The Fund and the World Bank are often referred to as twin institutions. They were born at about the same time, and their childhood home was the same—1818 H Street in Washington, D.C. These twin institutions, however, were not expected to look alike, and they have never done so. Nevertheless, their relationship is perhaps closer than that of any other two international organizations.

The Fund and the World Bank are often referred to as twin institutions. They were born at about the same time, and their childhood home was the same—1818 H Street in Washington, D.C. These twin institutions, however, were not expected to look alike, and they have never done so. Nevertheless, their relationship is perhaps closer than that of any other two international organizations.

The Fund and the Bank rely on each other to function effectively. The founding fathers of the two institutions fully recognized that the Bank needed the Fund; they provided that only members of the Fund could become members of the Bank. It is important that members of the Bank subscribe to the code of international conduct that was written into the Fund’s Articles of Agreement. By the same token, for effective relations with those of its members which are developing countries, the Fund needs the Bank. The success of the Fund in promoting adjustment depends on help from the World Bank, especially in effecting appropriate changes in the allocation of resources—in particular, in the pattern of public and private investment—within national economies.

The World Bank

The World Bank is the foremost institution helping the developing countries to raise their standards of living. The World Bank is in fact not one but a group of three institutions—the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), and the International Finance Corporation (IFC). The IBRD was established along with the Fund. IDA was created in I960 when it became clear that many poor countries could only afford to borrow on terms that were more concessionary than those offered by the IBRD. IDA was set up as an affiliate of the IBRD, and although the two are legally and technically distinct entities, they operate as a closely integrated unit and are administered by the same staff. Hereinafter, this composite unit will be referred to as the World Bank, or simply the Bank, unless the context clearly implies a different meaning. No further mention will be made of the IFC, with which the Fund has very few ties.

The World Bank promotes the development of the developing countries by channeling resources to them from the developed countries. For the IBRD, these resources are drawn only to a small extent from its own capital. Less than a tenth of the IBRD’s authorized capital has been paid in; the rest serves as a guarantee for the IBRD’s borrowings, which are its principal source of funds for lending. By mid-1982, the IBRD had borrowed a cumulative total of US$55 billion. These borrowings were from private investors and on commercial terms; the IBRD’s lending is therefore also on commercial terms. The rate of interest on IBRD loans was 9.6 percent at mid-1981; the average repayment period has been about 20 years.

IDA’s credits are free of interest but entail a 0.75 percent service charge and a 50-year repayment period, repayment beginning after a 10-year grace period. These terms are made possible because IDA’s resources are drawn principally from the budgetary contributions of the richer countries. Without such funds, it would be impossible for the World Bank to provide significant help to the poorest of countries. IDA resources are made available only to countries that are below a periodically adjusted “poverty ceiling” defined in terms of per capita income (at present, US$730 per capita); other criteria for eligibility to IDA credits are that a country be faced with unusually difficult balance of payments problems but still enjoy sufficient economic, financial, and political stability and display a genuine commitment to development. More than 70 countries, including China, have been eligible for IDA assistance. Some 25 countries have received only IDA credits; some 50 have received a “blend” of IDA credits and IBRD loans.

Total World Bank (IBRD plus IDA) lending has increased from an annual average of US$3.8 billion during 1971-75 to US$9.3 billion in 1976-81 and to US$13.0 billion in fiscal year 1982. The World Bank draws up a five-year lending program for each country, which is revised annually. The program is based on specific projects agreed on with the national government. Under the Bank’s charter, its lending must be primarily for specific projects. Loans for sectors and to intermediary institutions, however, are permissible. About a third of the lending in 1981 was for agricultural and rural development projects, about a sixth for energy projects, and about a tenth each for transportation projects and development finance companies. The principal change over the years has been a sharp reduction in the proportion of lending going to transportation and a largely offsetting increase in that going to agriculture and rural development. About 40 percent of total World Bank lending in the past ten years or so has been allocated to Asian countries.

