Cyril H. Davies
IN THESE WORDS Mr. Lester Pearson, former Prime Minister of Canada, addressing the Boards of Governors of the Bank and its affiliates, the International Development Association (IDA) and the International Finance Corporation (IFC), at their Annual Meeting in September, summed up the choice confronting the developed and the developing countries. Mr. Pearson was speaking as Chairman of the Commission on International Development, which, as the result of initiatives on the part of Mr. McNamara, President of the Bank, and his predecessor, Mr. George Woods, had reviewed during the past year the problems and prospects of development assistance, and was about to publish its report.
In addition to Mr. Pearson, the Commission consisted of Sir Edward Boyle (United Kingdom), Mr. Roberto Campos (Brazil), Mr. Douglas Dillon (United States), Dr. Wilfried Guth (Germany), Professor Sir W. Arthur Lewis (Jamaica), Dr. Robert Marjolin (France), and Dr. Saburo Okita (Japan), each of whom served in a personal rather than representative capacity. It had worked independently of the Bank. Mr. Pearson’s address to the Governors was not delivered, and the Commission’s report, entitled “Partners in Development,” was not distributed to them until after the midpoint of the meeting, too late for Governors to express any considered reactions. Nevertheless, even speeches made by Governors before this stage had been reached showed that the Commission’s recommendations, which had been formulated after discussions with governments, international organizations, business and professional associations, and individuals all over the world, touched upon matters to which much thought had already been given by people deeply concerned with development.
Mr. McNamara stated that the Bank’s staff would make a careful analysis of each of the Commission’s recommendations which in any way bore upon the Bank’s work, and that he would submit these analyses to the Executive Directors with proposals for appropriate action. When the Executive Directors had reviewed these analyses and proposals, their conclusions and recommendations would be reported to the Board of Governors. He urged that governments and other agencies affected by the Commission’s recommendations should take similar action.
The mood of the delegates was in general more constructive and hopeful than a year earlier, when the prevalent feeling was disappointment at the loss of momentum of the First Development Decade, exemplified by the delay in completing the second IDA replenishment. While there was no complacency, and speaker after speaker emphasized that the gap between the rich and poor nations was still widening, several new elements in the situation gave grounds for optimism: the notable expansion of the operations of the Bank Group, the completion of the second IDA replenishment, the imminent activation of the Fund’s special drawing rights which, despite cautions from a few, many Governors felt was somehow or other bound to lead to an increase of resources for development, and the stimulus provided by the eagerly awaited report of the Pearson Commission.
The more constructive attitude appeared to be due to a realization, on the part of both developed and developing countries, that they had entered the First Development Decade with exaggerated expectations, and had been too much inclined to assume that development was simply a matter of injecting a sufficient quantity of external resources. As Mr. Stephan Koren, Governor for Austria, put it, “I think that one of the most important lessons that can be learned from the experience of the last decade is that problems of development cannot be solved simply by providing money. Money can buy factories, dams, reactors, and other things. But it cannot guarantee development. To achieve development, appropriate structures, institutions and attitudes have to be created.”
Mr. David M. Kennedy, Governor for the United States, said, “I wonder, too, whether simple numerical targets for development assistance by industrial nations do not divert too much attention from the quality of the aid provided and the techniques employed.” Looking at the matter from the point of view of the developing world, Mr. Louis Namwisi, Governor for the Democratic Republic of Congo, said, “The new countries are fully aware that the success of their efforts depends in the first place upon themselves, upon the realistic nature of their development policies, upon the effectiveness of forms of associations with foreign enterprise, and upon progress in the technical training of national managerial staff.”
Mr. L.K. Jha, Governor of the Fund for India, said, “We labor under no illusions. The destiny of the developing world will be determined mainly by the wisdom and sacrifice of its own people.” Quoting Gunnar Myrdal’s phrase, “Development is the movement of the whole social system upwards,” Mr. Pearson cautioned against “expecting too much too soon” and “forgetting there is no such thing as instant development.”
