The International Financial Institutions and the
DPRK:
Prospects and Constraints
By: Bradley O. Babson
NPPP #9
Bradley O. Babson
Bradley Babson is a Senior Advisor on North Korea to the World Bank and consultant on
Northeast Asia economic cooperation to the United Nations. Mr. Babson worked for the
World Bank for 26 years before retiring in 2000, serving as a Senior Loan Officer on
Indonesia from 1983-87, Division Chief for Education and Health for eight Asian
countries from 1997-92, Regional Representative in Bangkok, Thailand from 1993-94,
and the first Resident Representative to Hanoi, Vietnam from 1994-97. From 1997-2000
he served as Senior Advisor in the office of the Regional Vice President for East Asia and
2
the Pacific. Mr. Babson received his BA degree from Williams College in 1972, and
MPA degree from the Woodrow Wilson School of International and Public Affairs at
Princeton University in 1974.
3
National Library of Canada Cataloguing in Publication Data
Babson, Bradley, 1950The international financial institutions and the DPRK
(North Pacific policy papers ; 9)
Includes bibliographical references.
ISBN 0-88865-756-0
1. Korea (North)--Foreign economic relations. 2. Korea
(North)--Economic
policy. I. University of British Columbia. Program on Canada-Asia
Policy
Studies. II. Title. III. Series.
HC470.2.B32 2002
C2002-910421-1
338.95193
4
The International Financial Institutions and the DPRK:
Prospects and Constraints
Executive Summary
The International Financial Institutions (IFIs) have not played a role in
engagement with the Democratic Peoples Republic of Korea (DPRK) in the past.
Increasingly, however, discussions are taking place in countries concerned with
developments in Korean affairs about the potential contributions that the IFIs could make
in the future, and how to overcome the constraints that they face in developing a
relationship with DPRK and gaining support from their shareholders for becoming
involved. 1
There are many factors that shape the context for a future IFI involvement in
DPRK. The most important driving forces are the economic pressures on DPRK
requiring economic reform and access to resources for capital investment, the desire of
the two Koreas to seek a long term reunification process marked by gradual reduction of
economic disparity between the two countries and integration of the two economic
systems, and DPRK’s decision to expand relations with the international community and
seek increased trade and investment with market economies. There are also severe
constraints that make uncertain the timing and process for development of IFI relations.
These involve issues relating to regime maintenance and willingness to go down the road
of economic system change, the regional political and security framework that needs to
be in place before IFIs could work effectively and with the full support of their major
shareholders, and practical obstacles such as the lack of understanding of economics and
finance and the policies and working methods of the IFIs among DPRK officials.
It is possible, however, to conceive of a robust role for the IFIs in DPRK in the
future, tailored to the particular context of the Korean peninsula. This would also be
shaped by the current debates about IFI mandates and effectiveness, and would need to
build on the experiences of UN agencies and NGOs which have been working on the
ground in DPRK. Non-lending services provided by these institutions will be even more
important than the financial resources they can mobilize in helping DPRK to develop
economic policies and institutions that will help integration with the international
financial community and put the economy on a sustainable growth path.
Relations between the IFIs and DPRK should evolve step-by-step as political
conditions permit, building on informal contacts that have taken place in recent years.
The first step should be a comprehensive economic assessment and discussions of
economic strategy. This could be followed by the establishment of a trust fund to finance
further studies, technical assistance, training and pre-investment studies that are needed
to underpin a future assistance program after the issues relating to eventual membership
1
The views expressed in this paper are solely those of the author and do not necessarily represent those of
the World Bank or Asian Development Bank, their Executive Directors, or the countries they represent.
5
in the IFIs have been addressed. Countries such as Canada can play a valuable role in
helping to advance the process and timing of development of IFI relations with DPRK.
Introduction
DPRK is not now a member of the International Monetary Fund (IMF) World
Bank and Asian Development Bank (ADB), although there have been growing
discussions among policy makers and academics in recent years about the possibility of
these institutions developing a relationship with DPRK and bringing a new dynamic of
multilateral economic engagement by the international community with DPRK. If
DPRK joins these institutions in the future, it would become eligible for both non-lending
and lending services provided by these organizations to developing country members.
There has also been a growing debate in recent years about the proper future role for the
International Financial Institutions (IFIs) in an era of spreading globalization and
intransigent poverty and criticisms of their performance with calls for reform to improve
their effectiveness. This debate is being deepened by the new resolve to combat global
terrorism aggressively and the determination of the U.S. to address DPRK’s weapons of
mass destruction programs in this context.
Against this backdrop, it is timely to ask the question what role the IFIs might
usefully play in the future to support the objectives of improving regional and global
security by channeling DPRK’s energies away from its military orientation towards
peaceful reconciliation and economic development, supporting the integration of DPRK
into the international economic system after decades of isolation, and facilitating the
gradual integration of the economies of the two Koreas as they pursue eventual
unification. It is also important to understand how the IFIs could be most effective in the
particular political context of DPRK and the constraints that they face in building an
effective working relationship with the current government as well as gaining support for
an evolving role that would be broadly supported by their shareholder governments and
the international community at large.
This paper explores these questions, first by assessing the factors drawing the IFIs
towards a role in DPRK and those constraining this process, and then discussing the
elements of a potential future role for the IFIs that would be relevant to the DPRK
situation. This is followed by a discussion of the views of major shareholders of the IFIs
on the development of IFI relations with DPRK, how the IFIs are seen by the DPRK
authorities, and how the IFI’s perceive their present situation. A “road map” of potential
step-by-step development of IFI relations with DPRK is then outlined with indications of
how countries such as Canada could support the process and form valuable partnerships
that would help build effective economic cooperation with DPRK in the future as
political conditions permit moving ahead with this agenda.
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Factors Shaping IFI Involvement in DPRK
In trying to imagine a future relationship of the IFIs with DPRK, it is necessary
both to look at the special conditions of Korea situation and also the debates that are
taking place about reform of the IFIs and their future role in promoting globalization and
reducing poverty. It is not an easy task to bring these two perspectives together and
integrate them, but eventually this will be necessary if the IFIs are to be relevant to the
context and also consistent with the policies and directions provided by their
shareholders. Shaping an effective role for the IFIs will be a significant challenge for
these institutions, the two Koreas, and the international community.
Economic challenges. Looking ahead, the Koreas face two major economic
tasks. One is to reduce the enormous gap between the size of the two economies. The
strategy must be to help DPRK first stabilize its economic contraction and then to set the
economy on a path of long-term sustainable growth with the objective of narrowing the
gap over time. To meet this challenge, DPRK will need to make changes in its internal
economic policies and management in order to make best use of resources for
development and to expand economic relations with other countries, including not only
the Republic of Korea (ROK), but also China, Japan, Russia and countries outside
Northeast Asia. The second task facing the two Koreas is to put in place a process of
integrating over time the economies of two countries with very different economic
systems. The future IFI role fundamentally should be to help the two Koreas address
these two basic tasks.
Regional political context: Because the IFIs work to help countries manage their
economies to promote stability and economic and social development with a medium and
longer-term perspective, there needs to be in place a political environment supportive of
inter-Korean reconciliation and integration of DPRK with the international community.
This requires sustained political will of the leadership within the two countries and
domestic popular support, and it also requires satisfaction of the concerns of major
powers on conditions for regional stability and security beyond the Korean peninsula,
especially the missile and nuclear programs. Without this political framework, there is
little the IFIs could do to help address the economic challenges without aggravating
tensions. As a practical matter, DPRK relations with the U.S relating to regional security
and the concerns about DPRK’s weapons of mass destruction for the global war on
terrorism will determine whether or not the political framework required for an IFI
involvement with DPRK can be achieved. Improved DPRK relations with Japan are also
a critical factor for the IFI’s because Japan is a major shareholder and provider of
development assistance, and Japan’s participation in a broad consensus about IFI
activities in DPRK will be critical to the support of other shareholders.
DPRK regime. The present regime in DPRK is vitally concerned about
maintaining its legitimacy and will only develop working relations with the IFIs when it
trusts that the IFI’s will not undermine its essential political interests and believes that IFI
7
advice and assistance will be directed to strengthening the economic security of the
country. However, DPRK’s economic polices and practices are now largely
incompatible with international standards, and the DPRK regime will not be able to
attract the resources it needs for investment in its economic future unless it adapts to
these standards. This pressure has been made more acute since DPRK’s traditional major
trading partners of China and Russia have embraced market economics. The DPRK must
adapt their economic system to market mechanisms if it is going to have trade and
investment relations with other countries. It simply has no choice. In this situation, the
DPRK regime is being forced by circumstance to accept that systemic change is
inevitable for survival. An important role for the IFIs would be to help DPRK understand
these realities and bring their economic policies and management system more closely in
line with international standards and market economic principles.
Resource constraints. The two Koreas together do not have the financial strength
to meet the economic challenges on their own and will need financial support from the
international community. The multilateral development banks provide a means by which
capital for large-scale projects could be mobilized and directed to complement bilaterally
provided funding and that provided by other multilateral sources such as Korea Peninsula
Development Organization (KEDO) or the European Union. The energy sector is likely
to be a key area for early attention, along with transport and agricultural rehabilitation.
Knowledge constraints. DPRK does not have the knowledge of market
economics needed to design and manage economic policies that will work to solve their
basic problems. The IFIs can help by supporting training and education initiatives and by
building a working relationship where dialogue, advice and technical assistance can build
confidence and competencies in economic management.
Concerns of foreign investors. DPRK is high risk and investors will not provide
significant financing on a commercial basis without much more economic transparency, a
legal code that respects foreign interests and is enforced, a financial system that can
accommodate the needs of foreign partners, and behaviors in negotiating and
implementing agreements that conform to normal business practice. The IFIs can help to
improve the investment environment, catalyze foreign investment by participating in
projects through their private sector windows, and reduce risks through guarantee
facilities.
Concerns of donors. Donor countries are not going to shift from humanitarian
aid to development assistance without assurances that DPRK will use these resources to
improve the life of the people and build appropriate economic structures. Any perception
of diversion of such resources to military use would be totally unacceptable. The IFIs
can provide transparent reporting of economic and financial trends, surveillance and
evaluation of economic developments, and close supervision of implementation of
projects funded multilaterally.
IFI mandates and limitations. Much of the present debate about IFI reform
focuses on their effectiveness in dealing with financial crises and global economic
8
developments, reducing poverty, helping countries adapt to globalization, and best ways
to finance physical and social capital to promote growth and rehabilitation from conflicts.
Promoting good governance and environmental and social safeguards are now
mainstreamed in the IFI’s role in most countries. Adapting these areas of priority
concern to DPRK could potentially lead to a very robust role for IFI advice, technical
assistance and funding. At the same time, given DPRK’s extreme isolation and economic
distortions, there is a risk of the perfect becoming the enemy of the good if present global
standards were to be applied blindly without appreciation for the contextual realities. For
these reasons it will be important that expectations of IFI influence and impact in DPRK
be defined clearly among their shareholders and other stakeholders. Policy advice and
conditionality for assistance should be carefully tailored to the realities of the DPRK
context, and IFI strategies and activities should be widely shared and discussed among
the stakeholders in the DPRK and international community. The lessons of the last 50
years of development assistance should be fully brought to bear in building IFI programs
with DPRK.
United Nations, European Union and Non-Governmental Organizations.
International organizations and NGOs have played an important role in DPRK in recent
years. The U.N. has lead the international humanitarian response to DPRK’s famine and
gained important operational experience in working with DPRK authorities and
coordinating assistance to DPRK from donors. The World Food Program (WFP), United
Nations Development Program (UNDP), and United Nations Children’s Fund (UNICEF)
in particular have developed effective working relations and understanding of operational
conditions in DPRK. UNDP and the United Nations Industrial Development
Organization (UNIDO) also supported activities throughout the 1990’s to help DPRK
focus on economic development issues, particularly through the support of the RajinSonbong Enterprise Zone initiative and the DPRK participation in the Tumen River Area
Development Program. More recently, the European Union has expanded engagement
and initiated development assistance pilot projects and a human rights dialogue with
DPRK. NGOs from an increasing number of countries also have been expanding contacts
and activities in DPRK and developing insights into on-the-ground realities. The
knowledge and experiences of these groups will form an important foundation for the
introduction of IFIs, and information sharing and development of working partnerships
will be important for the success of the IFIs.
Elements of a Potential IFI Role
Given this setting, the over-arching objective in shaping a potential future role for
the IFIs should be to support the long-term interests of both Koreas and contribute to
building a positive environment for managing economic and social change. The IFIs can
be most helpful by demonstrating broad multilateral commitment to helping implement a
Korean-led process and by bringing objectivity and fair-mindedness to the tasks of
analyzing issues, building consensus for strategies and actions, and solving practical
problems, so that the overall process of inter-Korean reconciliation is advanced and there
is maintenance of a stable framework for economic development and integration.
9
In carrying out such a role, the non-lending services of the IFIs are likely to prove
more valuable in the long-run than the financial support that they can provide. The
capacities to provide evaluation of economic issues, policy advice, technical assistance,
and knowledge services are likely to be enlisted before any lending. These non-lending
services will also be needed to create an environment responsive to the requirements of
investors and donors. Convening international meetings for discussions of strategies and
practical issues of common concern is a role that the multilateral development banks can
play that has proven to be very important for other countries’ success in mobilizing
foreign investment and official development assistance and for building partnerships for
coordinated efforts. The contribution of financial resources mobilized by the IFIs should
be to leverage efforts to mobilize domestic resources for development and foreign
investment, and to support social adjustment to necessary change. Lending for
infrastructure rehabilitation, education and health is likely to form the core of future
development bank financing to complement policy advice and capacity building.
Partnerships with UN organizations, the European Commission, bilateral donors, and
NGOs will be critically important for the IFIs to leverage their own the capabilities with
those that others can bring to the complex and challenging situation in DPRK.
A full blown IFI program for DPRK would be multifaceted. Major areas would
be:







Economic assessment and development strategy.
Education and training.
Mobilization of capital.
Social adjustment.
Environmental management.
Governance.
Harmonizing and integrating the two Korean systems.
Any future IFI activities with DPRK will require creation of a counterpart
framework within the DPRK government decision-making and administrative apparatus.
The development of working relations will require familiarization activities and informal
contacts beyond the very limited exposure of the IFIs to the DPRK government to date.
Economic Assessment and Development Strategy. The IFIs will want to begin
their relationship with DPRK with economic assessment activities. This foundational
work is necessary in order to establish effective working relations, engage in substantive
policy dialogue, determine priorities for future assistance, and build confidence in the
minds of the leadership, ROK, and the international community for the evolution of an
IFI role.
If there is one central message of more than 50 years of economic development
experience since the Bretton Woods Institutions were created, it is that putting money
into countries that have poor macroeconomic policies and management does not produce
good economic development. Money is wasted and countries end up with unsustainable
debt service obligations. In the case of DPRK, this represents a great danger. DPRK’s
10
behaviors in recent years seem to reflect a strategy of seeking external resources while
resisting economic reform or openness. This strategy will not produce the kind of
economic development that DPRK needs. The ability of the IFIs to develop an effective
working relationship with DPRK depends on DPRK leadership being willing to entertain
new ideas and endorse economic system change. While reaching this point may take
some time, eventually this is the only option for DPRK if it is going to achieve economic
recovery and a secure economic future. For this reason, the IFI’s are unlikely to
undertake any significant activities to support DPRK until the government is ready to
proceed with the economic assessment and policy dialogue as the starting point.
When the leadership is willing to pursue new ideas and is open to managed
change, then DPRK policy-makers will need to debate and adopt a new development
strategy for the future. A major role for the IFIs in the initial stage of their relations will
be to help shape this debate in ways that will be seen to be objective and constructive
without triggering resistance to open-minded discussion of issues and options. It is likely
that increased outward orientation of the DPRK economy will be a central issue and this
will require participation of DPRK’s future economic partners. The debate on strategy
will evolve as more information and analysis becomes available and as experiences with
initial efforts to introduce changes are evaluated.
Education and Training. Perhaps the greatest drawback to DPRK’s ability to
design and manage new economic policies and programs is the lack of knowledge of
basic economics, finance and commercial practices among policy-makers, technocrats
and enterprise managers. Also, while DPRK has a well educated labor force and highly
skilled technicians in some fields, lack of access to global knowledge and best practices
inhibits the potential of the North Korean people to improve their lives and modernize
their society and economy. Helping North Koreans to gain access to global knowledge
and experience will be one of the most valuable roles for the IFIs. Since DPRK’s
bilateral relationships are most likely also to give high priority to education and training
activities, this is an area where partnerships between IFIs and bilateral assistance
programs in DPRK could be fruitful.

