Geoffrey M. Wilson
THE WORLD BANK, like the International Monetary Fund, was conceived at the Bret-ton Woods Conference held in the summer of 1944. As it happens, it works in an adjacent intercommunicating building in Washington. Some of the Governors, Alternate Governors, and Executive Directors of the two institutions are the same people. Yet the institutions themselves are different: they have different financing and different organizations. They have completely separate staffs. Above all they have quite different—even if complementary—parts to play in the world.
The main task of the Bank, at which it has now been laboring for eighteen years, is that of providing (in the words of its Articles of Agreement) “finance for productive purposes out of its own capital, funds raised by it and its other resources.”
Mr. Wilson, after having served in the British Foreign Office and Treasury, joined the Bank in September 1961 and became Director of Operations for South Asia and Middle East in December of that year. On September 15, 1962, he assumed the rank of Vice President.
How the Bank Is Governed
The capital structure of the Bank is the key not only to its methods of financing, but also to the means by which it is governed. At its establishment, the Bank was provided with an authorized capital of $10,000 million. (The corresponding figure for the Fund—the proposed total of quotas—was $8,800 million.) Countries subscribing for shares were required to pay in only one fifth of their subscription on joining, the remainder being available on call, but only to meet the Bank’s liabilities if it got into difficulties. Moreover, not even the one fifth had to be paid over in hard cash at that time. The sole cash requirement was the payment in gold or dollars of 2 per cent of each country’s subscription. A further 18 per cent of the subscription was payable in the currency of the member country concerned, and although this sum was technically paid in, in the form of notes bearing no interest, it could not be used without the member’s permission. Only the United States and Canada were in a position for some time after the war to allow these notes to be cashed. Most of the other industrialized countries have since freed the national currency part of their subscriptions on a convertible basis, but the subscriptions of many of the underdeveloped members of the Bank are still largely frozen in this way.
Representatives of forty-five countries had attended Bretton Woods. Most of them joined the Bank, although the Soviet Union was one of those that did not. Subsequent accessions, more than thirty of them in the last two years alone, have brought the total membership of the Bank to just over one hundred countries. The subscription of each member is generally related to its quota in the International Monetary Fund; indirectly, it is founded on an old and somewhat complicated formula designed to reflect the economic strength of each member in 1946. On the basis of this formula, the Bretton Woods agreement parceled out the authorized capital among the prospective members of the Bank. The United States was given the largest allocation, at $3,175 million, the United Kingdom the second biggest, at $1,300 million, and the other members, amounts ranging down to the $200,000 of Panama. In 1959, the capital of the Bank was doubled and most members doubled their own individual subscriptions, without making any further cash payment. In consequence, the United States is still the largest shareholder, at $6,350 million, followed by Britain, at $2,600 million, and by France and the Federal Republic of Germany, with $1,050 million apiece. India, Canada, and the Republic of China are fairly close behind.
This kind of financial assessment on the basis of ability to pay is common enough among international organizations, including most notably the United Nations itself. But a fundamental difference between the Bank and the Fund, on the one hand, and most other international organizations, on the other, is that voting power over the conduct of Bank and Fund activities is related to these financial contributions. It is true that even the smallest subscriber gets a minimum number of votes. But the voting power of the smaller shareholders in the Bank is far outweighed by the big contributors: the United States alone wields almost three tenths of the votes; the United Kingdom casts more than one tenth; and when these two are allied with France, Germany, and Canada they can command a voting majority, should they wish it, over the ninety-odd other countries that are now members of the Bank.
These voting rights are held in the first instance by the Bank’s Board of Governors, an august body consisting mainly of ministers of finance and governors of central banks. The Governors meet only once a year, and they have delegated most of their responsibilities to a working Board of 19 Executive Directors. These Executive Directors direct the general operations of the Bank, most of them serving full time. Five of the Directors are nominated by the five largest shareholders, the United States, the United Kingdom, France, Germany, and India. The remainder represent groups of countries, each group aggregating sufficient votes to provide the Director with an audible voice in the councils of the Bank. Some of the groupings are fairly natural, such as that formed by the five Nordic countries, which are now represented by the only woman on the Bank’s Board, a Dane. Some are strangely disparate, like the conjuncture of Cyprus, Israel, the Netherlands, and Yugoslavia that is represented by a Dutchman. And there is one enormous group of twenty-four countries, mostly African, that is represented by our newly elected nineteenth Executive Director, a Nigerian.