Speakers pointed out that, if the quality of aid was to be improved, it must be better coordinated. Aid had in the past come from many independent sources, and too much of it had been prompted by motives of short-term political and commercial advantage to the donors which had led, for example, to the unsatisfactory practice of tying aid to specific sources of procurement. This pointed to the desirability of channeling aid as far as possible through multilateral agencies, and of looking to them for the coordination of aid from all sources, public and private. Mr. Kennedy said that the United States was “firmly committed to the multilateral approach to development financing epitomized by the World Bank and its affiliates.” Mr. McNamara, after saying, “Our objective is not to search for good investments in a sick economy,” went on to emphasize that the Bank could not be satisfied with “piecemeal solutions”; its aim was to find “a successful over-all strategy by which development in each individual sector improves and sustains it in all the others.”
Quantity and Quality
There was general agreement that, in the year just ended, the operations of the Bank Group had met both quantitative and qualitative tests in a way which augured well for the prospects of fulfillment of the five-year plan outlined by Mr. McNamara in 1968. Not only had the Group increased its financing of development projects by 87 per cent compared with the previous year, but the geographical shifts in favor of Africa and Latin America, and the sector shifts in favor of agriculture and education which Mr. McNamara had proposed a year earlier, had also been realized. The Bank had borrowed $1.25 billion in the world’s capital markets, 55 per cent more than in any previous year. Mr. Konan Bedie, Fund Governor for Ivory Coast, welcoming these achievements, commented that, “In sum, this increased dynamism, these qualitative advances, and these effective evidences of goodwill are every bit as important, in our view, as the record level of operations presented to us, and accordingly deserve equal tribute.”
It was widely recognized that the Bank’s advice and technical assistance was an essential ingredient of its aid. Mr. McNamara’s statement that the Bank was about to expand its program of country economic reports was therefore welcomed. Many developing countries, he said, would receive a regular annual mission which would report in detail on economic and social progress and investigate all sectors of the economy with a view to determining priorities for both investment and preinvestment activity. Both Mr. Emilio Colombo, Fund Governor for Italy, and Mr. Namwisi recommended that the bank should extend its advice on economic and development problems to the point that, in Mr. Namwisi’s words, the Bank “would give to its members the same assistance that the Fund already gives them in the field of monetary and exchange policies.” Mr. Colombo had in mind that the Bank would hold regular consultations with its members on their medium-term and long-term problems which would supplement their annual consultations with the Fund. The timing of these consultations would not be related to project appraisals or impending loan operations.
The emphasis on the quality of aid did not, however, mean that Governors were less preoccupied with its quantity. Many speakers deplored the failure of the developed countries to bring their total aid up to the target of 1 per cent of gross national product suggested by the United Nations Conference on Trade and Development (UNCTAD). In his address at the opening session the Chairman, Mr. Dagnino Pastore, Fund Governor for Argentina, reminded the Governors that the Bank’s capacity to borrow was affected by factors outside its control, and urged that more countries afford the Bank liberal and frequent access to their capital markets. Dr. Karl Blessing, Fund Governor for Germany, in whose capital markets the Bank had raised 46 per cent of its gross borrowing during the fiscal year, warned that the circumstances which had favored this borrowing could not be counted upon to continue, while Mr. Koren took the view that the world’s central banks, which had subscribed heavily during the year to the Bank two-year bond issues, could not provide the type of funds most appropriate for the Bank’s long-term lending operations. Mr. Witteveen, Governor for the Netherlands, suggested that the possibility of increasing the Bank’s resources by an increase in its subscribed capital be studied and, in his final address, Mr. McNamara said that a study of the desirability and feasibility of improvements in its capital structure had already been initiated.
Again led by the Chairman, nearly every speaker took up the question of IDA’s resources. The delay in completing the second IDA replenishment, which meant that the resources it provided would have to last until June 30, 1971, instead of until June 30, 1970 as originally planned, was deplored, and the hope was expressed that replenishment could in future be placed on a less uncertain basis. Mr. Kennedy in particular expressed the view that the balance of payments difficulties of the richer countries should not interrupt the flow of aid.
