Balwant S. Garcha
When World Bank Governors met in Washington, DC, for the Bank’s Annual Meetings, they had few illusions about the scarcity of development funds and its possible impact on the Bank’s operations. The question, as they saw it, therefore, was how to work around the constraints of tight resources.
Existing differences and tensions between the rich and poor countries on the issue were overshadowed in the end by a broad consensus on the need to expand lending for energy, mobilize additional funds for the sub-Saharan African countries, resolve the hiatus in commitments to the Sixth Replenishment of the International Development Association (IDA), and continue assistance to developing countries for adjusting their economies to the difficult global economic situation. In addition, there was clear—and strong—support for augmenting available resources with increased cofinancing with commercial banks and for an early completion of subscriptions to the Bank’s General Capital Increase from the current US$37 billion to over $75 billion.
In surveying the situation confronting the Bank Group—composed of the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and IDA—its new President, A. W. Clausen, made these points: because both domestic and external funds for investment in developing countries would be scarce, it was all the more important for the Bank Group to maintain and strengthen its twin roles as a financial intermediary between its borrowers and lenders and as a productive development institution. This could be accomplished only by taking a rigorously rational approach to the development process. In other words, the Bank would have “no political axes to grind and no ideological banners to wave.” It would instead concern itself exclusively with pragmatic economics. IDA, on its part, would retain its crucial function as a provider of long-term concessional assistance for the low-income countries—a task that called for continuing support from the Association’s donor countries (see box).
The challenge for the World Bank was to use its loanable resources in the most efficient way possible and to leverage them to the maximum. This would require that the Bank not only tap the world’s financial markets for as much as $8 billion to finance its lending program in the current fiscal year but also explore various possibilities for raising resources in a new way. The Bank Group would also need to increase cofinancing with commercial banks to mobilize additional funds, especially in the private sector, and to strengthen the role of the IFC, the Bank affiliate active in promoting private sector investments in the developing countries.
To further stimulate private sector investment, the Bank would propose two new initiatives. One would concern Bank assistance in the creation of a multilateral insurance agency to provide the private sector with reasonable security against certain kinds of political risks that could not always be met by a developing country alone or by the individual national insurance schemes already initiated by a number of developed countries. The second would involve the possibility of devising general agreements on international investment that would attempt to overcome the narrow nationalistic policies that at present discourage international investment.
In the Bank Group’s priorities there would be continued emphasis on structural adjustment by developing countries in order to maintain growth prospects in the changed economic environment. The Bank Group would direct its project and sector lending and its wide range of technical assistance to that end.
While the Bank would continue its activities in this as well as many other development sectors and geographical regions, three areas would receive high priority.
Agriculture and rural development, which has comprised as much as 30 per cent of IBRD and IDA lending in recent years, would continue to receive the largest slice of future lending as well. The Bank, moreover, would continue to play an important role in research into new agricultural techniques, tools, and seeds to improve productivity.
Energy would receive a 25 per cent increase in Bank lending during fiscal years 1982-83, bringing the total to $3 billion for that period.
Sub-Saharan Africa, according to a special Bank report, is a region in which 18 countries had suffered a decline in per capita income growth during the 1970s and, given the present trend, would have virtually no per capita income growth in the new decade. To help these countries, the Bank would be urging a doubling of aid to Africa.
In their statements, the Governors generally concurred with Mr. Clausen’s overall assessment. The situation did call for painful economic decisions, conceded Valentin Arismendi Elgue, Uruguay’s Minister of Economy and Finance, in his opening address as Chairman. Governors from other developing countries added that the economic adjustments expected particularly in the poorest non-oil developing countries would be harsh and protracted. The Bank’s own report on Accelerated Development in Sub-Saharan Africa: An Agenda for Action fully corroborated these concerns by suggesting that only a comprehensive action program could reverse the decline and stagnation of the past decade in the region. The issue for the developing countries, therefore, was whether the burden of adjustment would be shared equitably, without compromising the very goals of development in the process of adjustment.