Only in “special circumstances” is the World Bank allowed by its charter to lend for nonproject purposes. The Bank’s principal objective of bringing about transfers of resources from the developed to the developing countries can be attained through project lending. Such lending, however, is not flexible enough to secure quickly an increase in the rate of such transfers to any particular country should such a need arise. Nonproject lending is undertaken when unforeseen temporary difficulties facing a country give rise to an immediate need for foreign exchange, without which normal development activity would be adversely affected. To obtain such lending, a country must have an acceptable medium-term or long-term development program. It should also pursue policies that would make it possible for normal development activity to eventually resume without such special assistance. Because such lending is considered appropriate only under special circumstances, its scope has been limited. Except in the early postwar reconstruction years, lending of this nature has generally constituted less than 10 percent of the Bank’s total lending; during 1970–80, it averaged only 5 percent a year.

In April 1980, the Bank inaugurated a new policy called “structural adjustment lending.” This initiative was taken when the Bank saw that the economic problems faced by developing countries were greatly exacerbated by an unfavorable international economic environment—the oil price increases, the increases in interest rates, and stagflation in the developed countries. The developing countries need to adjust the structure of their economies if they are to cope adequately with this unfavorable environment without impairing their growth. While the rate of growth of output in these economies has to be sustained in the face of the new difficulties, the composition of output growth has to be changed so that exports can grow faster and imports slower than would otherwise occur. Policy and institutional changes are also necessary. Under the structural adjustment lending policy, the World Bank has stepped in to help countries draw up and implement the policy reforms needed for this purpose and to provide financial assistance while the structural adjustment takes place. This is necessarily a long process, and for this reason, three or four structural adjustment loans over a period of five or six years are envisaged for each country in which the Bank has negotiated a structural adjustment lending program. The structural adjustment programs supported by the Bank have covered a wide range of economic policies and institutional arrangements relating to these policies. Of course, only those aspects of policy which are considered relevant in a particular case are covered in each structural adjustment loan. In the two and a half years since the inauguration of the structural adjustment lending policy, 17 operations have been completed in 13 countries, including 4 Asian countries (Korea, Pakistan, the Philippines, and Thailand). The 17 operations have involved total commitments of about US$2.2 billion. In the fiscal year ended June 30, 1982, structural adjustment loan commitments represented about 10 percent of total Bank lending.

It is crucial to note that the Bank’s lending also has other, nonfinancial, goals. In the context of its lending, the Bank advises borrowing countries on the best way of attaining their development objectives. It engages in a continuous dialogue with the borrowing countries concerning their policies at the project, sector, and macroeconomic levels. In deciding on its lending to a country, the Bank takes into account the country’s performance in a variety of areas relating to the development process. Although the scope of such policy dialogue and performance appraisal is limited when the Bank’s involvement is confined to project lending, it can be very broad indeed when structural adjustment lending is involved. Thus, the Bank has its own “conditionality,” and the need for coordinating it with that of the Fund is evident.

A Brief History of Fund-Bank Relations1

During the negotiations that culminated in the Bretton Woods Agreement, the establishment of a single organization performing the functions now assigned to the Fund and the Bank had been considered. This idea was rejected, however, because it was not considered feasible for a single organization to perform effectively all the functions that were to be entrusted to the two. There was also a risk of overcentralization of power and a danger of making costly errors of judgment. The Fund and the Bank were thus established as two independent organizations with separate responsibilities as well as different purposes and functions. In broad terms, the Fund was designed to promote international monetary cooperation and, thus, to facilitate the adjustment of external payments imbalances of its members, and the Bank was designed to help reconstruct economies damaged by the war and to further the longer-term growth and development of developing countries.

While these purposes are distinct, they are also complementary and, in some areas, overlapping. It had always been recognized, therefore, that the two institutions would rely on each other for advice and guidance in each other’s areas of primary responsibility. No attempt was made, however, to formally delineate the scope of operations of each institution. The Fund and the Bank were expected to collaborate closely and to draw on each other’s expertise; this expertise was to develop as each institution sought to accomplish its own purpose. No organizational mechanism was created to coordinate the two institutions. Nor has any such mechanism been developed since then. The Executive Boards, the managements, and the staff of the two are completely independent of each other.2 Cooperation between the institutions has thus been based on the capacity of the two staffs to draw on each other’s help when assisting their members.

