THE FOCUS of attention at the World Bank Group meetings was the complex of new and changing development problems confronting the less developed member countries and new initiatives being taken to meet them by the Bank and its affiliated institutions, the International Development Association (IDA) and the International Finance Corporation (IFC).
In his annual address, Mr. Woods first summarized developments of the 1964 fiscal year, pointing out that combined commitments by the three institutions in loans, credits, and investments totaled more than $ 1,000 million for the second year in the Bank’s history, and that the pace of operations was accelerating.
He emphasized that the preponderance of Bank and IDA lending would continue to be for basic infrastructure projects in such fields as power, transportation, and communications. However, as the result of a re-examination of policies and objectives in the context of the existing world environment and of emerging problems in the field of economic development, he outlined a series of steps which he and the Executive Directors believed would make the three institutions more effective and flexible instruments for the achievement of their objectives. Some of these steps were proposed for action by the Board of Governors, some already had been taken, while others were still under study.
One proposal put before the Board of Governors was for the transfer to IDA, in the form of a grant, of $50 million out of the Bank’s net income for fiscal 1964—that is, the portion of net income which the Executive Directors decided was not needed to supplement reserves and, therefore, might prudently have been distributed as a dividend to shareholders if the Bank were a private institution. This proposal was approved unanimously by the Governors, making possible a further increase in IDA resources beyond commitments that Mr. Woods said had been received from 18 capital-exporting countries, which would make available more than $750 million in new funds for commitment through at least June 30, 1966. The Bank’s initiative in proposing the grant to IDA was referred to by the Chairman, Mr. Francisco Aquino h., Governor for El Salvador, as one demonstrating that “the impetus for imaginative responses to new problems is in no way being lost.”
The subject of IDA resources elicited a number of comments by Governors, reflecting general agreement on the need for a substantial increase in funds available to the developing countries on terms such as IDA can provide, since its resources are in the form of government contributions and need not reflect market rates of interest, as in the case of Bank loans.
Mr. Kiro Gligorov, Governor for Yugoslavia, said that he hoped the transfer of Bank profits to IDA would serve as an inducement for a substantial increase in IDA funds at the next round of replenishment, if not earlier. The Governor for the United Republic of Tanganyika and Zanzibar, Mr. Paul Bomani, called upon the industrialized countries to raise the level of public economic aid to a minimum of 1½ per cent of their national income. The Governor for Sweden, Mr. G. E. Sträng, also stressed the inadequacy of IDA funds in the face of emerging needs of the less developed countries. He urged thorough consideration of various ways in which a wider circle of countries might make supplementary contributions to IDA; Sweden itself already had made three supplementary contributions totaling about $15 million, in addition to its original subscription.
Mr. T. T. Krishnamachari, Governor for India, pointed out that some of the developing countries themselves, while in need of large-scale assistance, might at the same time be able to assist in development elsewhere. His own Government, he said, had expressed its willingness to explore ways in which its local currency contribution to IDA could be used for assistance to other countries without adverse effects upon India’s own development efforts. (Only one tenth of the subscriptions of developing countries to IDA are payable in convertible currency; the remaining 90 per cent may be used by IDA only with the member government’s consent.)
In his address, Mr. Woods also had expressed the hope that IDA funds would be augmented by further supplementary contributions, such as those by Sweden, and by contributions from some of the developing countries in the form of releases from their initial subscriptions; and he called attention to the example already set by Ireland, Israel, and Jordan in agreeing to release their entire local currency subscriptions on a convertible basis over a period of years.
Some Governors were critical of the manner in which IDA resources had been distributed. For example, Mr. Felix Ruiz, Governor for Chile, said that the Latin American countries were dissatisfied with the distribution of IDA credits, while Mr. Francois Aplogan, Governor for Dahomey, and Mr. A. J. P. M. Ssentongo, Alternate Governor for Uganda, thought that a higher proportion of IDA funds should have gone to Africa.
Bank Lending to IFC
Another major proposal which received unanimous endorsement by the Governors but which requires ratification by member governments, was for amendment of both Bank and IFC charters to enable the Bank to lend to IFC amounts up to four times the Corporation’s unimpaired subscribed capital and surplus, for IFC to relend to private enterprises in the less developed countries without government guarantees such as Bank loans require. In his address, Mr. Woods had urged approval of the proposal, which could make available to IFC up to $400 million in additional funds, pointing out that it resulted from a study which he and the Executive Directors had undertaken to determine the most effective ways in which the Bank Group could stimulate the development of private industry.
