languished because conditions were not suitable for its financial operations. The volume of the Fund’s financing began to grow at the end of the 1950s, and some of its individual transactions were huge when compared with the Bank’s loans. In the 1960s, the main issue of international political economy was the adequacy and control of the external reserves of monetary authorities. The Fund was in the limelight because international liquidity was recognized to be the business of the Fund. International negotiations led to the First Amendment of the Fund’s Articles and the creation of the SDR. In the 1970s, the collapse of the par value system once again focused attention on the Fund. Efforts to reform the international monetary system, which led to the Second Amendment, were conducted within the framework of the Fund. Current conditions put much pressure on both organizations. Neither is in a position to claim stardom and regard the other as the supporting player.

At the present time, both organizations make intense efforts to broaden collaboration and to increase its effectiveness. Nevertheless, a few voices are raised, not to dissent, but to admonish. A warning is issued against the application by each organization of the criteria of both: members should not be subjected to what has been called double jeopardy or cross-conditionality. It has been urged also that closer collaboration should lead in these hard times to an increase in the total resources made available by the Fund and the Bank and not a division of the resources that either might have provided in days of looser collaboration. Both risks, if they were indeed risks, have been avoided.

Not everyone is persuaded that recent policies are a movement to the border without overstepping it. Doubt may be inspired sometimes by too uncritical a belief in one of the aphorisms about jurisdiction. Something of a safeguard exists, however, in the common membership of the Fund and the Bank and the concern of most members, expressed in the formation of policy by the Executive Boards, to maintain distinct roles for the organizations. Whether members think that the border has remained inviolate, or has been approached too closely, or has been crossed, all agree that close and effective collaboration is essential, either as prevention or as cure.

Students of international law and organization may ask what, in view of the complementary character of the Fund and the Bank, is the justification for two organizations. William of Occam’s razor should be wielded in all disciplines: entities should not be multiplied beyond necessity. In 1942 and 1943 Keynes suggested a close link between his Clearing Union and a Board for International Investment, but he did not elaborate this suggestion.67 In 1945, after the Bretton Woods Conference, many bankers in the United States were more explicit about the link that they would prefer. Some supported the project for the Bank, but favored postponement of the Fund and performance of some of its functions by the Bank in the meantime. Others proposed that the two institutions should be merged or that the Fund should be a department of the Bank.68 These opinions influenced Congress to include in the U.S. Bretton Woods legislation the request for an authoritative interpretation on the competence of the Bank that has been discussed earlier in this article.69

The archaeology of the Fund and the Bank discloses that the argument for a single organization was considered and rejected in the April 1942 version of the White Plan:

Those two tasks should be kept distinct. Though in some of their facets and in many of their consequences there is considerable interdependence and interaction, the two are different enough to call for separate instrumentalities. Each is sufficiently specialized to require different resources, different responsibilities, and different procedures and criteria for action. … While either agency could function without the existence of the other, the creation of both would nevertheless aid greatly in the functioning of each. Doubtless one agency with the combined functions of both could be set up, but it could operate only with a loss of effectiveness, risk of over centralization of power, and danger of making costly errors of judgment. The best promise of successful operation seems to lie in the creation of two separate institutions, linked together by one or two directors in common.70

The version of the plan dated July 10, 1943 dealt with the proposal of an even greater integration of functions in the following words:

It is recognized that an international stabilization fund is only one of the instrumentalities which may be needed in the field of international economic cooperation. Other agencies may be needed to provide long-term international credit for post-war reconstruction and development, to provide funds for rehabilitation and relief, and to promote stability in the prices of primary international commodities. There is a strong inclination on the part of some to entrust to a single agency the responsibility for dealing with these and other international economic problems. We believe, however, that an international economic institution can operate most effectively if it is not burdened with diverse duties of a specialized character.71

In 1966, the subject of debate was closer cooperation between the Fund and the Bank and not merger. The case for closer cooperation was put in the passages quoted above, but in 1966 it was summed up neatly in a single word: synergism. It is defined by one dictionary as “cooperative action of discrete agencies such that the total effect is greater than the sum of the effects taken independently.” 72

Supplemental Note to Chapter 5

Footnote 24 refers to the possibility of guidelines on borrowing by the Fund. Guidelines were adopted by a decision of January 13, 1982 (Selected Decisions, 10th (1983), pp. 231–32) and revised on December 23, 1983 by the following decisions:

Guidelines for Borrowing by the Fund

Quota subscriptions are and should remain the basic source of the Fund’s financing. However, borrowing by the Fund provides an important temporary supplement to its resources. In present circumstances, it facilitates the provision of balance of payments assistance to members under the Fund’s policies of supplementary financing and enlarged access.