Educational Programs. The World Bank Institute(WBI) provides a rich
variety of learning services, including designing and delivering courses and
seminars, promoting knowledge networks and communities of practice, and
providing policy and technical advice. The IMF Institute also provides
similar programs focusing on macroeconomic and financial system policy,
monitoring and management. Similarly, the ADB Institute based in Tokyo
promotes research on development models and organizes policy discussions
and learning opportunities for member county officials. Organizing learning
programs and policy workshops tailored to DPRK’s needs will be a high
priority early in the relationship of the IFIs and contribute to capacity
building needed for a growing agenda of collaborative activities. These
programs played a valuable role in the early years of IFI relations with China
and Vietnam as well as other transition economies and can serve as models for
future application in DPRK.
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
Working Relationships: On-the-Job Training. The most effective mechanism
for imparting practical technical and managerial knowledge is through the
working relationships that are built between IFI task teams and their
counterparts in producing economic assessments and preparing and
implementing development projects. As IFI programs grow and diversify,
these informal on-the-job learning processes become the back-bone of the
operational relationship between the IFI and the country and contribute
significantly to building competencies in counterpart organizations.

Global Development Network(GDLN). The availability of inexpensive
global telecommunications is transforming the technology of learning as a
tool of economic and social development. Both on the job and in the
classroom, building access to global knowledge on demand is now becoming
a reality for people in a growing number of countries. This is supported by
growing use of internet based learning tools and telecommunications
investments that are sponsored by the multilateral development banks and
other development partners, using tools such as the Global Development
Network and Global Gateway. Already these links are being built in ROK,
and could become a valuable tool to support the learning needs of DPRK in
the future.

Project Financing for Education and Training. Whenever the IFIs are able to
initiate normal lending programs for DPRK, education and training is likely to
form a major element of their overall lending strategy. The focus on
education has recently been given a renewed emphasis by the G-8 leaders in
their efforts to strengthen the contribution of the multilateral development
banks to promoting productivity growth and poverty reduction.
Mobilization of Capital. Financing DPRK’s future economic development will
be a major task where assistance from the IFIs will be needed, especially given the
present creditworthiness and economic conditions in DPRK. This would involve not
only the resources that the multilateral development banks can allocate through their
lending and grant assistance programs, but also the contribution that the IFIs can make to
efforts to mobilize and use effectively domestic capital and foreign private investment.
These areas in fact will be more important for DPRK than the lending programs, and will
be given priority in policy dialogue.

