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The Bank Group Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1970
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By Cyril H. Davies

It was perhaps a pity that the demonstrators, whose threats to disrupt the Annual Meetings of the Boards of Governors of the Bank Group and International Monetary Fund fortunately came to nothing, could not have been admitted, strictly as spectators, since they might have found the proceedings enlightening. They would have found, in the discussion of the Bank’s developmental role, little suggestion of a bitter “confrontation” between “haves” and “have-nots.” Instead, they would have heard a serious dialogue notable for the wide agreement between representatives of developed and developing countries on what the problems were and how they should be approached.

Human Suffering and Depriration

This wide agreement was not the result of complacency on the part of the developed countries on the aid they had provided, or acceptance by the developing countries of this aid as sufficient. There was no sweeping of problems under the rug. Any tendency to complacency, even if it had existed, could have hardly survived the address given by Mr. McNamara, President of the Bank, at the opening session. After recounting the progress made in the past year toward the fulfillment of the Five-Year Program to double the Bank Group’s operations over the period 1969-73 in comparison with the period 1964-68, Mr. McNamara proceeded to characterize what he called “the realities of human suffering and deprivation” in the developing world in the following terms:

“Malnutrition is common.

The Food and Agriculture Organization estimates that at least a third to a half of the world’s people suffer from hunger or nutritional deprivation. The average person in a high-standard area consumes four pounds of food a day as compared with an average pound and a quarter in a low-standard area.

“Infant mortality is high.

Infant deaths per 1,000 live births are four times as high in the developing countries as in the developed countries (110 compared with 27).

“Life expectancy is low.

A man in the West can expect to live 40 per cent longer than the average man in the developing countries and twice as long as the average man in some of the African countries.

“Illiteracy is widespread.

There are 100 million more illiterates today than there were 20 years ago, bringing the total number to some 800 million.

“Unemployment is endemic and growing.

The equivalent of approximately 20 per cent of the entire male labor force is unemployed, and in many areas the urban population is growing twice as fast as the number of urban jobs.

“The distribution of income and wealth is severely skewed, and in some countries becoming more so.

In India, 12 per cent of the rural families control more than half of the cultivated land. In Brazil, less than 10 per cent of the families control 75 per cent of the land.

In Pakistan, the disparity in per capita income between East and West, which amounted to 18 per cent in 1950, became 25 per cent in 1970, 31 per cent in 1965, and 38 per cent in 1970.

“The gap between the per capita incomes of the rich nations and the poor nations is widening rather than narrowing, both relatively and absolutely. At the extremes that gap is already more than $3,000. Present projections indicate it may well widen to $9,000 by the end of the century. In the year 2000, per capita income in the United States in terms of today’s prices is expected to be approximately $10,000; in Brazil, $500; and in India, $200.”

The World Community and Its Conscience

The considerable consensus of views on the basics of development was thus due not to euphoria but rather to a sober and searching appraisal of the enormous task ahead, which, it was clear from Governors’ speeches, had been stimulated by the Report of the Pearson Commission on International Development, “Partners in Development”; this Report, according to Mr. Anthony Barber, Fund Governor for the United Kingdom, “has contributed in my country—and I do not doubt elsewhere—to a more informed public debate on aid and trade relationships with the developing countries.” Mr. Y. B. Chavan, Governor for India, said that it was enough to take a tally of the recommendations of the Report “to see what a gulf there still is between what the world community recognizes to be right and what it is prepared to do about it.” It was evident, however, both from events preceding the meeting and views expressed during its course, that the “world community” had already begun to examine its conscience on this point.

One cloud that might have over-shadowed the meeting had already been dissipated by what Mr. Edgar J. Benson, Governor for Canada, called “the most important event of the development year,” the agreement of the so called Part I countries, i.e., the richer members of the International Development Association (IDA), on a third replenishment of IDA’s resources at the rate of $800 million a year for three years, twice the amount of the second replenishment. The Chairman reminded the Governors in his closing remarks, however, that hard work and persuasion on their part would still be necessary to ensure speedy ratification of the agreement.