Many Governors for developing countries felt that they were approaching the limit of the debt they could afford to incur on conventional terms, and saw in a large increase of IDA credits relative to Bank loans their only hope for avoiding a slowdown in development. Mr. Edward Seaga, Governor for Jamaica, pleading the cause of those developing countries which, at the current level of IDA resources, were regarded as ineligible for IDA credits, pointed to the great difference between IDA’s ¾ per cent service charge and the current Bank lending rate of 7 per cent in the financing of slow-yielding educational and agricultural projects. IDA’s funds for lending on concessionary terms were, according to Mr. Witteveen, the most valuable resource of the Bank Group. These pleas for larger IDA resources were powerfully reinforced by Mr. Pearson, who said that the Commission for International Development was recommending that the concessionary element of multilateral aid should rise from the current 11 per cent to 20 per cent by 1975, and added that, “We particularly suggest a stronger role for the International Development Association. We believe that among existing organizations IDA is in the best position to exert leadership in the effort to establish criteria for the allocation of aid which emphasize economic performance, rather than the political relationships and historical accidents which bear little or no relationship to development needs or performance.”
Mr. Jha voiced the views of many other Governors anxious that IDA’s resources should be increased when he expressed regret that the question of a formal link between SDR’s and development finance had been shelved, “even though developing countries which account for over 80 per cent of our membership and at least some of the developed countries support it.” Mr. Witteveen objected to such a link on the grounds that the purpose of SDR’s was to finance temporary balance of payments maladjustments rather than real long-term transfers, which should be financed out of genuine savings if inflation was to be avoided. He proposed, however, that the “Part I” IDA members should consider increasing their contributions to IDA. Mr. Colombo renewed his 1968 suggestion that the chief industrial countries should agree to contribute the equivalent of part of their SDR allocations to the Bank or IDA, while Mr. Roy Jenkins, Fund Governor for the United Kingdom, expressed the hope that, although no formal link had been established, the contribution which SDR’s would make to the world’s liquid resources might help to create “more favorable conditions for the growth of development aid.” In his concluding remarks to the Governors, Mr. McNamara said that, while he recognized that there was a division of opinion among the Governors on whether there should be a formal link between SDR’s and development aid, he shared the views expressed by Mr. Colombo, Mr. Jenkins, and others.
Once again Mr. McNamara made clear that he had no illusion about the magnitude of the structural problems that had to be overcome if development efforts were not to be frustrated. He reported that, for the purpose of advising governments on ways of dealing with the population explosion—the “mushrooming cloud” overhanging all development—to which he had drawn attention in his address at the 1968 Annual Meeting and in subsequent public speeches, the Bank had set up a new Population Projects Department. This step was welcomed by many Governors, although Mr. Abdón Espinosa Valderrama, Governor for Colombia, speaking for 19 Latin American countries and the Philippines, expressed the hope that no question would arise of the Bank’s making its lending to any country conditional on the adoption of a specific family planning program, and Mr. Juan José Espinosa, Governor for Spain, pointed out that such programs raised “delicate moral issues.”
The Governor for Singapore, Mr. Goh Keng Swee, was in the exceptional position of being able to announce that, since 1957, the annual rate of population growth in his country had fallen from 4.4 per cent to 1.5 per cent, as the result of the widespread acceptance of family planning methods advocated, first by a private association, and later by the Singapore Family Planning and Population Board, whose former Chairman, Dr. Kandiah Kanagaratnam, had not inappropriately been appointed first Director of the Bank’s Population Projects Department.
Three Other Problems
To the population explosion Mr. McNamara added three more structural problems which presented grave threats to development—unemployment, urbanization, and misdirected and inefficient industrialization. No over-all development strategy, he said, could be complete unless it provided for an attack on these interrelated problems.
Twenty per cent of the entire male labor force of the developing world, said Mr. McNamara, was unemployed and, at current rates of population increase and economic growth, this unemployment could only grow worse. To ease the problem, not only must the average growth rate in the developing world rise to 6 per cent, a figure also selected by the Commission on International Development as a target for the 1970’s, but policies promoting the right balance between capital-intensive and labor-intensive activities, and between the supply of skilled and unskilled workers, would have to be adopted. Mr. McNamara commented on the “bitter irony” of unemployment while “there was enough unfinished business on this planet to keep everyone employed to the maximum of his ability,” and Mr. Espinosa Valderrama, noting that unemployment, effectively eradicated from the developed countries, had found fertile soil in the developing countries in which to root itself anew, warned that “to attempt to ignore it would be to fall into tragic and irreparable error.”