What made the adjustment especially difficult, according to Mohammad Said Nabulsi, Governor of the Central Bank of Jordan, who was also speaking for the Arab Governors, was a continuing low growth rate in most of the non-oil developing countries, growing external deficits that were becoming harder to finance, slower growth in industrial countries, large declines in the prices of a number of major primary exports, large and persistent increases in the prices of a wide range of imports, and the increasing burden of external debt servicing.
Against this background, a growing number of Governors suggested that, in addition to a sizable expansion of IBRD and IDA resources, economic adjustment in at least the low-income countries would require a massive increase in concessional funds from the developed countries to at least the United Nations target of 0.7 per cent of their gross national product (GNP).
Speaking for the Governors of the Caribbean countries, Grenada’s Deputy Minister of Finance, Trade, Industry and Planning, Lyden Ramdhanny, thought it was imperative for the Bank itself to mobilize sufficient resources and take a flexible approach in addressing its lending policies to the different circumstances and development levels of its members, particularly the small island states.
For the Prime Minister and Minister of Finance of the Philippines, Cesar Virata, the wishes of the developing countries were clear: appropriate adjustment in the current situation must promote economic and social growth and lead to real gains.
Given the needs of the low-income countries, there was considerable concern about the problems encountered in bringing the Sixth IDA Replenishment into effect, especially about the stretching out of the U.S. contributions from three years to four, and the uncertainties surrounding future IDA resources. Speaking for 48 African Governors, Senegal’s Minister of Economy and Finance, Ousmane Seek, suggested that to prevent the recent experience with the Sixth Replenishment from recurring, the Bank should study ways and means to transform IDA into a predictable and continuous source of development financing for the poor countries.
In arguing the case for greater concessional flows to the developing countries through IDA and official development assistance, several Governors emphasized that development assistance was neither altruistic nor a sacrifice on the part of the donor. Cesar Romeo Acosta, President of the Banco Central del Paraguay, who was speaking for the countries of Latin America, Spain, and the Philippines, pointed out that sales by developed countries to developing countries as a direct consequence of the assistance received by the latter had a multiplier effect—an estimated three dollars, for instance, came back to the United States for every dollar in aid that it sent out.
Governors from the developing countries were also concerned about protectionist barriers in the developed countries, subsidies for products that lacked competitive advantage, quantitative limits on certain products, and voluntary agreements to limit other exports. Chairman Arismendi Elgue also voiced concern that while prices of manufactured goods were rising, those of primary products, excluding oil, were falling. This directly affected the development of the low-income countries.
While the international economic environment and the difficult task of adjustment drew the most attention, the precise role to be played by the World Bank and its affiliates was a major recurring theme, raising such questions as: To what extent could—or should—the Bank Group involve itself in expanded energy lending and structural adjustment loans? How could it meet the development needs of China and overcome the economic stagnation in sub-Saharan Africa? Where would the additional resources come from? And in view of the limited resources, what should be the Bank Group’s new priorities?
The generally positive response of developed country spokesmen to these questions, coupled with the news that the Sixth Replenishment had finally come into effect and that the IBRD’s General Capital Increase was finally open for subscriptions, constituted cause for optimism. While views differed on the magnitude of the concessional flow and the source of additional funds, there was agreement for the most part that a genuine—and urgent—need did exist for generating additional resources and strengthening the Bank Group and other multilateral financial institutions.
For Tomas Arnason, Iceland’s Minister of Commerce, who was speaking for the Nordic countries, there was a clear need for a fresh look at the allocation and terms of Bank lending. IDA credits, in his view, should be reserved for the poorest countries and Bank loans granted only to those that could not obtain sufficient financing in the market. In addition, the Bank should consider introducing more flexible lending terms, based possibly on an interest subsidy account. The Bank might also consider reducing its financial support of projects in certain countries to a much lower proportion than customary until now, without reducing the amount of technical and administrative assistance and advice. This would also mean greater reliance on private capital, whenever it could be mobilized.