The developing countries were also encouraged by the increasing recognition on the part of the developed countries that aid was more than a matter of maneuvering to obtain commercial or political advantages. This trend was reflected in the wide support given to the untying of bilateral aid at the high-level meeting of the Development Assistance Committee (DAC) held in Tokyo just before the Copenhagen meetings, and by the intention expressed by a number of the industrialized countries to channel more aid through multilateral institutions. Noteworthy in this respect was the emphasis on multilateral aid in President Nixon’s special message to the U.S. Congress on foreign aid.

This constructive disposition on the part of the developed countries found an echo from the developing countries. The strongest statement of their responsibilities came from the Chairman himself, Mr. Hédi Nouira, Governor for Tunisia. In his opening address Mr. Nouira counseled the developing countries not to let their reproaches against the developed countries for inadequate aid, failure to stabilize the prices of primary products, and protectionist trade policies divert them from their own responsibilities. “An efficiently managed economy is in itself sufficient to attract foreign capital,” he continued, adding that “economic development should not be regarded as some kind of by-product of international philanthropy. It is something earned primarily by serious and disciplined effort on the part of the countries concerned.” The Governors of several developing countries advocated the establishment of the proposed International Investment Insurance Agency in order to encourage private capital to invest in the developing countries.

There was also, as there had been the previous year, general agreement that development called for profound structural changes in the developing countries; in the words of Mr. P. A. Reid, Governor for Guyana, “Unless investment is made in a favorable social and institutional environment, it must ultimately be sterile.” Other speakers went further by emphasizing that successful investment, which increased the gross national product (GNP), was not enough if social evils such as unemployment and an excessively unequal distribution of income continued. Mr. McNamara said, “Growth is a necessary but not a sufficient cause of successful modernization. . . . We must ensure that in such critical fields as population planning, rural renewal, fuller employment, and decent urbanism, positive policies support and hasten the social transformation without which economic growth itself becomes obstructed and its results impaired.” Mr. N. M. Perera, Governor for Ceylon, expressed the same idea when he said, “I think it is necessary also to question the conventional wisdom which emphasizes gross domestic product growth to the exclusion of redistributive social justice.”

Mr. McNamara testified to the serious attention that the Bank had given to the recommendations of the Pearson Commission, on 31 of which he had submitted detailed memoranda for discussion and review by the Executive Directors. He had endorsed most of those that related to the Bank Group, his chief disagreement being with the Commission’s suggestion that IDA, which was financed by government contributions, might in due course need reorganization to enable it to follow policies independent of those of the Bank, which, in the opinion of the Commission, was necessarily influenced by the need to borrow in private capital markets. Mr. McNamara said that both the Bank and IDA should lend on the basis of identical criteria; the decisive factor for both should be what contributed most to the borrowing country. The source of funds affected only the terms on which they could be lent, and was irrelevant to the choice of project in which to invest them.

The Population Problem

Turning to recommendations not specifically addressed to the Bank, Mr. McNamara commended the Pearson Commission for facing squarely what it had called “the ominous implications of uncontrolled population growth.” Reviewing the general state of population planning, he noted that in only a few areas was there clear evidence that the rate of population increase had been significantly reduced by family planning programs. What was needed was, first, a feasible goal which, he suggested, should be “to gain a few decades on what would occur to fertility in the absence of population planning.” In order to attain this goal, there were further requisites: the political will to support the effort, understanding and willingness to act on the part of the people, the availability of effective and acceptable birth control methods, an efficient administrative organization, and demographic analyses to evaluate results and to point to weaknesses in the program. While there had been a considerable increase of political support for population planning in recent years, much less progress had been made in respect of the other requisites. The additional funds needed to attack the population problem on all fronts were relatively small, but time was short, and it was essential to apply them quickly. The Bank was organizing itself to provide both the advice and financial assistance that many of its members were asking for. Governors paid tribute to Mr. McNamara’s speeches at the 1968 Annual Meeting and later at the University of Notre Dame for making the idea of population planning acceptable. ‘The fact that there are so many whose deeply held convictions are opposed to family planning.” said Mr. Barber, “only highlights the courage of those in the Bank who have nevertheless determined to press on with their policy.”

