Posted by Peter W. Kohnert (1)
In 1964 the International Monetary Fund established the Fiscal Affairs Department (FAD). This post describes the circumstances under which this happened. It reports about the activities in the fiscal area undertaken by the United Nations and the World Bank at that time, and presents the different aspects that were discussed in the Executive Board of the Fund before a decision of establishing FAD was actually taken.
New York 1964. The Secretary-General of the United Nations (UN), U. Thant, had just issued another annual report about his organization’s activities. While as in previous years political conflicts played an important role in his account, technical assistance issues received growing attention as a consequence of the rapidly increasing membership (2) of (mainly) newly independent nations.
By 1964, the UN could look back on 15 years of technical assistance it had provided to its members, mainly in the fiscal and statistical areas. The technical assistance in the economic area was provided through the UN economic and social department while another department/unit took care of technical assistance in other fields, all supervised by the Economic and Social Council (ECOSOC); the TA and the economic and social departments were staffed with a number of reputable staff: one of the division chiefs was the late Alexandre Kafka, who later represented Brazil and other Latin American countries for a long period (until 1998) on the Executive Board of the Fund. The Economic and Social Department of the UN Secretariat had recruited over the years for its technical assistance missions a number of outstanding economists as mission heads or even “only” as mission members (3). The support focused on issues such as monetary, fiscal and budget policy in Bolivia; the structure of revenue administration in Burma; budgetary and tax reform in Chile; taxation, budget presentation and budget procedures in Columbia; fiscal administration in Cuba; taxation and tax administration in El Salvador, Guatemala, Haiti, Panama, Philippines, Puerto Rico; taxation and public finance administration in Iran; capital budgeting, revenue administration, and budgeting and accounting in Thailand; taxation in Japan; public finance in Libya, and taxation and budget procedures in Turkey.
In the 1950s the UN also reported on the activities of the Bank for Reconstruction and Development (World Bank) in the fiscal area. The World Bank at that time provided technical assistance mainly at the project level, supported the formulation of development and investment programs, and conducted sectoral evaluations. Furthermore, between 1951 and 1965, it hired from the same pool of UN external experts to produce comprehensive economic development reports, for more than 20 countries, which also included detailed descriptions and recommendations on fiscal and budgetary policy as well as operational aspects (4).
In addition to providing technical assistance to more than a dozen member countries on fiscal issues, the UN had become the standard setter in the fiscal area. It disseminated information about international tax agreements, tax incentives for direct investments in other, mainly developing, countries, and detailed tax summaries of individual member countries. The UN organized the first international conference with the collaboration of the international tax program on taxation and economic development (1953). It developed and published an economic classification of the budget (1958), a functional classification (1962), a draft manual on program and performance budgeting (1962) and a manual on government accounting (1964). In 1963, it encouraged member countries to adopt a multiannual framework for budgeting, and provided training on taxation issues in cooperation with the Harvard Law School.
During the early 1960s, the UN was confronted with an increased and more diverse demand for technical assistance from new UN members, in particular newly independent African nations, and strong interest from Latin American countries in economic planning procedures. In addition to traditional fiscal topics, the coverage of technical assistance had expanded to include a wide range of topics such as creating basic economic, social and administrative infrastructure for development; economic planning and programming; establishing new and sustainable industries such as mining, tourism, and agriculture; supporting development planning and adequate administrative support; stabilizing commodity prices through international agreements. The UN was also promoting the increase in official development assistance (including a one percent-of-GDP target for industrialized countries); and the liberalization of international private capital flows to provide sufficient external savings in support of development strategies for growth and employment; strengthened education systems; an enhanced role of women in society; universal literacy; land reform, together with rural and community development; and development of basic services such as transport and communications.
The UN reacted to these challenges in two ways. Initially, it installed regional budget advisors in its Economic Commissions for Latin America, Asia, and Africa to facilitate the response to the requests in this field and expanded the responsibilities and activities of its regional commissions. Later, it focused on reorganizing its technical assistance operations. In 1964, it decided to give its development program (the so called “Specialized Fund” and “Expanded Program”) a new autonomous structure, established the United Nations Development Program (UNDP), and transferred responsibility for certain issues to the World Bank (5). On fiscal issues, the UN Secretariat tried to maintain its leadership in standard stetting by continuing to organize international conferences on issues pertaining to budget classification, government finance statistics, and accounting issues. Over the following years, however, the importance of its technical assistance in the fiscal field diminished.
Establishment of the Fiscal Affairs Department in the IMF
The Fiscal Affairs Department (FAD) was established with 33 positions in April of 1964 (6), preceded by a year-long discussion about its usefulness and focus; in the same year, the Fund’s Annual Report contained, for the first time in its history, a presentation on fiscal policy in industrial countries. In1964, the first IMF representative participated in a UN conference on budget classification (7). Until then, the Fund dealt with fiscal issues in a general way within the Article IV consultations, and focused mainly on exchange rate issues, monetary policy, and payment restrictions, recognized at that time as its core mandate.