When the two institutions expanded their operations in the developing countries in the 1950s and early 1960s, there was an increasing need to promote cooperation between the two staffs and to minimize the risk of duplication of effort, which in certain instances could lead to inconsistent or even contradictory policy advice to member countries. To facilitate this process, a set of guidelines was issued by the two managements to their respective Executive Boards in February 1966, specifying for the first time the procedures for this cooperation.

In December 1966, as a result of discussions following the Board’s approval of these guidelines, the Managing Director of the Fund issued a “Memorandum on Fund-Bank Collaboration” to the department heads of the Fund. The Bank was “recognized as having primary responsibility for the composition and appropriateness of development programs and project evaluation, including development priorities.” The Fund was “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.” These broad distinctions were not intended to preclude discussions between the two staffs on matters that were within the area of primary responsibility of one or the other institution; they did indicate, however, that the staff of each institution was required to inform itself of the established views and positions of the other in those areas where the other institution was primarily responsible and to “adopt those views as a working basis for their own work” and not to “engage in a critical review of those matters with member countries unless it is done with the prior consent” of the other institution.

The guidelines also recognized that “in between these two clear-cut areas of responsibility of the Bank and the Fund, respectively, there is the broad range of matters which are of interest to both institutions. … In connection with all such matters, efforts should be made to avoid conflicting views and judgments, through continuing close working relations between the respective area departments and other means.”

The question of Fund-Bank cooperation was reviewed again by the managements of the two institutions in 1970, and a detailed set of guidelines relating to the procedural arrangements for cooperation was circulated to the two staffs in a joint memorandum by the Managing Director of the Fund and the President of the Bank. This memorandum affirmed that the 1966 understandings had served the interests of the organizations and their member countries and continued to be valid as the basis for future cooperation.

Since then, because of a number of recent developments, there has been a renewed interest in the effectiveness of cooperation between the Fund and the Bank. The sharp deterioration in the external terms of trade for non-oil developing countries, combined with unfavorable conditions in the world financial and export markets, has resulted in large and structural external imbalances in many developing countries. These imbalances, in turn, have led to greater demand for financial resources from both the Fund and the Bank. The Fund’s response, initially under its extended Fund facility established in 1974, has been to provide larger amounts of financing for longer periods and to concentrate more on the supply aspects of the members’ economies. The Bank has responded by introducing structural adjustment lending, which, as described earlier, is designed to provide foreign exchange to support the development of the export sector and the import substituting sector in the medium term. As the two institutions have adapted their policies to increase their assistance to members facing large imbalances, they have both moved closer to the edge of their traditional spheres of responsibility and expertise, reinforcing the need for effective cooperation.

Effective collaboration between the Fund and the Bank in respect of a particular country does not require, however, that either or both of the two institutions should lend to that country in a particular form, say, the extended Fund facility in the case of the Fund and structural adjustment lending in the case of the Bank. There have been striking instances of very effective collaboration between the two institutions—to the benefit of member countries—without the existence of either an extended arrangement or a structural adjustment loan. It is important to note that the need for effective collaboration has been heightened by recent world economic developments and by the responses of the Fund and the Bank to these developments.

The two institutions reviewed the effectiveness of their cooperative efforts in mid-1980 and early 1981. This review reaffirmed that there was no need to revise the procedural aspects of cooperation. It did point out, however, that under current circumstances there was a greater need for more direct forms of exchange.

The Fund’s Areas of Expertise

The Fund conducts an annual consultation with its members to review their economic development and policies. In this consultation, the Fund staff carries out a thorough assessment of members’ macroeconomic policies. As a consequence, it has gained considerable experience in analyzing fiscal, monetary, and incomes policies, exchange rate policies, and foreign trade and external debt policies. This experience has enabled the staff to assist its members in designing stabilization programs aimed at balance of payments adjustment.

