Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
March 19, 2007
A high-level independent committee established to recommend how the IMF and the World Bank could improve their working relationship issued its final report on February 27.
A report prepared by a high-level committee chaired by Pedro Malan, Chairman of the Board of Unibanco and a former Minister of Finance of Brazil, to examine cooperation between the IMF and the World Bank.
Rodrigo de Rato, Managing Director of the International Monetary Fund, and Paul Wolfowitz, President of the World Bank Group, set up the committee in March 2006. It reported its findings in February 2007.
Malan report
It stressed that closer collaboration is critical for the effective and efficient delivery of services to the institutions' member countries—especially given an ever-shifting global economic landscape and emerging pressures from global warming, energy security, and population aging. It also urges the IMF to continue to clarify its role in low-income countries, including financing activities.
The External Review Committee on Bank-Fund Collaboration was formed in March 2006 by IMF Managing Director Rodrigo de Rato and World Bank President Paul Wolfowitz to assess the working relationship between the 61-year-old sister agencies. The six-member committee, headed by Pedro Malan, Chairman of Unibanco and a former Minister of Finance of Brazil (see Box at the bottom), offered a range of recommendations that call for action by the heads of the two institutions and, in some cases, by their governing bodies.
De Rato and Wolfowitz credited the report with providing a solid foundation on which to build. Noting that the issue would be discussed at this year's spring and annual meetings, de Rato said that he and Wolfowitz would work toward "proposals to implement a better framework for collaboration."
Malan, speaking to the press, said he disagreed with the view, voiced by some critics, that the institutions had lost relevance. "We have confidence in their ability to continue to rise to the challenges posed by an ever-changing world environment, and we are deeply convinced of the importance of further improvements in Bank-Fund collaboration."
Working with each other
The report emphasizes that the costs of insufficient collaboration between the Fund and the Bank are significant and include poor and conflicting advice, wasted resources, and unmet needs. Close collaboration is vital, it argues, because the two institutions' mandates are inherently linked (see Box 1). Macroeconomic stability (a Fund concern) will not be sustained unless linked to supply-side measures and improved quality of public spending (a Bank concern). Similarly, global monetary stability (a Fund concern) will have a direct bearing on overall development prospects (a Bank concern).
Established in 1945, the IMF focused initially on reestablishing confidence in international cooperation and the international financial system, and the World Bank on reconstructing war-ravaged Europe.
The IMF, with a staff of about 2,700, promotes international monetary cooperation and provides member countries with policy advice, temporary loans, and technical assistance so they can establish and maintain financial stability and external viability, and build and maintain strong economies.
The World Bank, with a staff of about 10,000 around the world, promotes long-term economic development and poverty reduction by providing its members with technical and financial support.
Some shortcomings in the relationship are the lack of autonomy of Fund country, or resident, representatives; the blurring of the distinction between the Fund's short-term balance of payments lending and the Bank's longer-term development lending; the absence of a robust dialogue between the institutions; the lack of clarity in the roles of the Bank and the Fund in providing technical assistance, in particular, on financial sector activities; and their failure to coordinate missions and information requests from countries.
But the committee also points to examples of good collaboration and to significant improvements. Among the examples are the Financial Sector Assessment Program, the Heavily Indebted Poor Countries Initiative, debt sustainability analysis and framework, and Reports on Standards and Codes.
Working with poor countries
The report finds that the IMF has moved beyond its core responsibilities in low-income countries and into activities that increase its overlap with the work of the Bank. And it recommends that the Fund start withdrawing from long-term financing operations in low-income countries. "But we suggested a clarification of the Fund's [role]—not a retrenchment, not a reduction in the level of support for low-income countries, but working closely with the World Bank" in these countries, Malan emphasized.