The confidence of present and potential creditors in the Fund will depend not only on the prudence and soundness of its financial policies but also on the effective performance of its various responsibilities, including, in particular, its success in promoting adjustment.

Against this background the Executive Board approves the following guidelines on borrowing by the Fund.

1. Fund borrowing shall remain subject to a process of continuous monitoring by the Executive Board in the light of the above considerations. For this purpose, the Executive Board will regularly review the Fund’s liquidity and financial position, taking into account all relevant factors of a quantitative and qualitative nature.

2. Subject to paragraph 4 below, the Fund will not allow the total of outstanding borrowing plus unused credit lines to exceed the range of 50–60 percent of the total of Fund quotas. If the total of outstanding borrowing plus unused credit lines reaches 50 percent of quotas, the Executive Board shall assess the various technical factors that determine, at that time, the availability of balances of unused lines of credit. While this assessment is being made, the total of outstanding borrowing plus unused credit lines may rise, if necessary, beyond 50 percent, but shall not exceed 60 percent of total quotas.

3. The total of outstanding borrowing plus unused credit lines under paragraph 2 above shall include, in respect of the GAB and borrowing arrangements associated with the GAB, either outstanding borrowing by the Fund under these arrangements, or two thirds of the total of credit lines under these arrangements, whichever is the greater.

4. In the case of major developments, the Executive Board shall promptly review, and may adjust, the guidelines. In any event, the guidelines shall be reviewed when the Board of Governors has completed the Ninth General Review of Quotas, or when there is a significant change in the GAB or associated arrangements, and may be adjusted as a result of such reviews.

5. The percentage limits specified in paragraph 2 above, or any other limits that may be adopted as a result of a review pursuant to paragraph 4 above, are not to be understood, at any time, as targets for borrowing by the Fund.

Decision No. 7589-(83/181), adopted

December 23, 1983

Note.—This essay was published originally in Creighton Law Review, Vol. 15, No. 2 (1981–82), pp. 499–521.

Procs. and Docs., p. 941.

Keynes, Collected Writings, Vol. 26, pp. 239–327.

Some excellent monographs have been written on GATT. See, for example, Kenneth W. Dam, The GATT: Law and International Economic Organization (Chicago: Chicago University Press, 1970); Robert E. Hudec, The GATT Legal System and World Trade Diplomacy (New York: Praeger, 1975); John H. Jackson, World Trade and the Law of GATT (Indianapolis: Bobbs Merrill, 1969). See also, Richard N. Gardner, Sterling-Dollar Diplomacy (New York: McGraw Hill, 1969).

Article VIII, Section 3.

John H. Jackson, op. cit., pp. 482 et seq.

Kenneth W. Dam, op. cit., pp. 152–57.

Sometimes called the White Plan after the chief American architect, Harry Dexter White. The other main plan was the British Proposals for an International Clearing Union, or the Keynes Plan, named after the chief British architect, John Maynard Keynes (History, 1945–65, Vol. III, Docs. 3–96).

Article III.

Article VII, Section 1.

Or of SDRs.

Article V, Section 3.

Article V, Section 7.

Manuel Guitián, “Conditionality: Access to Fund Resources” (reprinted from issues of Finance & Development as follows: Vol. 17 (December 1980), pp. 23–27; Vol. 18 (March 1981), pp. 8–11; and Vol. 18 (June 1981), pp. 14–17); Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington, 1979).

Article VIII, Section 7; Article XXII.

Article IV, Section 1.

Article IV, Section 3.

International Bank for Reconstruction and Development, Articles of Agreement (hereinafter cited as World Bank Articles), Art. III, Sec. 4(vii).

The organizations referred to are the International Development Association (IDA) and the International Finance Corporation (IFC). The other organization in the present family of the Bank is the International Centre for Settlement of Investment Disputes (ICSID). Its structure differs from those of the other organizations.

World Bank Articles, Art. II, Secs. 2 and 3.

Edward S. Mason and Robert E. Asher, The World Bank Since Bretton Woods (Washington: The Brookings Institution, 1973), p. 115.

World Bank Articles, Art. II, Sec. 5. See Eugene H. Rotberg, The World Bank: A Financial Appraisal (Washington: World Bank, March 1978), pp. 15–16.

World Bank Articles, Art. IV, Sec. 1.

Ibid., Art. III, Sec. 3.

Mr. Jacques de Larosière, Managing Director of the Fund, has contemplated the possibility of guidelines on the volume of borrowing by the Fund to finance its activities. See IMF Survey, Vol. 10 (April 6, 1981), p. 101.