As far as the relationship with governments is concerned, the Executive Directors have tended often to become as much the representatives of the Bank with their countries as they are representatives of their countries with the Bank. Of course, if a government has strong views on an issue, the Director it appoints will voice those views. But at the same time, the weight that individual Directors carry in the Board reflects their experience and judgment, much more than their voting power.
How the Bank Is Run from Day to Day
The relationship of the Board to the officers is also very important. The Bank has had a succession of strong and capable Presidents, of whom one, Eugene Black, held office from 1949 until the beginning of 1963, when he was succeeded by George Woods. On the whole, both loan and policy proposals considered by the Bank are initiated by the officers of the Bank. General policy proposals are thrashed out in Board meetings until a consensus is reached: there are few formal votes. Proposals for loans and other operations are not brought to the Board until any difficult issues have first been discussed informally, so that the fact that no formal proposals have ever been rejected is not, as it might suggest, evidence that the Board is a mere rubber stamp, but on the contrary shows the close and continuous working relationship between Directors and officers.
The subscriptions of the Bank’s members are of importance as governing the number of votes cast by each country, but their greatest significance is of course as the basic element in the financial resources of the Bank.
Altogther, the paid-in portion of the subscriptions now amounts to about $2,100 million, of which roughly $400 million is still un-released for lending by the Bank. That leaves $1,700 million of capital freely available for use in the business. But this is much less than half of the total funds available to us for lending. We draw much more money from other sources: from our borrowings in the market and from our earnings.
The Bank’s outstanding borrowings amount now to roughly $2,500 million, raised in the capital markets of the world and most particularly from private investors of the United States and Western Europe. In Western Europe we have made public bond issues in the capital markets of Austria, Belgium, Germany, Italy, the Netherlands, Switzerland, and the United Kingdom, and we have borrowed privately in these and most other countries of Europe. Somewhat more than half of our total debt is owed to non-U.S. investors. It has been possible for the Bank to raise this enormous sum, at interest rates little or no higher than are paid by governments themselves, for two basic reasons. One is the confidence in the Bank that has been engendered by its record of operations over the past eighteen years. The other reason is that investors know that we have available still larger sums which we can call upon to repay our borrowings, should we ever be in difficulty. These sums are of course the portions of our member countries’ subscriptions that have not been paid in, but remain on call. The United States’ guarantee alone amounts to $5,715 million, or more than twice our outstanding borrowings, and when the guarantees of the other industrialized countries are added, the cover for our debt rises to roughly four times.
The Bank’s uncalled subscriptions are the final guarantee for our borrowings. As a very substantial first line of defense, however, the Bank can call upon well over $800 million of accumulated earnings on past loans. A part of these earnings is required to be kept in liquid form as an immediately accessible Special Reserve against losses, and this reserve now exceeds $260 million. The remainder of our net income, besides providing the Bank with a cushion against possible losses, constitutes a third major source of funds for our lending. The lendable earnings are now approaching $600 million, and as the Board has always been reluctant to pay a dividend to member governments, a further $80 million or thereabouts becomes available to us for lending each year. Like our paid-in capital, these earnings are available to us without cost.
These three sources, capital, borrowings, and earnings, make up the original pool of funds for our lending. There are some further contributions, however, which in effect supplement this pool. Repayments of principal on earlier loans have allowed the Bank to turn over and re-lend about $700 million. In addition, the Bank sells to financial institutions in Europe and America portions of its loans (usually installments that are due to be repaid within a fairly short time), and so replenishes its cash resources. These sales have provided more than $1,700 million.
Together, these various sources of funds have enabled us to undertake loan commitments of some $7,500 million, of which approaching $6,000 million has now been disbursed. Toward these commitments, as I have already said, some $1,700 million has been provided by government subscriptions to shares, paid in when the member country joined the Bank. We have not received, or sought, any further contributions from governments, either toward running expenses or toward lendable funds. The balance of about $5,800 million has been or will be met entirely from our own earnings and from funds raised by the sale of our bonds or of portions of our loans in the capital markets of the world.
What the Bank Does
The most conspicuous difference between the Bank and the Fund is that the Bank is concerned directly with specific development projects, for which it lends money, whereas the Fund provides help to governments that are in balance of payments difficulties.