The IMF's primary instrument for lending to these countries is the Poverty Reduction and Growth Facility (PRGF), under which loans carry a concessional rate of interest and a longer repayment period than do loans under the IMF's nonconcessional lending facilities. The report notes that loans and new commitments of assistance under the PRGF have fallen sharply in recent years, which should allow the Fund to refocus its efforts and resources in areas where it has the greater comparative advantage—that is, macroeconomic stabilization; monetary, fiscal, and exchange rate policies; institutional arrangements and related structural measures; and financial system issues.
The IMF should therefore reconsider the appropriateness of successive PRGF arrangements, which take on the character of development financing. On that point, de Rato told the press, "we agree that we should be careful in focusing on our mandate, and it is not our mandate to provide development financing." He underscored that the Fund, as part of its medium-term strategy, is already working to better focus its role in low-income countries, an effort the report calls "highly appropriate." He pointed to the Policy Support Instrument, a nonfinancial instrument for low-income countries, through which the IMF signals that countries are making necessary adjustments, as an example of this better focus.
Wolfowitz noted that cooperation between the Bank and the Fund had improved since tensions over the handling of the Asian financial crisis of the late 1990s. "It would be a mistake if the IMF stopped working in poor countries," he said. "These institutions are going to have a very important role in many different ways in the future, and our ability to adapt to changing circumstances will depend on our ability to work together."
Ways to improve collaboration
The committee's remaining recommendations, which address the "culture" of collaboration, staff exchanges, cooperation on crisis management, collaboration on fiscal issues and on financial sector issues, technical cooperation, procedural changes, and the monitoring of progress on collaboration, call for the following:
A stronger culture of collaboration. The Governors, Boards, and managements of the two institutions must set the example and lead the effort. To achieve this, the report suggests
• a special joint meeting of the International Monetary and Financial Committee (which advises the IMF Board of Governors) and the joint Development Committee to consider the report and reinforce why and how the two institutions must collaborate.
• the establishment of a standing Bank-Fund Board working group to actively promote and monitor collaboration.
• a stronger ongoing, informal dialogue between management and senior staff in the two institutions.
• a longer-term strategic assessment of the Bank's operations, based on existing Bank documents.
Greater staff exchange. Interchanges between the staffs of the Fund and the Bank should be encouraged, and any impediments in terms of different remuneration and retirement arrangements resolved.
A new understanding on collaboration. A high-level framework that lays out how the institutions should work together and the responsibilities of management in promoting good collaboration should be established. Improved collaboration entails both a better demarcation of responsibilities and a stronger emphasis on working together.
Cooperation on crisis management. The Bank and the Fund must ensure that they have learned from the past and can work together more effectively in responding to future crises. In particular, any new or expanded financing facilities and liquidity instruments designed to help countries face shocks should complement rather than duplicate each other.
Collaboration on fiscal issues. The two institutions need to harmonize their recommendations rather than formally divide their responsibilities. Short-term stability and long-term growth should be viewed as complementary, not competing, objectives.
Collaboration on financial sector issues. The delineation of responsibilities should be based on the institutions' comparative expertise. The Fund should take the lead when there are significant domestic or global stability issues, and the Bank, when financial sector development issues are paramount.
Technical cooperation. The Bank and the Fund need to better coordinate their delivery of all forms of technical assistance.
Procedural changes. Both institutions should alter procedures to promote more effective collaboration. For example, the Bank should be more flexible in mobilizing resources so that it can respond faster to countries' requests for technical assistance; the Fund must be able to provide the Bank with comprehensive macroeconomic assessments of all countries, not just those with a Fund program. Members, for their part, should readily agree to the sharing of information between institutions.
Monitoring of progress on collaboration. The managements of the Bank and the Fund should periodically report to their Boards and Governors on progress and issues in implementing the understanding on collaboration.
Next steps
De Rato agreed that staff exchanges were an excellent way to improve collaboration and said he intends to promote them, as well as to focus more on strengthening cooperation on crisis management. He said that the Fund expects to "improve integration and harmonization of work on fiscal issues, as well as collaboration on financial sector issues." He also welcomed the recommendation that the managements of the two institutions monitor their progress on collaboration.
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