The phenomenon of urban decay, said Mr. McNamara, which was directly related to unemployment, was “a plague creeping over every continent,” but whose “corrosive effects” were critical in the poorer nations. It was estimated that, by the year 2000, the total population of the big cities of the developing world would have grown by some 500 per cent. The pace of migration to these cities was beyond any reasonable absorptive capacity, and even highly successful population planning could not curb it before the end of the century. No clear answer could yet be given to the key question whether resources should be used to provide inducements to villagers to stay in the countryside, or to provide the infrastructure for urban development. Nevertheless, an answer to this question was an essential element of any over-all strategy of development.
Mr. McNamara was critical of some of the policies followed by developing countries to promote industrialization. Local industries were all too often encouraged at the expense of agriculture, which had to remain the foundation of their economies. While industrialization required initial inducements, these could be justified only if, in the long run, they led to the emergence of efficient industries. The excessive and indiscriminate protection of import-substitution industries perpetuated inefficiency and hampered the effort to increase export earnings. The result was industrial sectors that produced too wide a range of items on a far less than optimum economic scale. The resultant economic waste was vividly illustrated by a Bank study which showed that, in 1965, developing countries spent $2.1 billion to manufacture automotive products which had a world market value of only $800 million. The rationalization of such unsound economic structures was bound to be a painful process resisted by vested interests. The Bank was establishing an Industrial Projects Department for the purpose of expanding lending to industry and to advise developing countries in this critical field of investment.
Duty of Developed Nations
Mr. McNamara pointed out that the developed nations had a duty to assist the sound industrial growth of the developing nations by dismantling discriminatory barriers against the latter’s exports of manufactured goods. The resultant new pattern of international trade, far from damaging the interests of the developed countries, would lead them to expand production in those directions in which their greatest comparative advantage lay. It was wholly absurd, said Mr. McNamara, for the rich countries to invest billions in developing the poorer countries, and then to refuse to be repaid in those goods which were the first fruits of development.
Governors for the developing countries supported Mr. McNamara’s advocacy of the removal of barriers to their exports. Mr. A.H. Jamal, Fund Governor for Tanzania, asked how soon there would be a truly equitable international division of labor so that, for example, half the world’s sugar production would no longer be high-cost beet sugar produced in the industrial countries behind barriers which prevented the expansion of efficient tropical cane production. Mr. Jha and Mr. Bédié reminded the Governors that UNCTAD’s recommendation that the developed countries should give preferential treatment to the products of developing countries had met with no response. Mr. Jae Sul Lee, Fund Alternate Governor for Korea, and Mr. Jha asked the Bank to study the possibility of refinancing export credits provided by developing countries to enable their manufactured goods to compete on more equal terms with those of developed countries.
In contrast were the pleas of several Governors for developing countries that the Bank should temper the operation of international competitive bidding in the procurement of loan-financed goods by according suppliers in borrowing countries substantially more than the 15 per cent preference margin it normally allowed them.
Prices of Primary Products
The aspect of international trade which claimed most attention was the problem of the stabilization of the prices of primary products, on which both Bank and Fund had submitted reports to the Boards of Governors in response to the resolutions adopted at the 1967 and 1968 Annual Meetings. Spokesmen for a number of countries producing primary commodities expressed disappointment that, as Mr. Augustin Boumah, Fund Governor for Gabon, speaking also on behalf of Cameroon, the Central African Republic, Congo (Brazzaville), and Chad, put it, the Bank’s decisions were limited “to measures aimed at the diversification of production and the improvement of the competitive capacity of primary products, without providing for any concrete action aimed specifically at assisting the developing countries to alleviate the consequences of the fluctuations in the world prices of these products.” In keeping with the constructive tone of the meeting, however, several of these speakers were grateful that the Fund and the Bank had taken primary products, in Mr. Boumah’s words, “out of the category of embarrassing and unsolvable problems,” and welcomed the fact that study of these problems was to continue. Several pointed out that the Bank’s Articles of Agreement limited its scope for action in this field, and looked forward to their eventual amendment.
On the other hand, Mr. Witteveen fully endorsed the position taken by the Bank; its contribution to the solution of the problem, he felt, should take the form of helping to remedy the structural causes underlying the instability of the prices of primary products, rather than the direct financing of commodity surpluses held in stock, which was essentially a commercial function.