The greater part of the Bank’s lending has financed the so-called infrastructure projects, which provide the framework supporting the rest of a country’s economy but which generally do not attract private investors. Thus, about a third of the total has financed the development of electric power, including both hydroelectric and thermoelectric projects as well as transmission lines. To give an idea of the scope of this power lending, for example: in the 14 countries in Central and South America where we have lent for power, the projects financed by us have on average amounted to a doubling of their generating capacity as compared with 1948. On a similar scale, another third of our lending has financed railways, roads, and ports, with a couple of pipelines and a few aircraft thrown in for good measure. Most of the rest has been split between industry and agriculture. The industrial lending has largely gone into heavy industry, such as iron and steel or mining, or has been channeled into development finance companies in the borrowing countries themselves, to be passed on to industrial firms whose projects are too small for us to deal with effectively from Washington. The agricultural loans have generally been for comparatively large schemes, and especially for projects for flood control or irrigation that involve heavy capital spending.
Most of these loans have been made to the underdeveloped countries, although we have also lent to some quite well-off countries, such as Australia and Norway, whose need for capital is bigger than they can meet through ordinary borrowing. The lending has been fairly evenly distributed about the world: Asia, the most heavily populated region, has taken the largest share, followed by the Western Hemisphere, Europe, and Africa. India is our largest individual borrower, with Japan in second place and Mexico in third.
Loans Without Strings
Although the Bank can claim to be the largest source of multilateral aid for development, its share in the total aid effort is small in comparison with that of bilateral aid programs. But we ourselves have always been more interested in the effectiveness than in the scale of our lending. It is one of the benefits of being an independent international organization that we do not have to lend for reasons of political or commercial convenience.
For example, our borrowers can often get better value from a Bank loan than from a loan of similar size from a bilateral lender. Whereas a bilateral loan is commonly tied to the purchase of goods or services in the lending country, our borrowers are free to spend the proceeds of a Bank loan in any of the Bank’s member countries (and also in Switzerland, in recognition of that country having opened its capital market to the Bank).
Our own records of competitive bidding under Bank-financed contracts show very wide variations in tender prices from different countries. In one case, for instance, suppliers from six industrialized countries quoted prices for equipment for a cement plant. The lowest price quoted by suppliers in country “A” was $450,000. Country “B” got the contract by offering similar—and entirely satisfactory—equipment for only $176,000. Both supplying countries are in Western Europe; the difference in price is about 150 per cent. Under another recent loan, suppliers in nine countries tendered for the supply of heavy diesel-electric locomotives for use in the Far East. Country “C” offered to sell them at $151,000 apiece, including the cost of shipment to the user; country “D” could not quote a better price than $251,000—and that price did not include freight.
Whereas differences in quoted prices do not often run as high as in these cases, a range of 20-40 per cent is perfectly normal. The important thing to remember is that under a bilateral loan, tied to procurement in the lending country, the borrower may well have no choice but to pay the highest of these prices. Indeed, he may have to pay even more, since it may well be that on occasion suppliers even raise their prices when they know that they will not have to contend with international competition. By contrast, when procurement is not tied, as under a Bank loan, the borrower can do his shopping in the least expensive market.
Freedom to shop around is only one of the reasons why Bank loans can be unusually effective. As a multilateral organization, the Bank can—and does—confine its lending to projects that it is convinced, after careful and thorough study, will make a worthwhile contribution to the economic progress of the borrowing country. The Bank sets none of the commercial or political conditions that are sometimes explicit, and often implicit, in bilateral aid—but we are never reluctant to insist on any conditions that we think necessary to insure a project’s success.
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
This approach has been used by the Bank in its lending since its earliest years, and it still applies. But whereas it once appeared that the Bank could meet most of its responsibilities toward its member countries through such straightforward lending operations, it has gradually been driven to enlarge the scope of its activities. The most spectacular enlargement of these activities came about four years ago with the establishment of the International Development Association—known for short as IDA.
Reasons for IDA
The background of the creation of IDA is the increasing burden of debt service being carried by many underdeveloped countries. In itself, the fact that a country’s external debt is growing is nothing to worry about, if its economic strength is also growing. But there are many countries able to make good use of considerably more outside capital than they can safely undertake to repay on conventional terms. In some of these countries, their limited ability to borrow on such terms simply reflects their poverty. In others, it reflects the unfavorable structure of their present debts, often incurred on unsuitably short terms—for instance, in the shape of 3- or 5-year commercial export credits when a more appropriate term of repayment would have been 10 or 15 years. There is one geographic area where today the structure of debt is so unfavorable that half of all the outstanding foreign borrowings fall due for repayment within the next 5 years.