Need for Aid on Concessionary Terms

Mr. McNamara devoted considerable attention to the Commission’s recommendation that a separate target—equivalent to 0.7 per cent of GNP—be established for official development aid, and reached, preferably by the middle of the decade, but in no case later than 1980. He pointed out that, although this target required the DAC countries to double the proportion of their total GNP devoted to aid, it had in general received a very positive response from those countries, one consequence of which was the agreement on the third IDA replenishment. Noting that the United States had supported the replenishment and that the U.S. Government had in mind an expansion of the flow of its external aid from its current low level, Mr. McNamara said that the United States, which would increase its GNP by $500 billion by 1979, was “wealthy enough to support a just and reasonable foreign aid program, and at the same time deal effectively with domestic needs.” Not only the United States, he continued, but also the other rich industrialized countries were faced with a fundamental question, “Which is ultimately more in a nation’s interest: to funnel national resources into an endlessly spiraling consumer economy—with its by-products of waste and pollution—or to dedicate a more reasonable share of these same resources to improving the fundamental quality of life both at home and abroad?” The same note had already been struck by Mr. Nouira when he emphasized that, while the task of bringing humanity out of the “dark labyrinth of poverty and ignorance” was first and foremost the responsibility of the “Third World,” this responsibility was shared by “the advanced countries which continue to flaunt their wealth in the face of the majority of mankind, who are hardly able to satisfy their basic needs.”

It was a sign of the times that the problem of finding resources for development was discussed mainly in terms of IDA, rather than the Bank. Many Governors for developing countries echoed the view of Mr. Veerasamy Ringadoo, Governor for Mauritius, that “one cannot fight the population explosion with World Bank money at 7¼ per cent interest.” However, while the high interest rate was deplored as a disincentive to development, most Governors accepted it with resignation as something due to circumstances over which the Bank had little control. Mr. Hannes Androsch, Governor for Austria, pointed out that the Bank had exercised great restraint in determining its lending rate, and that the recent increase from 7 per cent to 7¼ per cent did not reflect the increased cost of funds; the margin between its lending and borrowing rates, formerly a flat 1.25 per cent, had become negative a year or two earlier.

Pleas for an increase of IDA’s concessionary assistance were in general based on the heavy debt burdens of the developing countries. Many Governors cited the figures given in the Bank’s Annual Report, which showed, inter alia, that over the past decade both the outstanding debt and the debt service payments of the developing countries had grown twice as fast as their export earnings, and almost three times as fast as their combined gross domestic products.

Special Drawing Rights and Development Finance

It was generally realized that, in the long run, a substantially increased flow of concessionary aid depended on the response of the developed countries to the fundamental question posed by Mr. McNamara on “endlessly spiraling consumer economies.” However, the majority of the Governors for the developing countries were of the opinion, also expressed at the 1969 meeting, that the Fund’s special drawing rights (SDR’s) could be used to provide development finance, in a politically acceptable way, either through the allocation of more SDR’s to the developing countries, through the contribution by the developed countries of the equivalent of part of their SDR’s to IDA, or through some other mechanism for providing IDA with SDR’s. There was general support by these Governors for a proposal that the Fund be requested to study the question of the establishment of a direct link between SDR’s and development finance and to make its report available before decisions on the next round of allocations had to be taken in 1972.

Spokesmen for the developed countries, however, were skeptical. Mr. Karl Schiller, Governor for Germany, emphasizing that the primary need was to strengthen confidence in SDR’s and establish them firmly as a universally acceptable reserve medium, added, “This is also the reason why I do not consider it advisable to burden the new instrument with additional functions it was not designed for. SDR’s cannot be a medium to finance capital aid.” Mr. L.H.E. Bury, Governor for Australia, after saying that “to allow SDR creation to be influenced by the needs of development finance would run the risk of confusing the purpose for which SDR’s were invented, namely, to deal with the problem of maintaining adequate international liquidity,” added that, “Nor should it be imagined that there is anything painless about giving aid through SDR’s. To the extent that developing countries run down their SDR holdings they will be drawing on the resources of developed countries, and this will be taken into account in the aid plans of developed countries.” He expressed hope that consideration of the matter would not be carried to the point at which it might prejudice the future allocation of SDR’s.