An important element of any stabilization program is the formulation of a “financial program,” which aims at ensuring consistency between financial policies and the likely balance of payments outcome. For this purpose, a forecast of the demand for money consistent with growth and inflation targets has to be made. The expected increase in the demand for money should match the expected increase in the supply, which is based on the planned increase in supply of credit to the public and private sectors and on the changes in net foreign assets (i.e., the balance of payments target). If the projected figures for both demand and supply of money are not consistent, the planned set of measures affecting the public and the private sectors needs to be reviewed and adjusted. The most difficult problem in this exercise is often the adjustment of fiscal imbalances to a level that does not result in excessive creation of liquidity and, at the same time, does not impinge on the availability of credit to the private sector. Adjustment of budgetary expenditure or the introduction of revenue measures requires a thorough assessment before major policy decisions are made. Complementary monetary measures, including those relating to the efficiency of the financial system in allocating credit and the appropriateness of the levels and structure of interest rates, are an integral part of the financial program.

In many situations of balance of payments difficulty, the Fund has found that an adjustment of the exchange rate is necessary to reduce the demand for imports and to expand the export sector and the import substituting sector. In these cases, the Fund staff has worked closely with the authorities to determine the appropriate extent of the adjustment and the most effective manner of implementing it.

With the emergence of large and structural imbalances in the 1970s, it became apparent that, in many cases, demand management policies such as those mentioned above, even when accompanied by an exchange rate change, were not adequate to bring about the required adjustment of the balance of payments. In cases where large and protracted disequilibria have disrupted the structure of the economy, additional supply-oriented policies are needed to reallocate resources in the economy and to restore external viability. Because such restructuring of production and trade requires a longer adjustment period, the Fund has increasingly provided assistance in support of medium-term adjustment programs with emphasis on supply-oriented policies.

The ultimate objective of a medium-term adjustment program is, of course, to bring the balance of payments into a sustainable position. This involves reducing the current account deficit to a level consistent with the country’s capacity to acquire and to service external debt. Consequently, a thorough evaluation of the availability of different kinds of foreign financing—international bank credit, loans from governmental aid agencies and development finance institutions, trade financing from credit/guarantor agencies—has to be undertaken.

The desired adjustment in the current account needs to be addressed in terms of underlying changes in the economy brought about by changes in investment, savings, output, and thus the debt servicing capacity. A country’s external debt is sustainable if the available resources are used productively and if the economic rate of return to marginal investment exceeds the cost of foreign financing. Clearly, appropriate demand management policies play an important role in the efficient allocation of resources and are a necessary ingredient of any medium-term adjustment program. In addition, however, attention must be focused on those policies that directly affect the allocation of resources. In many developing countries, the public sector undertakes the bulk of investment and/or administers a variety of prices, in particular producer prices in the export sector. Therefore, in assessing the medium-term adjustment strategy, due emphasis must be given to the appropriateness of the allocation of investment by the public sector and of the structure of relative prices confronting the private sector. It is in this area that the Fund staff needs to rely heavily on the expertise of the Bank staff.

The Bank’s Areas of Expertise

The Bank has always recognized that the broad policy framework of a country that the Bank supports through its project loans must be appropriately designed if the country’s development objectives are to be reached. Therefore, the Bank undertakes a considerable amount of economic and sector work. About 20 percent of the Bank’s operational staff time is devoted to such work. Some of this work simply updates macroeconomic and sector data and reviews broad development issues. Other work analyzes the specific development issues and the obstacles to growth and development in a given country. Policy and institutional reforms that are required are then defined. The distinguishing feature of the Bank’s work—in areas in which it overlaps with work done in the Fund—is its longer-term focus, which involves a large amount of detailed sectoral work.

The specific projects financed by the Bank are evaluated by the Bank’s sectoral experts. In evaluating the feasibility of specific projects, the Bank staff carefully assesses not only the economics of the project itself but also the appropriateness of the policies of the country concerned relating to the sector to which the project belongs. Consequently, through the normal course of its lending operations, the Bank has accumulated substantial information on the microeconomic aspects of its members’ economies.