Raising Domestic Capital for Investment. The most important source of
capital for long-term economic development is domestic. Finding ways to
increase domestic investment, both in better use of public savings and
development of the domestic financial system, should be a high priority for
North Korea. East Asia’s economic success in recent decades is due in part to
high savings and investment rates. China in 1998 had a domestic investment
rate of over 38% of GDP. Vietnam increased its rate from 13% in 1990 to
over 28% in 1998. For a country that believes in Juche, aiming to increase
12
self-reliance in this way should be at the center of the future economic
development strategy for DPRK.
The IFIs are important sources of advice and technical assistance to support
the goal of mobilizing domestic capital for investment. This is a normal part
of their role in most countries, and also is often at the center of structural
adjustment programs that they help design and support with policy-based
lending. To start, what will be needed is a good understanding of the public
finance system: how the budget and tax system of DPRK is designed and how
it could evolve. A review of tax policies and administration would focus on
resource mobilization strategies. A public expenditure review would focus on
finding ways to shift the allocation of resources in ways that would have a
more beneficial economic impact. It is obvious that military expenditures
could not be ignored in a discussion of mobilization and allocation of
domestic resources, and this is likely to be a highly sensitive but necessary
part of the future role of the multilateral banks. Their job will be to make
clear the trade-off that DPRK makes between using scarce resources to
maintain a large military capability and using those resources to build a better
economy. The independence and objectivity of the analysis will be essential
if it is to make an impact on what in the DPRK situation is an extremely
political issue, both internally and in DPRK’s foreign relations. But the issue
cannot be avoided.

2
Foreign Investment. Foreign private investment will be more important than
Official Development Assistance (ODA) in the long-term process of
economic development of DPRK. The IFIs can play a critical role to support
the mobilization of foreign private capital in helping the DPRK government to
build policies and institutions that will be required to attract foreign
investment and to reduce perceived risk of investing in DPRK. Both the
World Bank and ADB have units that provide technical assistance in
reviewing policies and institutional arrangements for private sector
development, capital markets development and foreign investment. Similarly,
advice can be provided for building financial and legal institutions needed to
attract foreign private capital, and for specific industry and corporate level
issues as well. Both banks also provide project finance and guarantees2 that
reduce risks faced by foreign investors and contribute to mobilization of
equity and loan finance for specific investments. The role of the multilateral
development banks as “honest broker” and “neutral partner” is likely to be
especially important in attracting foreign investment to DPRK.
The International Finance Corporation (IFC) is the primary organization within the World Bank Group
that provides project finance and advisory services, and the ADB has a similar capability. The Multilateral
Investment Guarantee Agency (MIGA) provides investment guarantees against non-commercial risks, and
the International Bank for Reconstruction and Development and ADB also have limited guarantee facilities
that are available for certain situations.
13

Multilateral Lending. Both the World Bank and ADB were established
primarily to provide development finance to governments through lending,
offering a variety of instruments to achieve different objectives.3 For DPRK,
it is possible that the full range of lending instruments may be useful in
addressing different aspects of the future development strategy.
It is likely that the initial focus of lending for DPRK will be in removing
policy and infrastructure obstacles to domestic and foreign investment,
coupled with efforts to rehabilitate agricultural production and respond to
pressing social needs in health and education. The priorities and balance of
the initial lending activities will be determined based on the economic
assessment discussed above and also the plans and priorities of other donors.
However, it is clear that the energy and transport sectors will likely form the
core of infrastructure assistance along with agricultural rehabilitation, and
supporting a new industrial development strategy will form the core of the
policy agenda.

Role of IFI Grants. While primarily lending organizations, both the World
Bank and ADB have limited grant making capabilities that could be very
helpful in the early stage of their relations with DPRK.4 Typically grants are
provided to finance technical assistance, training and studies that support
capacity building and establishing the foundation for policy dialogue and
lending programs. While small in relation to the overall resource mobilization
requirements, these grants provide leverage by removing bottlenecks and
creating the building blocks of policies, institutional capacity, and preinvestment planning needed for large-scale projects.
Social Adjustment. The isolation of North Korean society from the international
community represents a huge challenge if the country is going to open up to market
economic principles and have significantly expanded relations with foreigners, especially
if it is going to be a recipient of large scale foreign investment and Official Development
Assistance. The perception gap that exists between realties of life within DPRK and
realities outside, poses both political challenges for the regime in Pyongyang and
practical challenges in helping the DPRK population adjust to new self perceptions and
opportunities. At the heart of these challenges is the social control system that DPRK
established that places strict limits on individual freedoms and emphasizes almost godlike reverence for the Dear Leader. It is hard to imagine a society more vulnerable to
social change and potential disruption than North Korea, although some may argue that
the country has already experienced large scale disruption stemming from severe
economic contraction and food shortages. In any case, the task will be to stabilize and
improve the present distressed social conditions.
3
Annex 1 provides a description of World Bank and ADB lending policies and instruments and also a
discussion of issues needing to be addressed for DPRK to gain access to these resources.
4
Annex 2 provides a description of grant instruments currently available to the multilateral development
banks, although future grant versus loan policy is a topic on which debate among shareholders of the banks
is presently taking place.
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The potential role for the IFIs in helping DPRK manage inevitable social
adjustment would focus on moderating downside risks of disruption, putting in place new
forms of social safety nets to replace the State distribution system that has already largely
broken down, and policies that would promote poverty alleviation among the worst off
segments of society. The vulnerability of urban households, particularly outside favored
areas such as Pyongyang, will need to be given priority along with areas of the country
that have a low economic base. One aspect of this will be activities that support the
growth of the informal markets that have emerged as the only viable alternative to the
State distribution system in meeting basic consumption needs of urban households.
Another will be to find ways to rebuild the basic health care system and adapt the
education system to support gradual integration of North Korean society with
international society. Given the political sensitivities involved in managing social change
of the scale required in DPRK, the objectivity and international comparative perspectives
that the IFIs can bring to analysis of issues and evaluation of alternative courses of action,
can make a valuable contribution to the process.
Environmental Management. DPRK faces severe environmental challenges as
well as social challenges. Deforestation and industrial pollution have already taken a
heavy toll. Seeking environmentally sustainable strategies for agricultural rehabilitation
and future industrial development will need to be give high priority in designing a
comprehensive development model for North Korea. Also, DPRK’s environmental
concerns are linked with those of neighboring countries. Water and air quality are crossborder issues for the two Koreas, and DPRK is vulnerable to air pollution from China,
sharing this problem with ROK and Japan.
The multilateral development banks can assist DPRK to adopt environmentally
friendly policies and investment strategies in agricultural rehabilitation, energy sector
rehabilitation and industrial development. Through environmental safeguards that are
required to accompany projects financed by the banks, they can also help demonstrate
and institutionalize good environmental planning and management practices. Also, the
banks can help integrate DPRK in existing regional initiatives to manage cross-border
issues and support development of inter-Korean environmental policy and planning
mechanisms as part of the broader framework for deepening integration of the two
countries over the medium and longer-term. In this area, an important opportunity is to
develop an environmental protection strategy for the demilitarized zone, which contains
large tracts of natural forests and harbors biodiversity resources that should be preserved
for future generations of Koreans as a positive legacy of the zone.
Governance. Transparency, clear delegations of authority, rule by law,
democratic processes, public accountability, and a free press are not known as attributes
of the DPRK system of governance, but are the mainstream expectation of the
international community in the pursuit of good development and human security in the
21st Century. As DPRK opens up and more resources begin to flow into the North
Korean economy, corruption and competition within the DPRK bureaucracy for control
over resources can be expected to become increasingly difficult problems, as has been the
15
case in other countries in transition. Equally important will be the need to introduce new
management techniques and accountability mechanisms at the enterprise and cooperative
farm level.
The IFIs should be expected to help DPRK introduce reforms that will promote
economic and administrative efficiency and good governance and to work towards
meeting international norms. This is likely to take some time and to encounter resistance
from entrenched interests within the DPRK government, as meeting internal norms for
good governance will require far-reaching reforms of DPRK’s economic and
administrative system. The challenge will be great and this agenda should be conducted
in partnership with other multilateral agencies such as UNDP and the European
Commission and with bilateral donors. A broad-based and sustained multilateral effort
will be needed. An important part of the process will be requirements under projects
financed by the multilateral development banks for competitive bidding for procurements
of goods and services, accounting and auditing of project expenditures, action plans for
social impacts, and ex-post evaluation of projects to determine their success in meeting
their objectives and sustainability. These “bread and butter” requirements of projects
and technical assistance that can be provided to help DPRK meet them, can make a major
contribution to the overall effort to strengthen public institutions and accountability and
in bringing DPRK closer to international norms in governance.
Harmonizing and integrating the two Korean systems. What is most unusual
about the situation on the Korean peninsula is the potential for the two Koreas to pursue a
deliberate and orderly long-term process of deepening economic integration with the
objective of eventual political unification of the two countries. Following the Summit of
June 2000, the two Koreas moved quickly to establish an administrative architecture to
coordinate planning and decision-making. Agreements were reached on four treaties
governing commercial economic relations and on opening a rail link between the two
countries across the demilitarized zone. While these agreements represent only the
beginning of a complex and long-term process, and the pause of recent months underlines
the vulnerability of this process to the overarching political context, they do provide a
starting point for designing a potential future multilateral role in assisting the two Koreas
in achieving their economic integration goals.
There are a number of ways in which the IFI’s could be enlisted to support the
inter-Korean economic agenda:

Studies on specific integration issues. While the IFIs in most countries carry
out a program of economic and sector studies to support national development
planning, it would be feasible also to conduct similar studies commissioned
jointly by the two Koreas to examine issues concerning the economic
integration agenda. This could include analysis of economic, technical and
institutional issues with the intention of seeking to articulate strategies to
address the challenges of harmonizing two very different systems over time.
Infrastructure and financial and legal system issues would be a high priority in
16
the short-run, with environmental, labor market and social policy issues taking
on more importance in the medium-term.

Technical workshops. As the two Koreas proceed with an agenda of their
own determination, IFIs and others from the international community can
support them by participating in technical workshops to bring global
knowledge and expert opinions to the teams working on specific topics or
projects. One example is the proposed Kaesong industrial park. There are
many lessons from experiences of other countries in how to make these
initiatives successful and also the problems that need to be overcome. If the
international community could find ways to help the two Koreas make
Kaesong a success story, it would make a major contribution to the
reconciliation process and trust building for DPRK’s growing participation in
the international economy.

Projects to support infrastructure linkages. Power, transport,
telecommunications, and water basin management are four areas where interKorean infrastructure projects can be expected in the medium-term.
Infrastructure to support joint tourism and industrial development initiatives
such as the Mt. Kumgong project and proposed Kaesong project will be given
short-term priority. But the agenda will expand over the medium-term to
include a diversified infrastructure that will support increase investment and
trade between the two Koreas. Regional projects such as linking to the transSiberian railroad and a gas pipeline across the Korean peninsula would also be
possible candidates for support from the multilateral development banks.

Projects to support institutional harmonization. If gradual integration of the
Korean economies is going to be successful in the long-run, there will also
need to be movement towards institutional harmonization. This may start
with legal and financial institutions, but over time will require addressing
more sensitive social institutions, such as labor markets, education and social
security. Projects could be designed to support institutional adjustment and
capacity building.

Financing inter-Korean private investments. The International Finance
Corporation, Multilateral Guarantee Agency of the World Bank and their
equivalents at the ADB could be enlisted to promote inter-Korean investment.
This could include both investment by ROK firms in the north and also DPRK
firms in the south. A special program could be designed to support this
objective.