While no opposition was evident to the proposal for Bank lending to IFC in support of private industry, some Governors were critical of the Bank’s reluctance to make loans to industries owned wholly or in part by governments. The Governor for Yugoslavia suggested that such a policy should not prevail when state-owned enterprises met the usual technical and financial standards, while Mr. A. M. El Kaissouni, Governor for the United Arab Republic, argued that state ownership often resulted from deep-rooted factors and structural deficiencies in developing countries and that there should be no discrimination against enterprises because they were publicly owned.
Other Aid to Industry
Mr. Woods said he believed that there were still other ways in which assistance to private industry could be made more versatile and effective. As an example, he pointed to an IDA credit made to India during the fiscal year to finance the import of capital equipment, raw materials, and components which were essential to the full utilization of existing plants, and said he expected that other cases would arise where this type of lending would be appropriate.
Several Governors, including Mr. Mohamed Shoaib of Pakistan, welcomed this expression of willingness to consider non-project financing in appropriate cases, while the opposing point of view was expressed by Mr. Valéry Giscard d’Estaing, Governor for France, who felt that the Bank should “refrain from financing balance of payments disequilibria” and finance projects rather than general programs.
Settlement of Investment Disputes
A third proposal to the Governors was that the Executive Directors formulate and submit to governments a Convention establishing facilities and procedures for the settlement, through conciliation or arbitration, of investment disputes between states and nationals of other states. Use of the facilities would be entirely voluntary, and neither governments nor investors would ever be under an obligation to go to conciliation or arbitration under the Convention without having consented to do so. However, once they had consented to use the facilities, they would be bound to carry out their undertaking and, in the case of arbitration, to abide by the award. This proposal was adopted by the Board of Governors; however, the Governors from Latin American countries and those for the Philippines and Iraq opposed it. Mr. Guido Carli, Governor for Italy, referred to the Bank’s “patient and steady work to provide an institutional frame for the settlement of disputes in the field of international investment.” Mr. Abdel Rahim Mirghani, Governor for the Sudan, expressed the view that the attraction of foreign capital was necessary for the economic growth of the less developed countries and added that the Bank’s proposal, while it perhaps would not be fully adequate, might help to increase the flow of private investment. Speaking for the Latin American nations and the Philippines, the Governor for Chile argued that adequate protection for both domestic and foreign investors was already provided by the legal and constitutional systems of those countries. He also contended that the proposal, if adopted, would place domestic investors in an inferior position.
Mr. Woods enumerated a number of steps already taken by the Executive Directors to carry out the general lines of policy which he had forecast in his address at the 1963 Annual Meetings, all designed to enhance the effectiveness of the Bank Group in meeting the needs of its less developed members. The commitment charge on undisbursed portions of all but a few Bank loans had been reduced by 50 per cent. The Bank had begun to take a more flexible approach in fixing the terms of its loans—extending final maturities in some cases to as much as 35 years and the grace period to as long as 8 years. “Even more important in my judgment,” Mr. Woods said, “the Executive Directors have agreed upon a restatement of policy with respect to financing local currency expenditures. It has now been made entirely clear that our criterion in the selection of projects is the extent of their prospective contribution to economic development, regardless of the ratio of costs as between foreign exchange and local currency. We now stand ready to finance some of the local costs of high-priority projects in cases where financing for imports alone would not provide adequate support.”
The Governors who commented supported these policy initiatives taken by the Bank, and broad support was evident for the new emphasis by the Bank and IDA upon the development of agriculture and education, which Mr. Woods had explained in some detail in his address. The Governor for Chile particularly welcomed the increased attention to agriculture and education, which he called “the two most important sectors of the complex problem of economic growth.” Similar support was expressed by Mr. Tan Siew Sin, Governor for Malaysia, and others. Mr. Woods had explained that, in carrying out its new policies in these fields, the Bank had negotiated partnership arrangements with the United Nations Educational, Scientific and Cultural Organization and the Food and Agriculture Organization of the United Nations, and that a number of projects in both fields were already under consideration for financing.
