Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

225. Letter From Secretary of the Treasury Baker to the Managing Director of the International Monetary Fund (Camdessus) and the President of the World Bank (Conable)¹

Washington, July 1, 1987

Dear Michel and Barber:

Thank you for your telex inviting me to send representatives to a meeting in Paris on July 10.² Your message provides an opportunity to share with you a number of thoughts I have about the problems of low-income countries.

As you know, the U.S. believes that the Policy Framework process offers the best approach for addressing these problems. Consequently, we joined the other Summit countries in Venice in welcoming your initiative, Michel, to expand the resources of the Structural Adjustment Facility.³ At the same time, we stressed that efforts to obtain contributions for this purpose should focus on countries with balance of payments or budget surpluses. I continue to believe this is the most practical basis on which to proceed.⁴

I would like to draw your attention, however, to several concerns which I have regarding the implementation of the Policy Framework process and the operation of the Structural Adjustment Facility. These concerns pre-date the initiative to expand the SAF, and merit prompt attention and action.

Let me first assure you that we recognize the considerable progress that has been made in implementing an inherently difficult approach. Indeed, we have seen some forward movement in a number of areas in recent months. Nevertheless, there is clear scope for additional efforts to make the approach more effective along the lines suggested to you by David Mulford last January. (Attached is the note which he left with you, Barber, and with Jacques de Larosiere.)⁵ Many of our concerns were reiterated by Charles Dallara in the recent IMF Board review of the SAF. Let me mention in particular three areas:

Collaboration between the Bank and the Fund. From the outset, we have felt that the key to success for the Policy Framework approach would be genuine and effective collaboration between your two institutions. In our view, the desired standard of collaboration has not yet been achieved. One area of concern is the extent to which the Bank has participated in the leadership and staffing of the missions that have negotiated Policy Framework papers with eligible countries. We have also been troubled by the suggestion that the Fund might move ahead of the Bank in a number of cases. In other words, we have not yet seen the full commitment to the Policy Framework approach within the two institutions that we expect.⁶

Financing in Support of Policy Frameworks. We have been pleased to see that the Bank has increased its lending to a number of countries that have embarked upon broad-ranging structural adjustment programs. Nonetheless, it is not clear that the Bank is consistently using Policy Frameworks to determine the level and composition of its lending programs in the majority of countries that have negotiated these Frameworks. Furthermore, we are disappointed by the limited response of bilateral donors to Policy Frameworks. While the donors themselves must address this problem, we believe that more effective use of Policy Framework papers in the donor coordination process would bring about a better response.

SAF Conditionality. Considerable efforts were made in order to achieve meaningful conditionality for SAF loans. Despite these achievements, there is considerable room for improvement in the selection and use of benchmarks regarding structural objectives, and in monitoring performance under annual SAF programs. Improvement is needed in view of the Bank’s decision to extend structural adjustment credits to countries without stand-by arrangements, and the Paris Club’s decision to provide debt relief on the basis of a SAF only. It is all the more important if the resources provided through the SAF are to be expanded significantly.

While I have this opportunity, I should also mention that we support the Bank’s proposal for mobilizing more co-financing from bilateral donors to support adjustment efforts in low-income African countries. To succeed, however, the Bank and Fund will need to address the concerns I have noted above in connection with the Policy Framework approach. Furthermore, I should mention some concerns related to the debt measures for African countries referred to in your telex. Although it is not entirely clear what kind of measures are being proposed, three constraints should be kept in mind. First, some of the measures may have budget impacts, and could end up shifting funds among foreign assistance programs rather than increasing aid to Africa. Second, some debt-related measures proposed for African countries could create negative precedents for efforts to deal with the debt problems of other borrowers, including domestic borrowers that have obtained credit from government agencies. Third, we must be certain that any new approaches in this area will be more effective than existing approaches in terms of promoting growth and balance of payments adjustment in Africa.

In closing, let me assure you that we will work closely with the Bank and the Fund to strengthen our efforts to deal with the serious economic problems of low-income African countries. I hope you can move quickly to address the specific issues I have raised in order to get the greatest possible return on the limited funds we are able to target on these countries.

Sincerely,

James A. Baker, III

1. Source: Washington National Records Center, RG 56, Executive Secretariat, Congressional Files, 1987, 56–90–29, Box 34, Dept and Agen, s/ World Bank ’87. No classification marking. Copies were sent to the G–10 Finance Ministers.
2. The June 19 telex is attached but not printed.
3. See Document 222.
4. See Document 224.
5. Not attached.
6. In an October 13 memorandum to Baker, Mulford communicated that Conable had requested a meeting with Baker on October 13 “to discuss World Bank/IMF coordination.” Mulford forwarded briefing materials he had used at a meeting with senior management of the Bank and Fund in January to discuss improving the Policy Framework process and to address longstanding concerns about effective collaboration between the Fund and Bank. (Washington National Records Center, RG 56, Records of the Under Secretary for International Affairs (Mulford), Subject Files, 1985, 1991, 56–04–0100, Box 4, [no folder title])