Bridging the Digital Divide. Both Koreas are keenly interested in the
potential of the new information economy. Creative use of new information
technologies should be applied to the Korean integration process, and the
multilateral development banks could support this by pursuing a dual country
strategy in extending knowledge management services, such as the Global
17
Development Network and Global Gateway initiatives. The banks could also
promote the use of information technology to support the social integration
process by connecting divided families and exploiting new opportunities for
social interaction between Koreans sharing common interests.
Aid Coordination. A formal aid coordination mechanism will need to be
developed once there is a shift from humanitarian to development assistance by the
international community. UNDP is already beginning to address this issue with the
DPRK authorities and should be expected to play a lead role in in-country coordination
and in capacity building for the government. The World Bank could eventually be
enlisted to chair a Consultative Group for DPRK, as it does for many other countries.
Coordination between KEDO and other donors to the energy sector will also be a high
priority, and IFI relations with KEDO in the future would be a critical part of this. As a
stepping stone to development of formal aid coordination mechanisms, informal meetings
and conferences with donors, NGOs, and private investors can provide valuable
opportunities for information sharing and consensus building for priority issues to
address with the DPRK and in building dialogue between these foreign groups and
DPRK officials. Sponsoring such meetings would be one way for countries pursuing
engagement policies with DPRK to support a process of deepening dialogue with IFI
participation.
Views of Shareholders
Shareholders of the IFIs have somewhat different views of the desirability and
timing of development of relations between the IFIs and DPRK. In 1997, the government
of South Korea announced in a speech to the Boards of Governors of the IMF and World
Bank the view that ROK favored development of relations between the IFIs and DPRK
and hoped that technical assistance activities could be initiated even though DPRK was
not a member country. Under President Kim Dae Jung, the ROK government has
consistently adhered to this policy that was formed by the previous government and
pushed for efforts to advance relations, including inviting DPRK as a “special guest” to
the Bank/Fund Annual Meetings. Similar statements have been made regarding potential
relations between the ADB and DPRK. China also favors involvement of IFIs in DPRK
once the authorities are ready to work with the IFIs.
The United States and Japan, as the largest shareholders in all the IFIs, carry
considerable weight in determining the development of IFI relations with DPRK. For the
U.S. there are both political and legal obstacles to supporting the development of IFI
activities with DPRK. Politically, the U.S. position has been not to support IFI efforts to
help DPRK improve its economy in any meaningful sense until the U.S. obtains
satisfactory progress in addressing its concerns about DPRK’s programs for weapons of
mass destruction and reduction of military tensions on the peninsula. The U.S., however,
has not objected to IFI efforts to initiate informal discussions with DPRK officials, study
the DPRK economy, and encourage DPRK to obtain knowledge of market economics.
The U.S. tends to view future access to the resources of the IFIs as a carrot in its efforts
to obtain military and political concessions from DPRK and eventually is likely to
18
support a robust role for the IFIs once these issues have been resolved. Legally, the U.S.
Treasury is obligated not to support any IFI actions that would assist DPRK until it has
been removed from certain U.S. sanctions, most notably the list of states supporting
terrorism. If the U.S. government comes to the point where it favors some IFI
involvement in DPRK, as part of the process of reaching agreements on the security
agenda, it could consider the use of abstention as a way to overcome the legal obstacles
in the Boards of these institutions.
Japan also does not favor any significant IFI role in DPRK until bilateral
normalization of relations talks are further advanced. These talks include overcoming
sensitive historical issues in Japanese-DPRK relations and also a financial package that
will shape future Japanese economic assistance to DPRK. Understandably, as a major
shareholder, Japan does not want the IFIs to get out ahead of the curve on these critical
normalization talks. If they succeed, it is likely that Japan will become a strong promoter
of future IFI relations with DPRK.
A major development in recent years has been the normalization of DPRK’s
relations with most of Europe, Australia and Canada. Together these countries represent
a sizable block of IFI shareholders who now have a stake in DPRK’s integration into the
international community and are more inclined to support the introduction of IFI
relations and activities for this reason. While this group of countries pursue bilateral
agendas, actively encourage inter-Korean reconciliation, and support KEDO and
European Commission activities in DPRK they are unlikely to press for membership of
North Korea in the IFIs until there is consensus with the U.S. and Japan that the securitybased political preconditions for this step have been satisfied. In the meantime, those
countries that are pursuing similar policies of engagement with DPRK can help prepare
the way for a future IFI role in DPRK. One way is to advise DPRK on the benefits of
membership and realistic expectations of the IFIs to help build understanding and
confidence in developing effective working relationships with the IFIs. Another
important way is to provide training and educational opportunities to DPRK officials so
they are prepared for data requests, policy dialogue and counterpart relationships when
they begin to work with the IFIs.
DPRK’s Views
DPRK tends to view the IFIs with a mixture of attraction and apprehension.
They appreciate the potential value of objective multilateral advice, technical assistance
and training, and they would like to be able to gain access to the financial resources of the
IFIs. On the other hand, they tend to view the IFIs with trepidation, fearing that they will
press for access to information, adoption of policies, and changes in the economic
system that go beyond what they are prepared to do, and use conditionality to force
unwelcome changes. In particular, they perceive the Washington-based IMF and World
Bank to be strongly influenced by the U.S. government and likely to be instruments of
Washington’s policies towards North Korea. For this reason, the DPRK government has
pursued a policy of seeking to initiate relations with ADB as a first step and only to
develop relations with the IMF and World Bank after they have gained some experience
19
with ADB. Thus in 1997 and again in 2000, the DPRK government sent letters to ADB
indicating their interest in being considered for membership. These overtures, however,
did not elicit a positive response of the ADB shareholders, and as a result, DPRK’s first
foray into relations with the IFIs has been colored by the experience of rejection.
IFI Views and Contacts with DPRK
The IFI’s all desire to play a constructive role in promoting peace and prosperity
on the Korean peninsula, but recognize that this requires both a willingness of DPRK to
abide by their requirements and working methods, and also that there must be broadbased support for expanding IFI relations with DPRK among the shareholders, especially
South Korea, Japan and the U.S. IFI direct contacts with DPRK officials started in
September 1997 when the IMF sent a Fact-Finding mission to Pyongyang . This was
followed in February 1998, by an Introductory Mission from the World Bank. The
objective of both visits was to exchange information and to begin face to face discussions
of issues relating to the economic situation in DPRK and potential for development of
relations. Contacts since then have been sporadic and informal. In 2000, DPRK was
invited to attend the Bank-Fund Annual Meetings in Prague as a Special Guest, but did
not participate in the end for a number of understandable reasons. Informal contacts have
also taken place in a number of contexts outside of DPRK. These are valuable
opportunities for information exchange, clarifications of views on issues related to
development of IFI relations with DPRK, and trust building. The IFIs have also
contributed to international discussions of engagement policy with DPRK through
participation in conferences and consultations with countries and other multilateral
organizations involved with DPRK, bringing their perspectives on economic issues and
potential value of multilateral economic cooperation to the process of DPRK’s opening
up to the international community.
“Road Map” for Developing IFI Relations with DPRK
At present, there is no clear cut “road map” for advancing DPRK’s relations with
international community and no obvious consensus about how the IFI’s fit into this
process. The lack of such an understanding is one obstacle to progress. Some of the
elements that would need to be included are:

Consensus that an IFI involvement in DPRK would support the interests of
the international community. To achieve this consensus, the security
concerns of the “front-line” states of ROK, Japan, the U.S. and China would
need to be addressed in a way that they do not believe their security interests
would be threatened by sincere efforts to help DPRK overcome its economic
problems and integrate more fully with the regional and global economy. The
expansion of relations and activities with “second-circle” states including
Europe, Australia, and Canada, could contribute to the trust building needed to
underpin the formation of this consensus, and help DPRK appreciate the
potential benefits of joining the international financial system.
20

A Joint Commissioning by the Two Koreas. The conditions on the Korean
peninsula require that IFIs be responsive to both countries views about their
appropriate role in supporting a long-term vision of evolution of economic
relations between the two countries. Thus at the beginning, it would be highly
desirable if there were a joint declaration of desire for assistance from the
IFIs. Ideally, this would come as a result of a future inter-Korean Summit
meeting of the leaders of the two countries.