Other proposals involving the Fund, supported by a number of Governors for developing countries, were that it should transfer part of its reserves to IDA, or that it should invest its reserves in low-interest Bank bonds and thus enable the Bank, to this extent, to make loans at a concessionary rate.

Eligibility for IDA Assistance

There was, as in previous years, strong criticism of IDA’s restriction of its financing to countries with a per capita GNP of not more than $300, which, it was complained, excluded most Latin American countries. The Governor for Mexico, Mr. Hugo B. Margain, speaking for the Latin American countries and the Philippines, said that while these countries did not object to the proposed transfer of part of the Bank’s net earnings in the past fiscal year to IDA, they hoped that other ways of helping IDA could “be found in future, so as to ensure that it will not be the developing countries themselves who through profit-producing interest, subsidize, albeit partially, a limited group of countries.” Mr. Margain, like several other Governors, pointed out that some countries which had per capita GNP of more than $300 contained depressed areas which in some cases had larger populations than whole countries which were eligible for IDA financing. IDA’s Articles of Agreement, it was urged, made a country’s creditworthiness, and not its per capita GNP, the basic criterion of eligibility for IDA financing. Hopes were expressed that the doubled rate of IDA replenishment would permit a relaxation of this criterion and would permit a blend of IDA and Bank financing containing higher proportions of IDA funds for countries that had limited creditworthiness, but were not poor enough to justify their receiving IDA funds only. Some Governors seemed to feel that even this division of borrowers into Bank, IDA-blend, and IDA categories did not permit a sufficiently flexible adjustment of lending terms to the economic circumstances of countries (and, as some would have it, the rates of return on projects) and envisaged some sort of pooling of Bank and IDA resources that would permit each country, and perhaps even each project, to have its own made-to-measure interest rate and other terms.

While the proposed transfer to IDA of $100 million from the Bank’s net earnings of $213 million was generally approved, some Governors regretted that the transfer was of a smaller proportion of net earnings than in 1969. On the other hand, Mr. H. J. Witteveen, Governor for the Netherlands, warned that the developing countries could not have the best of both worlds-large Bank transfers to IDA as well as a lending rate well below the prevailing cost of money. In his opinion, the Bank was striking a fair balance between these two objectives.

Special Forms of Lending

Many Governors revived familiar but controversial proposals for the use or increased use of special forms of lending. Some were disappointed that there had been no progress in the direction of Bank action toward the stabilization of the prices of primary products, a subject on which both Bank and Fund had submitted reports to their Boards of Governors in 1969, or toward the adoption of a scheme of supplementary finance which would provide funds to enable countries to maintain their development despite unforeseen falls in export earnings. Mr. Perera, describing the effects on Ceylon’s economy of the fall of tea prices from 1965 to 1969, said that much of the aid received by Ceylon during that period had to be regarded as supplementary finance rather than aid proper. He described Ceylon’s experience as an example of the “harshness of the international climate within which small open economies are today compelled to develop.” He therefore regretted that, in his reply to a request from the Trade and Development Board of the United Nations Conference on Trade and Development (UNCTAD) that the Bank consider working out and introducing arrangements for supplementary finance, Mr. McNamara had said that, because there was little prospect at the moment of obtaining additional IDA funds for this purpose, the Bank should defer further detailed consideration of the subject. Mr. Perera added that, while he appreciated the reason given by Mr. McNamara, potential donor countries were likely to give more serious consideration to the idea of additional commitments if they were presented as part of a detailed scheme. He therefore welcomed the decision reached by the Trade and Development Board the previous week to renew its request to the Bank to pursue its efforts to work out a scheme.

There was strong support by Governors for developing countries, and also by Mr. Barber, for the proposals that the Bank and IDA should be more flexible than at present in financing the local costs of projects and in making nonproject loans, which could be disbursed rapidly. Urging a “judicious mixture” of project and nonproject assistance, Mr. Chavan said that he failed to understand why the latter should be considered less desirable than the former; “no such thoughts confused our minds during the days of the Marshall Plan or, indeed, when the World Bank assisted industrial countries.” Mr. Janko Smole, Governor for Yugoslavia, revived the suggestion made by several Governors at the 1969 meetings that the Bank consider the possibility of refinancing export credits granted by developing countries to other developing countries.