Mr. Kjell-Olof Feldt, Temporary Alternate Governor for Sweden, pointing out that what mattered to the producing country was not price stabilization per se but stabilization of export earnings, reminded the Governors that this end could be attained by means of supplementary financing, of which Sweden had been one of the original proponents. A study of supplementary financing proposals had been made by the Bank in 1965 at the request of UNCTAD, which had recently referred it back to the Bank for final preparation and decision. Mr. Janko Smole, Governor for Yugoslavia, also commended supplementary financing as an approach to the problem of fluctuating commodity prices.
Flow of Private Aid
While Governors were naturally concerned primarily with aid flowing through multilateral channels, a number of them made clear that they shared the view expressed by Mr. Pearson on behalf of the Commission that “this emphasis on official aid in no way means that we minimize the importance of private flows.” On the side of the developed countries, Mr. Koren welcomed the upward trend of private investment in developing countries; the technology, management, and capital which the private investor provided, he said, could not be obtained in any other way. Mr. Kennedy spoke of his conviction that “development can be accelerated if we enlist more effectively the vast potential of private enterprise.” Too often, he said, individuals in developing countries with ability and ambition lack resources while, in developed countries, companies with ample financial strength and technical competence “shy away from the challenges” of the less developed areas.
Mr. Seaga described the traditional search of individual entrepreneurs from developed countries for investment opportunities in developing countries as “spearfishing”; the search could be much more efficiently conducted, he suggested, by “net fishing,” carried out by institutions like the Commonwealth Development Corporation or the Commonwealth Development Finance Company of the United Kingdom, which were supported by both private and public capital, in the developed countries, in conjunction with development banks or other appropriate agencies in the developing countries. He welcomed the proposal made in May by President Nixon to establish an Overseas Private Investment Corporation in the United States.
Mr. Colombo commended the progress made by the International Finance Corporation, the private enterprise arm of the Bank Group, in the past year. At the same time he, together with a number of Governors for developing countries, urged that IFC should, in Mr. Seaga’s words, “divest itself of its doctrinaire aproach” to public enterprise by being willing to consider investing in businesses with more than the 25 per cent of state ownership which, in view of its charter restriction to investment in private enterprises, it normally applied as a criterion. Mr. M.S. Forna, Governor for Sierra Leone, associating himself with this view, emphasized that state participation in businesses and development banks in most developing countries was prompted by pragmatic rather than ideological considerations.
That IFC’s attitude toward state enterprise was not inflexible, however, was evident when Mr. Smole expressed appreciation of IFC’s role in the establishment of an international corporation to be domiciled in an IFC member country outside Yugoslavia. Besides IFC, the charter shareholders would be Yugoslav banks, together with financial institutions in Europe, the United States, the United Kingdom, and Japan. The new corporation would promote, and occasionally participate in, joint ventures between foreign private companies and Yugoslav enterprises.
The Governors dispersed from Washington reassured to know that strong counterattacks were being mounted from various directions against the stagnation of aid and development which had threatened a year earlier. Consultations with “Part I” countries looking toward the third IDA replenishment, Mr. McNamara told them, would be begun immediately with a view to their reaching agreement by June 30, 1970, so that the Executive Directors could consider a resolution authorizing the replenishment for submission in July 1970 to IDA’s member governments. This would leave nearly a year for the Part I countries to enact legislation that would permit the replenishment to become effective in time to provide IDA with new commitment authority by July 1, 1971. During the year to come the Fund’s SDR’s, on which so many hopes had been pinned, would begin to be activated. The report of the Commission on International Development would provide a focus for and a stimulus to the more constructive approach to development problems of which the meeting had already given evidence, and which reflected a growing realization that the problems to be overcome were of such magnitude, and the penalties for failure to solve them so great, that both developed and developing countries had, as Mr. Pearson put it, “no choice but to face together with honesty and energy the difficult, frustrating problems that are caused by the grossly uneven pattern of world growth.” It was evident that the year ahead would be significant for world economic development.
BANK GROUP ANNUAL MEETING
The report in this issue of Finance and Development of the Bank Annual Meeting is greatly condensed, touching only upon a small portion of the speeches and activities.
A more complete record of the Meeting will be published shortly by the Bank in a volume entitled Summary Proceedings. It is available free on request from
International Bank for Reconstruction and Development
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