The World Bank’s elaborate project supervision system, which covers all Bank-assisted projects under execution and is supplemented by findings of country economic and sector work performed within the organization, has long been the principal means for the Bank to learn from its operating experience. The supervision system consists of regular reporting by the borrowers, periodic field visits by Bank staff, regular middle management reviews of progress in solving implementation problems, a semiannual review by senior management of the status of the more serious problem projects, and an annual general discussion of problems in project implementation.3

On the basis of the extensive information compiled and analyzed by its sectoral experts, the Bank is in a position to assess member countries’ sectoral policies that embrace microeconomic decisions on pricing, taxation, and subsidization of specific products. Pricing, taxation, and subsidy policies have a direct impact on cost-profitability relationships in various sectors of the economy and, thereby, on the efficient allocation of resources. A typical experience in developing countries is that pricing, taxation, and subsidy policies that are designed to benefit consumers have resulted in lowered production incentives—and thus in supply shortages—or in inefficient use of essential inputs, such as fertilizer, water, or energy products, in the production process.

The allocative impact of pricing, taxation, and subsidy policies is particularly important in those cases where public enterprises that are subject to these policies play a dominant role in the economy. In such cases, pricing, taxation, and subsidy policies can have pervasive macroeconomic effects because they directly affect the financial position of the public enterprises concerned. Inappropriate policies can lead to large public sector deficits and more rapid expansion of domestic credit. The Bank, however, has generally focused on the allocative aspect of pricing and subsidy policies, while the Fund has concentrated on the broader macroeconomic impact of these policies on the budgetary and the balance of payments positions.

Because of the Bank’s extensive sectoral work in many countries, it is in an excellent position to evaluate their overall investment priorities consistent with their long-term development strategy. The wide-ranging expertise of the Bank staff places it in a unique position to assist countries in analyzing various aspects of their public investment programs and to offer advice on development priorities with respect to size and composition of the programs, recurrent outlays necessary to support the programs, and the efficiency of resource use. A prime objective of the Bank is to assist countries to develop the institutional framework necessary to improve their capacity for determining sectoral priorities and criteria for project evaluation, establishing and implementing public investment programs, and reviewing investment plans and government budgets.

Areas of Common Interest

It is clear that, in spite of their distinct purposes and functions, there are large areas where the interests of the Fund and the Bank overlap. This is natural since most economies are sufficiently integrated that any policy or development that affects one part or aspect of an economy is certain to affect large segments of the rest. Besides this commonality of interests in a general sense, the Fund and the Bank share an interest in a number of specific areas. The 1966 guidelines for Fund-Bank collaboration recognized that “there is the broad range of matters which is of interest to both institutions. This range includes such matters as 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 both for the internal financial position of a country and for its external situation, foreign debt problems, and so on.”

In all these areas, close working relations have been established between the Fund and the Bank staff so as to avoid duplication of effort. For example, both institutions are interested in technical assistance in the fiscal field, particularly in the field of tax policy and fiscal administration. In practice, however, the Bank does not offer technical assistance in this area and relies on the Fiscal Affairs Department of the Fund, which provides this assistance on behalf of both institutions. Under this arrangement, regular meetings are held and information is exchanged between the Fiscal Affairs Department of the Fund and the Economics Department of the Bank to ensure that fiscal experts address issues of concern to both organizations.

Both the Fund and the Bank are also keenly interested in the issue of external debt because debt problems are generally a manifestation of underlying balance of payments difficulties, which often require structural adjustment of the economy through appropriate macroeconomic and microeconomic policies. The two institutions have worked closely in this area by analyzing various aspects of the external indebtedness of countries. The Fund focuses on short-term economic and financial policies, prospects, and requirements in cases where external debt difficulties are acute. The Bank concentrates its attention on long-term borrowing, development strategy, and debt management. Both the Fund and the Bank are represented at meetings of multilateral debt renegotiations carried out under the auspices of “creditor clubs” (e.g., the Paris Club).