Comprehensive Economic Assessment. The first undertaking by the IFIs
should be a comprehensive economic assessment of the DPRK economy.
This should be done collaboratively by the IMF, World Bank and ADB at the
invitation of DPRK. Such a study would give the IFIs the information and
understanding they need to formulate advice about strategies and policies for
economic rehabilitation. The process of preparing the report would also be
important as a means to develop a working relationship with DPRK officials
that will be a foundation for future dialogue and activities. Once completed,
the report would serve as a foundation for formulating assistance programs,
starting with technical assistance, training and further studies, and leading
eventually to full-scale lending programs. For the international community
and especially those countries that have normalized relations with DPRK and
willing to begin development assistance, the report would serve as a common
platform for discussions of future economic engagement and aid
coordination. One valuable role for countries that want to encourage the
multilateral process for engagement with DPRK would be to provide funding
and experts to work with the IFIs in carrying out the economic assessment
work. This would send an important signal to DPRK about the importance of
partnership that is essential for effective economic development cooperation
in today’s world.

Technical Assistance and Training – Potential for Grant Trust Funds. To
create the policy and institutional base for economic reform and development,
a grant-funded program of IFI activities will be needed. A priority agenda
would be agreed following completion of the economic assessment. It would
likely include such activities as improving statistical information systems;
strengthening capacity to perform essential functions in macroeconomic and
external debt management; strengthening legal and financial systems;
preparing sector investment strategies for energy, transport, agriculture,
industry, education and health; and project preparation studies for future
lending. Establishment of Trust Funds to finance these activities could be
done even before formal membership procedures have been completed, with
the approval of the Boards of Executive of the IFIs. Board approval would
require that the IFI shareholders have reached a political consensus that
provision of such services to DPRK would serve their interests. The
willingness of individual countries to make financial contributions to such an
initial trust fund and to participate in the execution of activities it supports,
would demonstrate the broad support that exists in the international
21
community for the DPRK opening-up process and desire to use multilateral as
well as bilateral instruments to help advance the process.

Membership process: IMF first. Membership in the IFIs will need to begin
with the IMF, but applications to the World Bank and ADB could be
processed in parallel and membership approved shortly after the formal action
of the IMF. For all of the World Bank’s constituent organs (International
Bank for Reconstruction and Development, International Development
Association, International Finance Corporation, and Multilateral Investment
Guarantee Agency), prior IMF membership is a legal requirement5. While not
a legal requirement for membership in the ADB, prior IMF membership will
be a political requirement to obtain the support of major shareholders. For all
the IFIs, the membership process will begin with an application from the
DPRK authorities. This will be followed by technical discussions and
assistance to help DPRK meet various requirements for membership. Once
these have been met, membership is accomplished though a vote of support
for this action by the Boards of Governors of each of the IFIs. It will be
helpful for North Korea to have the advice and support of friendly existing
shareholders of the IFI’s as they work their way through the membership
process.
Conclusion
The challenges facing the economic rehabilitation of DPRK, deepening of economic
relations with ROK, and integration into the international financial system are daunting.
The two Koreas will not be able to meet these challenges on their own and the support of
the international community will be needed. The IFIs can contribute to a new dynamic of
peacefully managed change on the Korean peninsula by supporting efforts to achieve
shared long-term goals of both Koreas. There are strong reasons for bringing the IFIs
into a future role in DPRK that could result in improved welfare for the Korean people
and greater stability in Northeast Asia. However, there are also significant political and
practical constraints which create uncertainty about the timing and process for
development the future IFI role.
Countries such as Canada that have taken the step of normalizing relations with
DPRK can contribute to influencing the course of IFI involvement with DPRK. Some
ways that have been identified are:
5
It is a formal requirement that a country sign the Articles of Agreement of the IMF before signing Articles
of Agreement of IBRD. Similarly, a country must become a member of IBRD before it may become a
member of IDA, IFC and MIGA. The capital subscription quota agreed for membership in the IMF is also
used to determine the quotas in IBRD, IDA, IFC and MIGA in consultation with the country. An important
reason for these requirements of prior membership is the obligation of members of the IMF to provide
regular reports to the Fund for transparent surveillance of economic and financial conditions of all
members. Similarly, a requirement of IBRD for annual external debt reporting is needed to determine
country creditworthiness for borrowing.
22

Sponsor meetings of donors, NGOs and other stakeholders with IFI participation
to exchange ideas and form consensus on issues needing to be addressed with
DPRK.

Help DPRK develop realistic expectations of IFIs and how they work with
counterparts and other donors in development assistance.

Assist DPRK to acquire basic knowledge of economics and finance in order to
develop the capacity to work with the IFIs and others on economic assessments
and engage in policy dialogue.

Coordinate policy and activities with other like-minded countries that have
adopted engagement policies with DPRK and wish to pursue multilateral as well
as bilateral initiatives.