This problem of the debt burden has been made still more difficult for most of the underdeveloped countries by the general decline in prices of the export products upon which they depend to finance the service of their overseas debts. The staff of the Bank recently assembled some illuminating statistics on this subject, covering the debt position and export earnings of a group of 34 countries that account between them for some 70 per cent of the population of the underdeveloped world. Between 1955 and 1961, the total external debt owed or guaranteed by the governments of the countries in this group more than doubled. Yet over the same period, the export earnings of these countries increased by little more than 15 per cent. In such circumstances, the heavy call of debt service on a country’s resources is liable either, to bring economic development to a halt, or else to drive the borrower to default on his creditors. And whatever one’s views on the morality of not paying one’s debts, there is no doubt that it is an excellent way of ensuring that people will be less happy to lend to you in future.
Functions of IDA
The International Development Association was brought into being in 1960. Its function is to lend at long term and minimum interest, in order to reduce the weight of debt service imposed on the less developed countries. It is financially separate from the Bank, but otherwise completely integrated with it; in effect it is simply a special fund available to the Bank to be used in cases where we consider that a project is economically justified, and that a government is following sensible policies, but that the balance of payments situation of the country concerned makes it desirable that generous terms of repayment be offered. It differs sharply from the Bank in one very important respect: its lending terms preclude it from borrowing in the market, and make it entirely dependent upon its member governments for funds.
IDA makes loans, not grants, and they are repayable in convertible currencies. But it will be a long time before the money comes back, and earnings will always be very small: all the loans so far made cost the borrower only a service charge of less than 1 per cent, designed to cover administrative expenses, and repayments begin only after 10 years, and are spread over a further 40 years. With such a low rate of return on its funds, IDA is in no position to finance borrowings from the private market, nor will it accumulate lendable earnings in any quantity. In contrast to the Bank, it must inevitably look periodically to its member countries to renew its resources.
The great majority of the Bank’s member countries are also members of IDA, and it is governed in much the same way, as voting power is proportioned to subscriptions. There are major differences, however, in the structure and significance of the subscriptions. When IDA was set up, all of its potential members were sorted into two categories: the developed and the undeveloped. The developed countries agreed to put up their subscriptions entirely in gold or convertible currencies; the undeveloped paid only one tenth in convertible funds and the rest in their own currencies—which up to now have been no more useful to IDA than the unreleased local currency subscriptions of the Bank. This formula gave IDA initial funds of about $765 million in lendable form. A further $15 million has been provided through special supplementary contributions by Sweden as part of her development aid effort.
Most of these resources have already been committed. IDA’s development credits, as they are called, have been concentrated in a smaller group of countries than the Bank’s loans, because of the special problems they are designed to meet. India has been by far the largest borrower; Pakistan is in second place. But the projects to be financed are very similar to those covered by the Bank’s loans—railways and roads, power stations and irrigation schemes. There are some differences. The special terms of IDA credits are granted in consideration of the borrower’s balance of payments problems and are not meant to subsidize individual projects. Therefore we make our credits only to governments and insist, if the funds are to be re-lent to revenue-producing enterprises (whether public or private), that the re-lending be done on conventional terms that reflect the true cost of the money. IDA has also ventured into fields which the Bank, at the time, had not touched, by lending for water supply and school construction. The similarities, however, are much more significant than the differences. Most important, we apply exactly the same stringent technical and economic standards in assessing a proposed project and the policies of a borrowing country, regardless of whether the money will be provided by the Bank or from the funds of IDA. Notice, incidentally, that even IDA’s loans are tied to specific projects; although they are influenced by balance of payments considerations they are not—as the Fund’s loans are—provided exclusively to offset balance of payments deficits.
Almost all of IDA’s initial resources are now earmarked, and new commitments are being undertaken at a rate approaching $300 million a year. The time has accordingly come for a second round of contributions. This second round was negotiated last summer, and agreement in principle has been reached among our member governments on providing IDA with a further $750 million in convertible currencies. These funds are to be committed over the next three years, and are to be paid in by the contributing countries in three annual installments, starting in November 1965. Contributions this time are to be confined to the industrialized members. The plan is for the United States to provide $312 million, the British share is $96.6 million, and Germany and France will contribute $72.6 million and $61.9 million, respectively.
This “second round” for IDA will enable it to continue its work for three more years. But the Bank, too, must continue to adjust its activities to meet the changing needs of its member countries; above all, it must help itself to attack the special problems of the more than thirty countries that have become members over the past couple of years. Almost all of these new members are recently independent, poor, and largely inexperienced. If we are to meet our responsibilities, it is clear that we shall have to try new kinds and methods of lending, and give more help in preparing plans and projects. We are thinking how to do this, but we already have some idea of the kinds of things we might do—and also of the kinds of things we have no intention of doing.