At about the same time, IMF staff and management began to realize that the Fund’s tool kit was too limited (8) to deal with the fiscal imbalances in newly independent nations which were also reflected in external imbalances and pressure on their currencies. An increasing number of countries requested assistance from the Fund in the fiscal area, which the UN could not provide to a sufficient degree. But, at that time, also the Fund was not yet in a position to meet these requests.
In April 1963, in the context of discussing the Fund’s administrative budget for FY 1964, Fund management under Per Jacobson (9) submitted to the Executive Board (10) a proposal to create an expert group on fiscal issues, followed by the establishment of a Fiscal Affairs Department one year later. The Deputy Managing Director, Frank Suthard, stressed that fiscal matters were of central importance to the Fund’s work with its membership, and that the approach to such work should be broad based, covering areas such as tax policy and tax administration, budgeting and financial control, public debt administration, and even to a limited extent the finances of state enterprises. Management proposed using fiscal experts on Fund missions as circumstances required, in a similar way to the use of specialists from the Exchange Restrictions Department (later: ETR/PDR/SPR) and the Research and Statistics Department. In order to preempt criticism, management emphasized that it did not expect conflicts or duplication of work with other organizations working in the fiscal field since the Fund would only be providing such assistance where and when specifically requested. Although the Fund might be able to use a panel of outside experts for carrying out fiscal assignments, management recommended that fiscal experts be fully integrated into the regular work of the Fund by appointing them as members of staff.
Executive Directors, however, were divided on the appropriateness and approach proposed by management. Except for the U.S. Director (11) and a number of EDs representing low income countries, who fully supported management’s suggestion without further discussion, many other directors expressed concern about aspects of the proposal. For example, while management’s proposal to establish an expert group found support, many directors argued that the involvement of the Fund in fiscal issues should be strictly confined to purely technical issues; and many also resisted the proposal to establish a full-fledged fiscal affairs department. In contrast, there was strong support from directors for another proposal by management, namely to establish a department for monetary and central banking affairs a development which, they stressed, would strengthen the Fund’s mandate.
The establishment of a panel of fiscal experts was also recommended, but it was not at all clear whether fiscal experts were to participate in area department missions. Many executive directors expressed reservations on this point, and recommended the use of fiscal experts on regular Fund missions only if exceptional circumstances warranted it. They believed that the group of fiscal experts should operate like its Fund counterpart on monetary affairs, the central banking group, which recruited long-term experts from member countries’ central banks. These experts were not directly supervised by headquarters and provided advice on their own account. Directors stressed that the Fund should not become accountable for any advice provided by fiscal experts as they feared the potential reputational risks to the institution.
Executive Directors’ concerns were rooted in several considerations. Some believed that the Fund should focus on its core mandate which they saw anchored in the monetary field; they agued that the Fund’s Research Department (12) was the “mother of all departments” and should provide guidance and information on the general directions of fiscal policy to area departments and management. The Fund should not get involved in detailed fiscal issues. Other EDs realized the necessity for the Fund to deal with fiscal issues, but doubted whether there were sufficient experts available with both sufficient technical knowledge and sensitivity to deal with delicate political issues. A third group of directors was agreeable to the provision of technical assistance in the budget and tax administration area. However, this group believed that fiscal policy, and tax policy in particular, was too sensitive an area, and too close to the heart of governance issues in member countries, for the Fund to provide advice from a genuinely neutral and arms-length perspective. Therefore, many directors believed that, contrary to management’s proposal, technical assistance provided by the Fund should be narrowly defined, excluding politically “sensitive” subjects. In response to these critical comments, the Managing Director noted at the end of the meeting that there would be an expert group attached to his office, but he would be flexible about the future development of this group.
As a transitional arrangement, for several months in FY 1964, management hired about ten experts which constituted the Fiscal Advisory Group attached to the office of the Managing Director. As some Executive Directors had predicted, expertise on fiscal issues was indeed not easily available. Unlike the situation today, only few universities at that time, such as Oxford, Harvard, and Columbia, offered courses in the fiscal area that provided a suitable basis for the operational work of the IMF. As a consequence, most of the early intake of staff came from these universities. This tradition continued for a number of years as witnessed by the recruitment of FAD staff in the early 1970s such as Mr. Tanzi (Harvard), Mrs.Ter-Minassian (Harvard), Mr. Heller (Harvard), and Mr. Bird (Columbia). The first fiscal experts hired were mainly specialists in tax policy such as Mr. Abdel-Rahman (13) (Egypt), Mr. Jonathan Levin (USA), George Lent (USA), Mr. Oja (India), Mr. Tanabi (Japan); in tax administration Mr. Witherspoon (UK), and in public financial management Mr. van der Felts (Netherlands).