The Executive Board of the Fund has recently approved proposals for the Fund’s role in future debt renegotiation exercises. Under these proposals:

The Fund and the Bank would continue to cooperate closely within the framework of existing arrangements; specifically, the Fund would continue to avail itself of the Bank’s extensive data on debt, while it is expected that the Bank would have access to Fund information on balance of payments and short-term debt. To the extent that the analysis to be undertaken must include assessments bearing on policies and prospects of a developmental or long-term nature, it would be expected that the Bank would provide a separate report on these aspects for the participants. If the Bank were approached by a debtor country for an assessment of its economic situation and prospects, the Fund staff would stand ready to cooperate with the Bank staff by providing information and analysis on matters within the Fund’s competence.4

Operational Aspects of Fund-Bank Cooperation

The substantive purpose of Fund-Bank collaboration is to improve the effectiveness of each institution in assisting member countries to design appropriate programs of adjustment and development. In principle, the ideal situation from an institutional and operational point of view would be one in which the Bank was responsible for the design and monitoring of the investment plan and pricing policies of a country and the Fund for its balance of payments adjustment policies. These two aspects of adjustment could then be combined to form a comprehensive adjustment program. In reality, the situation is much more complicated. Two types of complication arise: one relating to the limitations on the ability of each institution to provide the other with the required input; and the other relating to the practical difficulties of incorporating this input into the specific adjustment programs supported by each institution.

In general, the Fund and the Bank rely extensively on the information exchanged through informal contacts between the staffs as well as that contained in their respective reports. When one institution receives information or data from a country on a confidential basis, this confidentiality is, of course, fully respected. An effective means of utilizing the expertise of the other institution has been to include staff members in each other’s missions, subject to the consent of the country concerned. In recent years, the number of missions including staff from the other organization has increased considerably. For example, the Bank participated in a recent Fund staff mission to China. There is limited scope, however, for expanding this form of cooperation because of the severe manpower constraints faced by both institutions.

Aside from these constraints, the ability of each institution to assist the other depends largely on its level of involvement in the specific country concerned. By the nature of its operations, the Fund tends to be closely involved in the assessment of financial policies of all its members on a more or less regular basis. The Bank provides financial and technical assistance in different sectors of the economy and for a wide range of projects. The level of Bank involvement in specific countries is dictated by limitations of financial and human resources and by the priorities it sets regarding the relative importance of a member’s needs; the Bank tends to be more selective in its involvement with its members. Consequently, it may sometimes be difficult to coordinate the operations of the two institutions in cases in which they may have different priorities.

A related issue is the difference in the operational time horizons of the Fund and the Bank. In many cases, by the time a member approaches the Fund, its economic and financial position has already deteriorated to a critical stage. To avoid further deterioriation, appropriate policies need to be implemented fairly quickly. Therefore, Fund-supported programs are often negotiated in a somewhat short period, and Fund missions operate on a tight schedule.

By contrast, the Bank’s task of evaluating members’ investment and pricing policies is a time-consuming process because it involves a coordinated analysis of various sectors of the economy. There is a great deal of information available in the Bank relating to specific sectors of the economy. Compiling all the information on specific projects and sectors in order to ascertain their implications for the broader developmental aspects of a member’s economy, such as the appropriate investment strategy, is an exercise that takes time. Even more difficult is the task of converting the generalizations derived from diagnostic studies into specific policy recommendations that can be dovetailed into the decision-making process of member countries. Another element affecting the time horizon of the Bank’s work is that a prime objective of the Bank is to assist its member countries in building up local capacity to carry out work in key areas. For example, rather than assessing an investment program itself, the Bank will sometimes help a country to develop its own capacity to perform appraisals. Although the latter is more time-consuming, the Bank considers that, in some cases, this use of its manpower is more efficient.

In assessing a country’s adjustment program, the Fund and the Bank must each rely on the input of the other. Both institutions, however, are careful to avoid attaching additional criteria to their lending that would delay or reduce the flow of resources to the country. In their recent review of Fund-Bank cooperation, both institutions have emphasized that closer relations between their two staffs should not lead to any “cross-conditionality”—that is, when a country is required to satisfy policy prescriptions by one institution in order to secure a financial arrangement with the other. Each institution should retain its separate functions and full responsibility for its own decisions. The purpose of cooperation is to increase the knowledge on the basis of which such decisions are made and to improve the effectiveness of the assistance provided to members. The purpose is not to achieve bureaucratic cohesiveness between the two institutions. In the final analysis, it is the institution with which the member concludes a financial arrangement that must decide whether a country’s policies are adequate.

