Financial&�� Development Bahram Nowzad ADVISORS TO THE EDITOR Finance & Development is published quarterly in English, Arabic, EDITOR Chinese, French, German, Portuguese, and Spanish by the International Andrew Crockett Monetary Fund and the International Bank for Reconstruction and Shuja Nawaz Vinod Dubey Development, Washington, DC 20431, USA {DSPS 123-250). 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An annual GRAPHICS ARTIST David Williams index of articles and book reviews is carried in the December issue. International Monetary Fund Published quarterly in March, June, September, and December, Staff the Staff Papers of the International Monetary Fund contains studies on monetary and financial problems affecting the world economy. Articles appearing in the December 1985 issue are: • Fiscal Deficits and Interest Rates in the United Stales: Papers An Empirical Analysis by Vito Tanzi • The Sustainabtlity of Fiscal Deficits by P.R. Masson • Foreign Borrowing and Capital Flight: A Formal Analysis by Mohsin S. Khan and Nadeem Ul Haque • Currency Substitution in Argentina, Mexico, and Uruguay by C.L, Ramirez-Rojas • Trade Data Discrependes and the Incentive to Smuggle: An Empirical Analysis by Donogh C. McDonald • The Speed of Adjustment of the Inflation Rate in Developing Countries: A Cross-Country Study of Inertia by Ajai Chopra Subscriptions for Staff Papers (US$15.00 for a volume, US$4.00 for a single issue, special rates—US$7.50 a volume—to university libraries, faculty, and students) should be sent to: Publications Unit, Box A-861 • International Monetary Fund 700 19th Street, N.W, • Washington, D.C. 20431, U.S.A. Telephone (202) 623-7430 ©International Monetary Fund. Not for Redistribution March 1986/Volume 23/Number 1 Finance Development A quarterly publication at the International Monetary Fund and the World Bank Richard D. Erb 2 Adjustment, growth, and the Fund's role Interview with the Deputy Managing Director of the IMF Economic aid reconsidered Shahid Javed Burki A fresh look at development aid and Robert Ay res Major findings of a Development Committee task force Robert Cassen 11 The effectiveness of aid The record and the lessons Richard D. Erb 15 Collaboration between aid agencies and the IMF Ibrahim Shihata and 17 A review of OPEC aid efforts Naiem Sherbiny Experience of the first 25 years Edward V.K. Jaycox 21 Africa: Development challenges and the World Bank's response Effects of Fund programs Morris Goldstein 24 Global effects of Fund-supported programs Are they properly understood and easily measured? Not entirely. Jacques de Larosiere 28 Economic adjustment and growth . from the speeches of the Managing Director Mohsin Khan and 30 Do Fund-supported adjustment programs retard growth? Malcolm Knight A study of available evidence Charles A. Sisson 33 Fund-supported programs and income distribution in LDCs Distributional issues in adjustment programs are important but complex Basil Kavalsky 37 Reviewing public investment programs How the Bank works with countries to assess priorities -" Robert Solomon 41 The IMF in a period of turbulence A i . , Review article on latest installment of the Fund history V ' ' . ! v Friedrich Kahnert 44 Re-examining urban poverty and employment r Improved incomes and labor productivity hold the key to better results J / V.V. Bhatt 48 Entrepreneurship development: India's experience / ,-•, ~—3-.-\j(. — Books Wm. C. Hood so International Economic Policy Coordination by Willem H. Buiter and Richard C. Marston (editors) Lyn Squire 51 Taxation for Development by Stephen R. Lewis Jr. Graham Donaldson 51 Agriculture and the Development Process by D.P. Chaudhri and Ajit K. Dasgupta Anthony Lanyi 51 Bank Lending to Developing Countries by C. Fred Bergsten, William R. Cline, and John Williamson; Financial Intermediation Beyond the Debt Crisis by Donald R. Lessard and John Williamson 52 Books in brief 53 Letters The Editor welcomes views and comments from readers on the contents of the journal. The contents of Finance & Development may be quoted or reproduced without further permission. Due acknowledgement is requested. ©International Monetary Fund. Not for Redistribution Adjustment, growth, and the Fund's role A conversation with Richard D. Erb, Deputy Managing Director of the Fund F&D What is realty new about the so-called Baker initiative, and where does the Fund fit in? Erb I see the Baker initiative as an important step in strengthening the debt strategy that has been followed since 1982; indeed that is the way Treasury Secretary Baker himself cast the proposal at the October 1985 Annual Meetings of the Fund and the Bank in Seoul. It is an initiative that builds on the experience to date, yet faces up to the continued efforts that need to be made in the future, and finally identifies and lays out the cooperative roles that the various parties must play in the process. I think we need to look back and recognize the progress that a number of countries have made in dealing with their debt problems. We also need to appreciate that many countries are having a more difficult time than had been anticipated in dealing with their internal and external imbalances, and with their external debt problems. In particular, we need to face up to the additional efforts that are required in a number of major debtor countries. In that connection, under the Baker plan, the Fund would continue to play a central role in dealing with the economic imbalances and the debt problems that countries face, a role that would continue to include the analysis and policy advice that the Fund brings to discussions with member countries. The Fund's role will also be to continue to help countries obtain new external financing from commercial banks as well as from official sources. I would also emphasize the joint role of the Bank and the Fund in the areas of analysis and policy advice as well as in bringing external funds to assist a country. Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution F&D Many people speak (and write) as though until the Seoul government has a certain growth objective. We try to help frame the meeting, the key to debt problems was adjustment, and after Seoul, policies in a way that will enable the country to achieve its growth growth. Do you see any conflict between adjustment and growth? objective, while recognizing the constraints that it may face, con- Erb No, I don't see any conflict between adjustment and growth. straints related to the availability of external financing, domestic Indeed, I think they go together. Adjustment got a bad name because savings, and domestic investment. We don't view a particular growth of a misperception, in the early days of the financial crisis, of the rate as an abstract magnitude or target. If better conditions can be initial need for a number of countries to respond to the sudden drying created to foster investment, make more efficient use of resources, up of external financing. They did that by drastically cutting govern- and attract foreign resources, then the growth rate can be very high. ment expenditures—with emphasis on investment expenditures— If these conditions are not there, the growth rate is not going to be and in many cases by adopting exchange controls and by putting as high. This is not because a target was not set, but because of the restrictions on imports. In several cases, the adjustments were more absence of underlying policies. The objective is to achieve as high a severe because governments had delayed making appropriate policy rate of growth in the country as possible; putting in place appropriate responses to deteriorating economic conditions. micro and macro policies will improve the chances of achieving that That is not the desirable path of adjustment in the way we view it growth. at the Fund. When economic conditions begin to deteriorate, adjust- ment from a Fund perspective means an appropriate and timely policy F&D Promoting better micro, as well as macro, policies implies a response to prevent severe imbalances from building up. In cases more activist role for the Fund. Is the Fund ready for such a role? where conditions have deteriorated sharply—for whatever reason— Erb I think the real question is whether the members are ready adjustment involves adopting policies that will lay the basis not only for a more active role for the Fund in growth-oriented policies. There for restoring external creditworthiness and external financial flows is a widespread misperception that growth-oriented policies are easy but also for re-establishing the domestic basis for economic growth to implement. Our experience has been that in many countries those by encouraging more savings and a more efficient use of resources. policies that would have the most immediate, dramatic, and sustained What we call adjustment includes, for example, reducing fiscal impact on growth are often the most difficult ones for countries to deficits when they have been a source of a major imbalance in an implement.