Governors from the major industrial countries cautioned, however, that, confronted with large payments deficits and difficult economic and fiscal situations, their governments would not be in a position to increase assistance substantially. They also pointed out that the primary burden for adjustment and development must be with the countries themselves and that economic assistance should be aimed at supporting the self-help efforts of developing countries. Overall, they stressed, development funds would continue to be scarce and would have to be supplemented by the flow of private capital. There was general agreement, however, that international trade should be as free of restrictive practices as possible and that the developing countries should enjoy unhampered access to the markets of the developed countries.
Speaking for the United States, Treasury Secretary Donald T. Regan echoed what had been said earlier by U.S. President Ronald Reagan: the Fund and the Bank had key roles to play in fostering economic adjustment and in initiating policies that would catalyze the energies of the private sector in promoting investment and trade for long-term sustainable development. The United States, Mr. Regan added, was deeply aware of the wrenching difficulties facing many of the developing countries, as well as of its responsibilities for shaping and supporting the efforts of the Fund and the Bank.
Sir Geoffrey Howe, United Kingdom’s Chancellor of the Exchequer, said that while some reduction in the total volume of British aid was inevitable, his country, nevertheless, had pledged to give 0.15 per cent of its GNP to the least developed. The United Kingdom, he added, also supported the Bank’s plans for increasing energy lending and was willing to discuss mechanisms designed to mobilize additional funds without multiplying bureaucracies. An energy affiliate could be a part of this discussion, provided it had the support of oil-producing countries.
Detailing the French viewpoint, Minister of Economy and Finance, Jacques Delors pledged to strengthen the role of international organizations, increase his country’s volume of concessional aid substantially to meet the United Nations target, support Bank and IDA assistance to sub-Saharan Africa on a more appropriate scale, press for priority aid to the rural and agricultural sectors in conjunction with other multilateral institutions, strive for the creation of an energy affiliate, and help stabilize the major international markets for primary products.
As the Meeting drew to a close, Mr. Clausen noted that a consensus had emerged on several key issues. There was overwhelming support, for instance, for increased Bank help for tapping domestic energy sources in developing member countries. He promised that management would, over the next few months, review in detail the various alternatives for the effective mobilization of additional resources for investment in the energy sector.
Balwant S. Garcha
an Indian citizen, joined the World Bank in 1981. He has held senior editorial positions with U.S. business publications and worked for the United Nations for six years as an information officer. He has an M.A. degree in sociology from Nagpur University (India) and an M.S. in journalism from Columbia University (U.S.A.).
On sub-Saharan Africa, Mr. Clausen noted the beginning of a genuine dialogue which, he said, would move forward at the individual country level. As this process continued, the Bank would explore every possible avenue for greater coordination among donor nations and international and regional development agencies to assist the sub-Saharan countries in their development priorities.
The Bank President also announced a compromise solution, following a meeting of IDA Deputies, representing 33 donor countries, on the outstanding issues involving the Sixth Replenishment of IDA. It recognized the urgent need of IDA recipients for continued commitments, with donor contributions being consistent with the principle of equitable burden-sharing. Though it would not provide full commitments to meet the requirements for the current fiscal year, the compromise solution nevertheless represented important progress.
Mr. Clausen was confident at the same time that the initial discussions early next year on the Seventh IDA Replenishment would lead to an agreement reflecting both the realities of the world economy and the critically urgent needs of the Bank’s poorest member countries. He also reported strong support for the General Capital Increase. There was good news on cofinancing as well, with Mr. Clausen disclosing that a number of Governors had expressed their willingness to cofinance projects on concessional terms with the Bank in the low-income countries.
Summing up the achievements of the Annual Meetings, Mr. Clausen said he was struck by two similarities in so many of the addresses: “There is, of course, a realization that these are difficult times for all our membership and that new departures may be necessary to deal with the problems of the 1980s. But there is, too, a general expression of confidence in the part that our institutions must play in helping to overcome the difficulties the world is facing. Speaking for the Bank, I welcome the expression of confidence and accept the challenge.”
The contents of Finance & Development may be quoted or reproduced without further permission.
Due acknowledgment is requested.
The Editor would appreciate receiving 2 copies of publications containing reprints or quotations.