World Bank Articles, Art. IV, Sec. 4(a).

E. Rotberg, The World Bank’s Borrowing Program: Some Questions and Answers (Washington: World Bank, 1979), p. 5. See also Edward S. Mason and Robert E. Asher, op. cit., p. 735.

World Bank Articles, Art. II, Sec. 1.

Ibid., Art. VI, Sec. 3.

On June 1, 1981, of the 141 members of the Fund, 139 were members of the Bank as well. St. Vincent and Malta were members of the Fund but not the Bank on that date. See Gold, Membership and Nonmembership, pp. 28–29, 175, 326–27, and 399–400.

Procs. and Docs., pp. 547–48, 613, 624, and 1101–102.

Article XII, Section 2(a); World Bank Articles, Art. V, Sec. 5(a).

World Bank Articles, Art. V, Sec. 4; IMF Article XII, Section 3, original.

History, 1945–65, Vol. III, pp. 433 and 459.

Article XII, Section 3.

Bretton Woods Agreements Act, Public Law 79-171, 59 Stat. 512 (U.S.C. Sec. 286 (1945)) provides in Section 3(a) that the President, by and with the advice and consent of the Senate, shall appoint a Governor of the Fund who shall also serve as a Governor of the Bank. The objective was to promote coordination between the two organizations. (See U.S. Senate Hearings on Bretton Woods Agreements Act, pp. 480–81.) One witness proposed that all Governors and Executive Directors should be dual for the same reason. Ibid., p. 496. Keynes’s view on dual Executive Directors was as follows: “[I]t seems to me a thoroughly bad idea. Different qualities are required, and the range of activities of the two would be widely divergent. It must be doubtful, therefore, whether one man can efficiently perform both functions. I should like to see the Board of the Fund composed of cautious bankers, and the Board of the Bank of imaginative expansionists,” Keynes, Collected Writings, Vol. 26, p. 194.

The name of the Fund’s organ has been changed by the Second Amendment from “the Executive Directors” to “the Executive Board.”

Edward S. Mason and Robert E. Asher, op. cit. (footnote 20), pp. 544–58; History, 1945–65, Vol. I, pp. 340–43.

See, for example, International Monetary Fund, The Problem of Stabilization of Prices of Primary Products: Report of the Executive Directors—Scope for Action by the Fund (Washington, June 1969).

Resolution No. 29-9, Selected Decisions, 9th (1981), pp. 310–14.

Foremost among them was the “link,” i.e., the proposal that the allocation of SDRs should be linked to assistance for development.

Documents of Committee of Twenty.

For a full account, see Joseph Gold, “‘… To Contribute Thereby To … Development ….’: Aspects of the Relations of the International Monetary Fund with Its Developing Members,” Columbia Journal of Transnational Law (New York), Vol. 10 (1971), pp. 267–302.

Article V, Section 12(f)(ii)-(iii); Schedule B, paragraph 7(b); Schedule D, paragraph 2(a).

Article IV, Section 1.

World Bank Articles, Art. III, Sec. 4(vii).

Procs. and Docs., pp. 196, 376, and 378.

John M. Blum, From the Morgenthau Diaries: Years of War, 1941–1945 (Boston: Houghton Mifflin Co., 1967), pp. 428 and 435. U.S. Senate Hearings on Bretton Woods Agreements Act, pp. 78, 136–37, and 352–54.

See footnote 35 above.

World Bank, First Annual Report of the Executive Directors (Washington, 1946) pp. 25–26.

Edward S. Mason and Robert E. Asher, op. cit. (footnote 20), p. 25.

Ibid., pp. 260–94.

Ibid., pp. 290–91.

Ibid., p. 185.

World Bank Articles, Art. V, Sec. 8(a); IMF Article X. Although the provisions seem obviously to be directed toward cooperation between the Fund and the Bank, and undoubtedly do apply to them, the discussion of the Bank’s provision at Bretton Woods concentrated on cooperation between the Bank and the future Food and Agriculture Organization (FAO). Representatives of the UN Interim Commission on Food and Agriculture attended the Conference as observers and pressed for cooperation on agricultural credits, Procs. and Docs., pp. 377, 466–81, and 582–83.

Art. V, Sec. 8(b) of the World Bank’s Articles provides that

“In making decisions on applications for loans or guarantees relating to matters directly within the competence of any international organization of the types specified in the preceding paragraph and participated in primarily by members of the Bank, the Bank should give consideration to the views and recommendations of such organization.”