Mr. Woods recalled that one of the problems that had limited Bank activities from the start was “the shortage of sound, economically viable projects coming forward from most of the developing countries,” and he outlined a number of steps being taken to improve and expand the Bank’s technical assistance to members in order to increase the flow of project proposals worthy of financing. The program of the Economic Development Institute, he said, had been expanded, with emphasis upon new courses in project evaluation. “We have undertaken more and more pre-investment studies,” he added, “both as Executing Agency for the United Nations Special Fund and on our own. We are making plans to establish two field offices in Africa, staffed with men whose specific function will be to assist member governments on that continent in preparing projects to the point where they can be presented for Bank or IDA financing.”
Another principal problem on the Bank’s agenda for the future, Mr. Woods said, was the debt service burden “which now weighs heavily upon a number of our members.” This was one of a number of problems affecting the development of the less developed countries which occupied the attention of delegates to the United Nations Conference on Trade and Development that opened in Geneva in March 1964, and in which representatives of the Bank took an active part. Mr. Woods reported that, at the request of the Conference, the Bank had agreed to undertake a series of studies relating to three basic issues: (1) how best to bring about a major increase in the flow of public and private funds to the developing nations; (2) how to make sure that a greater proportion of such funds was made available on terms which did not impose too heavy a burden on recipient nations; and (3) how to apply the funds most effectively in order to lessen the consequences of fluctuations in export earnings.
Problems of Developing Countries
In assessing the significance of the Geneva Conference, Mr. Woods said that it was the first time the developing countries had found it possible to submerge divergent interests and to present a common front on issues of development finance. The Conference, he said, had moved the problem of economic development “from the second line of political concern to the forefront of the problems confronting the world’s leaders.” Although attention at Geneva had been focused primarily on contributions required of the industrialized countries, Mr. Woods warned that such requirements were unlikely to be met unless doubts as to the effectiveness of development assistance were resolved—“and that will happen only if the less developed nations themselves demonstrate a genuine readiness to take the hard domestic decisions required to accelerate economic growth.” Mr. Woods also emphasized that the need of the developing countries for more assistance from the industrialized nations, not only in capital on suitable terms but also in making their own markets more accessible, was real and urgent.
Commenting on these remarks, the Governor for the United Arab Republic stressed that the less developed countries were doing all they could to advance their own development, but that far more assistance from the industrialized countries was essential. Mr. Kurt Schmuecker, Governor for the Federal Republic of Germany, said that the Bank is qualified to play a constructive role because it is “the institution in the framework of which there is already exemplary cooperation between industrialized and less developed nations.”
The problem of. servicing the debt burden of developing countries was referred to by many Governors. Mr. Amir Abbas Hoveyda, Governor for Iran, stated that developing countries must now pay $5 billion annually in interest and principal and that for some countries the servicing of foreign debt alone constituted 40 per cent of total export receipts. He echoed a feeling, expressed by a number of developing countries, that the Bank should consider revising its present rate of interest on loans in order to ease the debt servicing burden.
Keen interest was attached to Mr. Woods’s statement that the Bank would return to the financial markets of the world to borrow substantial sums during the current fiscal year. Mr. Douglas Dillon, Governor for the United States, expressed the view that the Bank should intensify its efforts to assure that “another kind of development is fostered—namely the development of more effective facilities for mobilizing private savings in the capital markets of industrialized countries that are accumulating international reserves.” He warned that unless such facilities were developed the Bank “will run the risk of having to limit its operations because of excessive reliance on the markets of the United States.” He also commented that “it is essential that the Bank find ways to make good use of available private funds even though the interest cost of some of these funds may be somewhat higher than would otherwise be desirable.”
In his closing remarks, Mr. Woods said that the week of the meetings had been memorable because of the “harmonious and reasoned tenor of the discussions,” but also sobering in view of the urgency of the problems that had been presented by many of the Governors. His concluding remarks echoed the statement by the Prime Minister of Japan, Mr. Hayato Ikeda, in his speech at the opening session: “Today, when rapid expansion is taking place in economic and cultural relations between nations,” Mr. Ikeda said, “no one nation can prosper unless others also prosper. Prosperity is indivisible.” And Mr. Woods used the words of the economist Adam Smith to reinforce the point: “No society can surely be flourishing and happy of which the far greater part of its members are poor and miserable.”
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