At the discussion at the Board about the FY1965 administrative budget, on April 8 1964, most concerns about the establishment of a Fiscal Affairs Department were put to rest. Justifying its suggestion to establish a department for fiscal affairs, management (14) opened the meeting with some remarks about its experience concerning member countries’ interest and requests: “ During the year our contacts with a number of member countries have reinforced our conviction that there is a greater need for the Fund to strengthen its capacity to carry out analysis and give advice in the fiscal field. We have been unable to meet the request of member countries for such advice and we have not been equipped to do intensive comparative analysis in taxation, budgeting, and so on. On the strength of the authorities given in the budget for fiscal year 1964, we have begun employing competent experts and the proposal now before the Board is to establish a Department of Fiscal Affairs. I am convinced that a Department rather than some looser arrangement is needed in order to enable us to provide effective administration and leadership for a group of experts which will be assigned to the Department. I have personally made some effort to find an experienced man fully qualified to be head of the Department and I hope that we shall be successful in the near future.”
While endorsing the building up of capacity and knowledge in the fiscal area, some executive directors continued to express reservations about the desirability of the Fund providing advice to member countries in sensitive areas such as the design of fiscal policy and tax policy. As a consequence, for many years, the terms of reference of tax policy missions were cleared by the Fund’s management, while others were processed by FAD’s immediate office.
In April 1964, the Fiscal Advisory Group was converted into the Fiscal Affairs Department, with three divisions and three managers in the immediate office. FAD was assigned 33 staff positions, of which 23 were professional, including one director position, a deputy director, and an assistant director. Tax policy was the largest division headed initially by George E. Lent (USA); Mr. Sweeney was the assistant director (USA, University of Chicago).
This chapter in the early history of FAD came to an end in March 1965 with the appointment of Richard Goode as the first director. He served until 1981. Mr. Goode was a well regarded expert in tax policy. He had led missions for the UN Secretariat on fiscal issues in the 1950s, was a professor at Chicago University and, at the time of his appointment, was a scholar at the Brookings Institution. He was succeeded only by three other Directors:
...and this is how FAD became a core department of the Fund, now for 44 years. Numerous times it has proven the saying that IMF stands for: It’s Mainly Fiscal.
(1) I am very grateful to Mr. A.M. Abdul-Rahman who provided very useful guidance and information in preparing this note, and to Mr. Richard Allen for his useful comments. (2) The UN was founded by 51 nations in 1945; in 1955 the UN had 76 members and grew to 117 by 1965. (3) The first Managing Director of the Fund, Emille Gutt, headed a TA mission to Iran in 1952 with Robert Triffin as a member of this mission; Stanley Surrey, the former assistant undersecretary of the U.S. Treasury and professor at Harvard Law School headed a mission to Japan (1949) with William Vickrey ,who was professor at Columbia, as a mission member; later, 1996, he won the Nobel Prize for economics; Richard Musgrave (mission to Colombia 1950), professor at Harvard and economic advisor to U.S. Presidents Kennedy and Johnson; he also went on mission to Burma and Bolivia; Walter H. Heller (consultant to the Fiscal and Financial Branch of the Department of Economic Affairs of the UN Secretariat, 1954), later President Kennedy’s economic advisor; Mr. Henry Wallich, Governor of the U.S. Federal Reserve System (mission to El Salvador 1951); Mr. Richard Goode (mission to Bolivia 1951) who later became the first director of FAD. (4) For example, International Bank for Reconstruction and Development: The Economic Development of Syria, 1955, mission report, pages 255 – 291; Mr. Goode was the fiscal economist of this mission, headed by Mr. Lieftinck, former Minister of Finance of the Netherlands and Executive Director of the Fund. (5) The World Bank acted, for example, as the executing agency for UNDP financed infrastructure studies. (6) At the same time, the central banking advisory group was established. In 1963, the Fund had a staff complement of 554. (7) A Fund representative participated in a UN inter-regional Workshop on Problems of Budget Classification and Management in Developing Countries in Copenhagen, from August 31 to September 11, 1964. (8) International Monetary Fund, Annual Report 1964, p.20 f.; ”In the course of the years, the Fund has on many occasions expressed the view that, while monetary stability is a prerequisite for sustained economic development, it must be accompanied by resolute efforts to increase productivity and capital formation. An orderly development program should ensure that total investment plans are within the financial resources available....It has become increasingly evident that in a number of countries fiscal difficulties which give rise to deficits in the public sector are a substantial element in economic instability. To the extent that the Fund can, by expert analysis and advice, help such countries to deal with their fiscal problems, the principal task of the Fund in the monetary and exchange fields will be eased.” (9) Managing Director from 1956 until 1963. (10) In 1963, the Board of Directors consisted of 18 chairs, of which 5 were appointed (USA, UK, France, Federal Republic of Germany, India); and 13 elected (The Executive Directors of this group came from Argentina, Australia, Belgium, Brazil, Canada, China (Taiwan), Iceland, Indonesia, Italy, Japan, Netherlands, United Arab Republic (Egypt),Venezuela,). (11) Mr. William B. Dale who, in 1974, became the Deputy Managing Director and served in this capacity until May 1984. (12) In 1963, there was one staff looking after fiscal policy issues. (13) Still member of FAD’s fiscal roster in 2008. (14) Under the leadership of Mr. Schweitzer since November 1963; Mr. Jacobsson had passed away on May 5, 1963.