What makes IDA a sound economic investment
The following excerpts from Mr. Clausen’s address at the Annual Meetings of the World Bank and its affiliates deal with the role of IDA within the Bank’s development effort.
“Though the problems of mobilizing resources on market terms are serious, the problems of mobilizing concessional funds adequate to support the development programs of the low-income countries are even more severe. All of you are familiar with the problems of completing the agreed subscriptions to the Sixth Replenishment of IDA. We plan to begin discussions next year of the Seventh Replenishment of IDA. Those discussions may be difficult. But if we have the collective will to resolve the problems posed, I am confident we will be able to do so.
But today I want to concentrate my comments, not on the specifics of these Replenishments, but rather on what I see as the underlying difficulty; namely, the lack of support for IDA based on what I regard as honest but serious misunderstandings about what IDA really does. These misunderstandings have their origins in part in some unfortunate semantics. The Association is often referred to as the World Bank’s soft loan window,’ and IDA credits are often referred to as ‘soft loans.’
At best that is misleading terminology. The Association is a vital part of the Bank Group created to assist member countries which do not have adequate creditworthiness to borrow on market terms. However, IDA is an independent entity, separate from the Bank. It is fully responsible for the costs and the risks of its own operations. It is true that IDA’s credit terms are concessional—and they are concessional for sound, no-nonsense economic reasons—but what is not true is that the development projects themselves, which these credits help finance, are soft.
IDA credits get exactly the same tough, searching treatment from the staff and in the Board that IBRD loans do. And that is not surprising since there is absolutely no difference in standards between an IDA project and an IBRD project. The same professional staff in the World Bank negotiates and administers these credits; the same high rates of economic return are insisted upon; the same supervision and international competitive bidding for procurement are rigorously applied; and the same full government guarantees of repayment are required.
For an IDA project to be approved at all, it must have an estimated rate of economic return of at least 10 per cent in real terms. But when the project has been completed, it is independently audited—as are all Bank projects—by a special watchdog group in the Bank, the Operations Evaluation Staff.
The group’s most recent findings covered projects approved in the 1970s. One hundred thirty projects representing over $10 billion of total investments, and $2.8 billion in Bank loans and IDA credits, were reviewed. Projects representing more than 94 per cent of the total investment had achieved their major objectives, and the economic rates of return for most of them exceeded 10 per cent. The 49 agricultural projects reviewed, for example, had an average economic rate of return, at audit, of 19.5 per cent.
So the issue is not whether IDA is effective. It is. Nor is the issue whether IDA is a philanthropic society. It is not. An IDA credit is not a welfare check. It is a productive investment. Consider the countries that were IDA recipients only a few years ago: Korea, the Philippines, Thailand, Ivory Coast, and some 15 similar cases. These countries have not only graduated from low-income to middle-income economies, but today are vigorous and valuable trading partners with the developed nations.
IDA is clearly a sound economic investment for the low-income countries. But it also is a sound economic investment for the nations contributing to IDA who will one day earn substantial returns on that investment through expanded trade. That economic fact of life has been demonstrated many times over in IDA’s 20-year history.
But there is another thought I would like to leave with those in the developed nations who are skeptical about the value of IDA, and it is this.
What is it worth to the wealthy nations to be able to count on a reasonable degree of political and social stability, based on prospects for economic progress, in the poorest countries of the world? Does that touch on the affluent nations’ self-interest; on their trading patterns; on their assured supply of this or that commodity; on their relations with other countries in the region? Should affluent countries worry that hunger and hopelessness in an urban slum of a poor society can drive jobless young people to irrational violence? Or can the rich countries afford, in the security of their wealth, not to care?
Well, those are questions that wealthy nations must answer for themselves. But one thing is certain. The extremes of poverty and deprivation have not done much historically to promote tranquility in the world.
IDA alone cannot make the world peaceful. But it can help countries containing half of the world’s population—most of it very poor—to achieve greater economic stability, greater self-reliance, and greater social cohesion. And that is clearly in the national self-interest of the developed nations.”