It seems likely that we shall enlarge our activities in three specific fields: in assistance to agriculture, to industry, and to education. All of these will be more complicated than the relatively straightforward, large infrastructure projects that have been, and will continue to be, our main business; all three, however, are of basic importance.
Agriculture’s importance in the underdeveloped nations hardly needs underlining. In many countries, it employs four out of five persons. Up to now, most of our agricultural lending has been for large irrigation projects, or for flood control or land clearance. These are exceptional cases; and we want to spread our activities more widely. For instance, we may finance more of such basic agricultural investments as farm-to-market roads and facilities for crop storage. We may support organizations that give technical help to the farmer. As bankers, we ought surely to be especially well equipped to assist in setting up and financing local institutions for agricultural credit and investment.
Assistance to Industry
In industry, too, we think that there is more for us to do. Here we already have another affiliate at work, the International Finance Corporation. This lends to private industry without government guarantees, and there is effective division of labor between us. One kind of assistance the Bank itself might undertake is the provision of long-term loans to help establish industries entirely new to a country. Although these industries might be slow to find their feet, they offer the best means of eventually reducing the present extreme dependence of so many of our members on exports of one or two primary products. A second possibility, which I would expect, however, to arise only in a very few instances, would be to offer finance for the so-called maintenance imports. This might be of considerable help to the one or two countries where existing capacity cannot be used to the full for lack of foreign exchange with which to import replacement parts from abroad. Here again it should be noticed that the assistance given by IFC is not for balance of payments deficits as such, but for specific imports which the country’s foreign exchange resources do not allow it to buy.
There is another direction in which we certainly expect to increase our assistance to industry. As I mentioned earlier, a part of our lending has been channeled through privately owned industrial financing companies in our borrowing countries. Since 1950, the Bank and IFC have helped to finance more than a dozen of these companies, most of which we also helped to establish. We are convinced that, in providing capital and advice to small or medium-sized industrial firms in the developing countries, they can fill a need which no one else is properly equipped to meet. We expect to increase this activity.
Our third special field of study is education. Here IDA has lent a little, the Bank so far not at all. Everyone agrees that education is of basic importance to economic development. There is an especially urgent need in the developing countries for better vocational and technical schools, which produce the middle-level manpower and the agricultural and other specialists whose efforts are fairly quickly reflected in the economic progress of their countries. We should like to help finance these schools.
In this widening of our horizons, we start from a position of strength, backed as we are by large reserves and a continuing flow of earnings. We intend to use this strength, not to hoard it. As a financial institution dependent on the market, we must continue to relate the interest rates we charge on our loans to the cost of money to us. But we can usefully reduce the burden on our borrowers by other means, where this seems appropriate; longer periods of grace before repayments start can ease the financial strain during the years when a project is just beginning to show a return, while a stretching out of the period over which repayments are made may be suitable in certain cases. We have also decided that the financial strength of the Bank is now such that we need no longer automatically allocate our net income to reserve. In future we shall decide on the allocation of each year’s net income, whether to reserve or otherwise, after the close of the fiscal year concerned.
The more difficult and awkward the projects we undertake, and the less experienced the countries in which we operate, the more likely is it that we shall have to offer technical assistance to bring projects to the stage at which they are ready for financing. The Bank’s technical assistance program is of long standing and of considerable diversity. It includes a staff college providing training in problems of economic development, a corps of resident economic advisers, and a wide variety of other services. But if we enlarge our activities in the way I have been describing, it is clear that the calls upon us for technical assistance will also grow. In part, we shall have to meet these calls in the fields in which we have competence, by enlarging our own staff. But we hope also to work very much more closely with other institutions than in the past, and especially with the other Specialized Agencies of the United Nations.
All these are things that we hope to do. But as I hinted earlier, there are some things we are certain that we are not going to do. We are not going to lower our standards in assessing projects. We are not going to soften our resistance to policies that we believe are hindering economic development. We are not going to jeopardize our standing with private investors, since we must continue to depend upon them to a great extent for the resources that we lend. In fact, we are going to continue to display the qualities that often madden many of our borrowers: we are going to go on being cautious and pragmatic—but not, I hope, unimaginative or unsympathetic. This is the approach that has served the Bank and its borrowers well throughout the years of its existence, and that has made it, in our view at any rate, an unusually effective instrument for its purpose.