Although the provision can be read to apply to the Fund, it is at least doubtful that the drafters would have regarded the Bank’s loans or guarantees as relating to matters “directly” within the competence of the Fund. This provision also seems to have been inspired by the Interim Commission on Food and Agriculture, Procs. and Docs., p. 859.

Edward S. Mason and Robert E. Asher, op. cit. (footnote 20), pp. 544–54; History, 1945–65, Vol. I, pp. 340–43 and 603–604.

One reason why the form of an agreement was avoided was the wish to preserve flexibility. Both Articles of Agreement provided in 1966 that the power to “make arrangements to cooperate with other international organizations (other than informal arrangements of a temporary or administrative character)” was reserved to the Board of Governors (World Bank Articles, Art. V, Sec. 2(b)(v); IMF Article XII, Section 2(b) (iv), original). Action by the Boards of Governors would have been too formal to permit flexibility, while to treat the understandings as a “temporary” or “administrative” arrangement that the Executive Boards could enter into would have seemed too informal. The Second Amendment has deleted the provision from the Fund’s Articles but the Bank’s Articles remain unchanged in this respect.

The examples, cited without limitation, were “the structure and functioning of financial institutions, the adequacy of money and capital markets, the actual and potential capacity of a member country to generate domestic savings, the financial implications of economic development programs for the internal financial position of a country and for its internal debt program. …”

History, 1966–71, Vol. I (1976), pp. 610–15.

Bahram Nowzad, Richard C. Williams, et al., External Indebtedness of Developing Countries, IMF Occasional Paper, No. 3 (Washington, 1981), pp. 21–29.

Selected Decisions, 9th (1981), pp. 26–31.

Annual Report, 1980, pp. 71 and 145.

See the address by Mr. Jacques de Lariosière reported in IMF Survey, Vol. 9 (June 3, 1980), p. 173; Annual Report, 1980, pp. 38–39. See also the following passage in the communiqué of the Interim Committee of the Board of Governors on the International Monetary System (International Monetary Fund, Press Release No. 81/40, May 21, 1981): “The Committee urged that monetary and fiscal policies aimed at restraint on expansion of nominal demand be supplemented by appropriate supply-side policies designed to improve the climate for investment and economic efficiency. It recognized that increased productivity, moderation in growth of incomes, and a better matching of supplies with the structure of demand could contribute in due course to an easing of inflation and to establishment of a basis for stronger growth with relative price stability,” IMF Survey, Vol. 10 (June 8, 1981), p. 167.

World Bank, Annual Report, 1980, pp. 67–68; Address to the Board of Governors by Robert S. McNamara, President, World Bank (1980), pp. 5–16.

“To achieve desirable growth rates in the future, developing countries will have to use available capital more efficiently, increase domestic savings, increase domestic production of energy and economize in its use, increase domestic output of food, and increase and diversify their exports. Actions of this sort will require a pattern of investment different from that in the past,” World Bank, Annual Report, 1980, p. 67.

The language of cross-default, however, is not appropriate for the Fund for reasons discussed in Joseph Gold, The Legal Character of the Fund’s Stand-By Arrangements and Why It Matters, IMF Pamphlet Series, No. 35 (Washington, 1980).

Edward S. Mason and Robert E. Asher, op. cit. (footnote 20), pp. 547–50.

History, 1945–65, Vol. III, pp. 15 and 34.

See U.S. Senate Hearings on Bretton Woods Agreements Act, pp. 252, 324, 420–21, and 597; House Hearings on H.R. 2211, pp. 348, 350, 385, 396, 406, 410, 415, 422–23, 429, 481, 493, etc. Among the various reasons for these views was the broad authority of a member to control the use of its currency in the Bank’s lending (World Bank Articles, Art. IV, Sees. 1 and 2). No corresponding provision is included in the Fund’s Articles (see, for example, House Hearings on H.R. 2211, p. 397).

The opinions also had some influence on the restrictive interpretation of the Fund’s Articles called for by Section 13 of the U.S. Act. The interpretation provided by the Fund in response to this request by the United States (Selected Decisions, 9th (1981), p. 17) had to be reconsidered and, in effect, broadened 15 years later. See Joseph Gold, International Capital Movements Under the Law of the International Monetary Fund, IMF Pamphlet Series, No. 21 (Washington, 1977), pp. 20–25.

History, 1945–65, Vol. III, p. 39.

Ibid., p. 84.

For a recent proposal on the cooperative management of international economic affairs, see Miriam Camps, “The New Bretton Woods,” International Journal, Vol. 35 (1980), pp. 240–62.

    Other Resources Citing This Publication