Support a step-by-step process of IFI relations with DPRK linked to progress in
establishment of the political framework needed and be willing to contribute to
IFI activities at each step. This would involve creating opportunities for IFI
contacts and informal discussions with DPRK officials, support for initial
economic studies, contributing to a grant trust fund for technical assistance and
training, and eventually assisting DPRK prepare itself for meeting the formal
requirements of IFI membership.
23
Annex 1
LENDING POLICIES AND INSTRUMENTS OF THE MULTILATERAL
DEVELOPMENT BANKS
Both the World Bank and ADB were established primarily to provide
development finance to governments through lending instruments.6 Mobilization of
capital to provide this finance is accomplished in a number of ways, including paid-in
capital subscriptions of member countries, issuance of bonds on the global capital
markets, and contributions of member governments to replenishments of soft loan
window facilities. Reserves from repayments of loans provided in the past are also now a
significant source of funds for new lending. Loans provided on commercial terms with
15-25 year repayment periods are provided by the International Bank for Reconstruction
and Development (IBRD) from the World Bank Group and by the Ordinary Capital
Resources (OCR) of the ADB. Concessional lending with a grant element of about 70%
is provided with 30-40 year repayment periods by the International Development
Association (IDA) of the World Bank Group and the Asian Development Fund (ADF) of
the ADB.
Access to the IBRD and OCR resources is determined by country
creditworthiness considerations and policies adopted by the Boards of the multilateral
development banks on appropriate use of such resources. Resource mobilization through
bond issuance by both IBRD and ADB is geared to estimates of demand among
borrowing countries. Costs of borrowing are reflected in lending rates.
Access to the IDA and ADF resources is based on level of economic development
and eligibility of borrowing countries, creditworthiness, and policies adopted by the
donor countries to guide priorities for allocation and performance criteria for access.
Allocations for individual countries are constrained by the amount of funds available
from the tri-annual replenishments and repayments from past lending, as well as the
number of countries eligible to receive such funds who are competing for them.
Both the World Bank and ADB offer a range of lending instruments to achieve
different objectives. IBRD and IDA, for example, have two main types of lending
instruments, known as investment lending and adjustment lending, as well the guarantee
instruments which are designed to help countries to attract private sector involvement by
underwriting government contractual commitments and by making longer term private
sector lending more accessible.
6
While the IMF is not primarily a lending institution for development purposes, among its financial
support instruments for member countries is the Poverty reduction Growth Facility (PRGF) for the poorest
countries. Loans are disbursed over three years at an annual rate of 0.5 percent with a 5 1/2 year grace
period and 10 year repayment period. Access to these resources is tied to a country’s quota share and
disbursement is made in accordance with strict adherence to conditionalities specified for the loan.
24
Issues needing to be addressed for DPRK to gain access to IFI resources.
Apart from the political and legal issues relating to membership in order to gain
access to the resources of the IFIs, there are a number of other factors that will determine
the extent to which these banks can mobilize resources for lending to DPRK:

IDA/ADF eligibility. A determination must be made whether DPRK will be eligible
for the concessional lending windows of the IFIs, especially IDA of the World Bank
and ADF of the ADB. This will be based primarily on the estimate of the GDP per
capita and how it fits with eligibility criteria in force at that time. The advantage for
North would be the low cost of such funds. The disadvantage is that IDA/ADF funds
are limited and North Korea would be competing with low income countries in other
regions of the world for a share of the pool available. Any increment for DPRK in
the future will also have to be proposed by the IDA Deputies and appropriated by the
legislatures of the donor governments. Given the large infrastructure investment
requirements in DPRK, it is unlikely that IDA/ADF funds alone could be any where
near sufficient to meet the requirements. Some countries, such as Indonesia and
India, receive blend programs that include both IDA/ADF and IBRD/OCR lending.
Typically the IBRD/OCR loans go towards infrastructure projects, while the
concessional lending goes for social and environmentally oriented projects. In the
case of DPRK the potential for a blend program should be explored, if it is
determined to be IDA eligible.

Creditworthiness. The amount of lending any bank will provide to DPRK – whether
it is from the multilateral development banks or commercial banks – will be strongly
influenced by assessments of DPRK’s ability to repay the loans. Any future program
of lending by the World Bank and ADB will need to be based on such an assessment,
which in turn requires that there be an acceptable macroeconomic context for
determining the amount of borrowing that DPRK can prudently afford.

Economic Policy Performance and Institutional Capacity. All loans provided by the
IFIs have to be approved by their Board of Executive Directors. These Boards will
require some evidence that DPRK is sincerely making efforts to improve its economic
policies and strengthen economic management capacities. The amount of lending and
timing will be affected by the government’s own priorities and level of effort in these
areas. Meeting the expectations of the Boards will likely be a significant challenge
for DPRK at the initial stages of a future lending program.

Country Assistance Strategy. The amount as well as the composition of lending will
be primarily shaped by country assistance strategies that are prepared by the staff of
the IFIs in close consultation with the government as well as other partners. These
strategies provide the context and rationale for the program of both lending and nonlending services to be provided during a multi-year (usually three year) programming
cycle. All relevant considerations are included in the strategy documents, which are
25
discussed by the Board of Executive Directors and provide the foundation for
management decisions on country programs and budgets.

Safeguard policies. Environmental and social protection are taken very seriously by
the multilateral development banks, and specific lending operations must be designed
to mitigate any detrimental environmental or social effects. In these cases, detailed
environmental action plans and resettlement action plans are required to be prepared
and approved before loans are approved. DPRK’s willingness and ability to address
these aspects will have a bearing on future lending.
26
Annex 2
GRANT INSTRUMENTS AVAILABLE TO
THE MULTILATERAL DEVELOPMENT BANKS
While the World Bank and ADB are primarily loan financing institutions, both
also administer grant programs and mobilize grant resources through trust funds that
complement their lending activities. In the case of DPRK, the ability of the multilateral
development banks to provide such grant assistance in the early phase of their programs
is likely to be especially important.
Grants mobilized by the multilateral development banks generally come in three
forms. One is grants made to member countries and executed by them, normally for
technical assistance, studies and training. Small amounts of equipment purchase are
permitted in conjunction with funds for technical assistance or studies. Some of these
grants are funded by the multilateral bank out of its own resources. For example, the
Institutional Development Fund (IDF) of the World Bank provides for capacity building
that cannot be accomplished through other means. Most grants, however, are provided
by bilateral donors and administered by the bank for specified purposes under trust fund
agreements. Two of the largest at the World Bank are funded by the Japanese
government, mainly for project preparation (PHRD) and poverty alleviation (Social
Development Fund) activities. The ADB also has a significant grant program of this type
for studies and project preparation. Some programs, such as the Global Environment
Fund (GEF) involve significant sums and also decision processes that involve other
partners.
In special situations, grant funds have been established at the country-level, such as
for East Timor, Bosnia & Herzegovia, and the West Bank and Gaza. These country
funds require specific approval by the Board of Executive Directors before their
establishment. In the case of DPRK, it may be possible to consider creating a trust fund
of this type funded by one or more donor countries to support an early program of
studies, technical assistance and training needed to build the foundation for a normal
program of lending later on. To do this would require broad-based support among the
Bank’s Board of Executive Directors and their agreement on strategy for use of the fund.
A second form is grants executed by the bank to provide services to member
countries or to finance consultants to participate in bank-led work activities. Typically,
these are funded through the bilateral trust funds set up by individual donor countries
with the banks.
The third form is grants mobilized to complement development bank lending
through cofinancing. This is an effective way for donor countries to leverage their
limited grant resources available for Official Development Assistance with the larger
capital mobilization capacity of the multilateral development banks on loan terms. The
27
complementarity of the grant funded activities with the procurements supported by the
bank loans is an important form of partnership in development finance.
28
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Bradley O. Babson
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