In practice, the extent of each institution’s involvement in providing the other with an input for assessing a country’s adjustment program depends on the scope of the particular program. For instance, in some Fund-supported programs, where the involvement of the public sector in the investment program is not very important, a Bank assessment of the program would not be essential. In those cases, however, where the appropriateness of the public investment program is crucial to the success of the adjustment effort, the Fund obviously needs to take into account the views of the Bank before entering into a financial arrangement. In some cases, the Bank may not be in a position to provide a detailed assessment of the investment program but may be able to indicate whether the general thrust of the program is in the right direction, making it possible for the Fund to proceed with an arrangement without waiting for a detailed Bank assessment. In yet other cases, the public investment program may be dominated by a few large projects, such as hydroelectric or public works projects. In such cases, before entering into an arrangement, the Fund must have an indication from the Bank’s sectoral experts that this heavy investment is justified and properly phased.

The focus of the Bank’s structural adjustment programs is on the appropriate size and composition of the country’s public investment program, on the need to improve the efficiency of enterprises in the public sector, and on policy changes in the agricultural, industrial, and energy sectors. The success of any such medium-term program, however, depends greatly on the appropriateness of domestic financial and exchange rate policies. In a fundamental sense, a medium-term program can be viewed as a succession of short-term programs. It is, therefore, essential that a member’s short-term financial policies be consistent with its long-term developmental goals and that the Bank take into account the views of the Fund on the member’s general financial situation and policies before concluding a medium-term structural adjustment loan. For instance, in cases where a country’s structural adjustment program requires a medium-term target for the current account of the balance of payments, the Bank looks to the Fund to develop such a target in close consultation with the national authorities. The Bank also seeks the judgment of the Fund on exchange rate policy issues. This does not mean that the Bank staff cannot or does not have views on exchange rate policy; they do, and the Fund staff takes those views into account in forming its own judgment. As indicated earlier, however, this is an example of an area where the ultimate responsibility rests with one institution.

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In conclusion, close cooperation between the Fund and the Bank is an essential ingredient of the continuing effort to improve the effectiveness of the assistance each institution provides its members. The two institutions play a central role in facilitating the financing and adjustment of the structural imbalances faced by many developing countries. Under the current difficult world economic conditions, it is ever more important for the two institutions to work closely together and complement each other’s policy advice to member countries. By combining their expertise in various aspects of economic policy, the Fund and the Bank can greatly enhance the impact of their financial assistance on member countries.

Summary of Discussion

The discussion covered a wide range of subjects relating to both the Bank and the Fund, including the possibility of conflict between the two organizations when they borrowed funds, their attitudes toward the freezing of foreign-owned assets by some members, and the barriers preventing citizens of developing countries from heading the two organizations. The nature and functions of creditor clubs and the role that the Fund could play in promoting the North-South dialogue were also discussed.

Participants observed that neither the Bank nor the Fund had financed its lending activities wholly from capital subscriptions. The substantial borrowing needs of the two organizations in fact created considerable potential for conflict between them when they sought funds. The Fund staff pointed out that no conflicts had arisen in the commercial markets because the Fund had not yet borrowed in these markets.

References were made to recent instances where countries had frozen assets that were under their control but were owned by residents of other countries. Participants were interested in how the Bank and the Fund viewed these measures. The Fund staff pointed out that such actions were not of direct concern to the Bank. Nor, to the extent that assets were frozen for security reasons, were such measures within the purview of the Fund. In other cases, however, the measures conflicted with the Fund’s code of conduct, and the member introducing them was expected to consult with the Fund on the manner and timing of their removal.

Since 1946, when the first President of the Bank and the first Managing Director of the Fund were elected, a citizen of the United States had headed the Bank and a European had headed the Fund. Participants inquired about the reasons for this, noting that membership in the two organizations had increased substantially and the relative economic importance of different regional groupings had changed considerably during the last 36 years. In particular, they wanted to know whether there were any formal barriers that prevented a citizen of a developing country from heading either the Bank or the Fund.

The Fund staff observed that, when the Board of Governors of the Fund held its Inaugural Meeting in Savannah, Georgia, in March 1946, it had been widely expected that the United States would nominate Harry Dexter White, a U.S. citizen who was also one of the chief architects of the Fund, to be the first Managing Director. The U.S. authorities, however, apparently believed that it was more important for the President of the Bank to be a U.S. citizen, so that the Bank would be accepted in the international capital markets, which at the time were dominated by the New York market. They also believed that it would not be appropriate for U.S. citizens to head both organizations. Accordingly, Eugene Meyer, from the United States, became the first President of the Bank, and Camille Gutt, a citizen of Belgium, was elected to be the first Managing Director of the Fund. The Fund staff added that there were no legal barriers that might prevent citizens of other member countries from heading the Bank or the Fund.

Participants commented on the sharp increase in the number of countries experiencing payments arrears, on the prospective need for some of these countries to seek rescheduling of their debts, and on the role played by creditor clubs in debt rescheduling exercises. With respect to the last, the Fund staff noted that the creditor clubs were informal gatherings of government officials from both creditor countries and the debtor country concerned. Their purpose was to help countries experiencing debt servicing difficulties to cope with them in an orderly manner. The best-known creditor club was the Paris Club, but others, such as the London Club and the Hague Club, were also important. The Paris Club, which had explicit rules and procedures, handled reschedulings of official credits. The other clubs were less formal and dealt with reschedulings of private debt, including debt owed to commercial banks.

Participants observed that the North-South dialogue appeared to have reached a stalemate and that this was having an adverse effect on relations between the developing and the industrial countries. An important reason for the stalemate was the different views that the two groups of countries held about equity. Countries from the South took an international view and believed that the goal of equity should be structural reform of the international monetary system. On the other hand, countries from the North took an individual approach and claimed that the goal should be reasonable equality of incomes among individuals; therefore, they argued, aid should contribute to the satisfaction of basic human needs. It was suggested that the Bank and the Fund should attempt to reconcile these views and do whatever else was in their power to accelerate progress on the dialogue.

The Fund staff agreed that countries from the North and the South tended to have different perceptions of equity. The countries of the North strongly rejected the international approach. They were concerned that the revenue collected from their own taxpayers, including middle-income and lower-income taxpayers, be used to meet the basic needs of the poor, not merely the wants of the rich in the countries that were recipients of aid.

Many of the developing countries claimed that the approach of the industrial countries was hypocritical insofar as it was used to justify a smaller commitment or slower disbursement of aid. They argued that donor countries could always give aid in such a manner that it would benefit primarily the poor in the developing countries. The developing countries also argued that the rich countries had little real understanding of class relations in the poor countries and that, by focusing so much attention on the end-uses of their aid, the rich countries were interfering unduly with the social structures of developing countries.

The Fund staff noted that the Bank and the Fund were intergovernmental, not supranational, institutions. Their scope for action was determined by their members. They could not remove the political barriers to progress in the North-South dialogue. What they could do was provide analyses, where requested, of proposals in their own areas of competence. These analyses could facilitate progress by throwing light on the implications of different courses of action and by helping to focus attention on areas where useful compromises could be made.


For an excellent account of the development of Fund-Bank relations, see Joseph Gold, “The Relationship Between the International Monetary Fund and the World Bank,” Creighton Law Review, Creighton University School of Law, Vol. 15, No. 2 (1982), pp. 499-521.


There are cases, however, in which the same person represents a country in the Executive Boards of both the Fund and the Bank—the so-called dual Executive Directors.


World Bank, Operations Evaluation: World Bank Standards and Procedures, 2nd edition (Washington, August 1979), p. 10.


Bahram Nowzad, Richard C. Williams, and others, External Indebtedness of Developing Countries, IMF Occasional Paper No. 3 (Washington, May 1981), p. 29.