Private Investment

The importance attached to private investment as a source of funds for development and the need to give the private investor assurances of equitable treatment was emphasized by the marked revival of interest in the proposed International Investment Insurance Agency. At the request of UNCTAD, the Bank had for some years been trying to draft a charter that would command sufficient support to justify the setting up of such an agency, but progress had been slow and halting because some of the most important developed countries and most of the developing countries had shown little interest. Within recent months, however, there had been encouraging changes in the positions taken by Japan, the United Kingdom, and the United States and some developing countries, which were confirmed in speeches at the meeting. Mr. Takeo Fukuda, Governor for Japan, expressing the hope that an agency could be created as soon as possible “with the blessing of all countries, developing as well as developed,” said that two points should be borne in mind: first, the need for a spirit of partnership and solidarity among developing and developed countries should be clearly stated in the scheme; second, the scheme should not place an excessive burden on the developing countries. Mr. Aleke K. Banda, Governor for Malawi, said that the fears of investors of nationalization without adequate compensation were usually groundless but were fed by newspaper headlines and rumors. These fears could only be allayed by active and positive support for the proposed agency on the part of developing countries.

In the direction of fiscal incentives to foreign investment, however, Mr. Cesar Virata, Governor for the Philippines, thought that developing countries tended to go too far, and he hoped that the Bank would try to dissuade them from offering inducements not really needed to attract foreign investors.

Considerable interest was aroused by Mr. Witteveen’s statement that the Netherlands Government intended in 1971 to make a loan of $5 million to the International Finance Corporation (IFC), the Bank Group’s private enterprise arm, on “appropriate terms.” Mr. Witteveen expressed the hope that the Netherlands’ initiative would be followed by other members. Although Mr. Witteveen did not specify the terms of the proposed loan, his statement raised the possibility that loans from member governments might help to solve the problem that would confront IFC in a few years’ time, namely, that of finding additional funds for equity investment, since the Bank’s Articles of Agreement did not permit the proceeds of Bank loans to IFC, at present IFC’s chief source of additional funds, to be invested in equity.

Wanted and Unwanted Advice

While the technical assistance and advice provided by the Bank in cooperation with other agencies, such as United Nations Development Program, Food and Agriculture Organization, and United Nations Educational, Scientific and Cultural Organization, was generally commended. Governors for some African countries pointed out that there were development problems that the developing countries felt they had to decide for themselves. Mr. Banda said that, while the developing countries often needed and asked for advice, and appreciated it when it was given, they did not want “advice, or rather lectures, for which we have not asked. What we do not want is to be told that money will be provided for a project only if we take certain other actions which we ourselves consider unnecessary and which involve expenditures we can ill afford.” Similarly, Mr. Mwai Kibaki, Governor for Kenya, advised Bank missions to exercise greater caution when they questioned the organization of governments, and to show less enthusiasm for setting up new government agencies simply to operate individual projects.

Mr. P. Bomani, Governor for the United Republic of Tanzania, summed up this problem when, after welcoming what he described as the change from the Bank’s “early role as a reconstruction agent for Europe and the international market to the developmental role so ably outlined by President McNamara earlier in these meetings,” he went on to say, “It is vital that the Bank should consider development strategy as well as projects, education as well as roads, the quality of life as well as repayment schedules. If it can do this as a servant of development and a partner of developing countries, the potential benefits to all of us are immense. The danger is that the Bank-by virtue of its professional expertise and funds—will come to see itself as a world planning authority supplanting national effort, rather than as a source of resources and advice for supplementing national and regional planning by the developing economies. . . . Industrial economies and the Bank are welcome as colleagues, advisers, friends in our course toward development. National development must be nationally determined, nationally sought, and largely nationally financed if it is to be real and if it is to lay the basis for a more harmonious, equitable, and prosperous international system.”

Agenda for Study

In his closing remarks, Mr. McNamara singled out for comment five proposals that had received particularly strong support from Governors. First, he said that the Bank would make a study of the mounting burden of external debt, which had become a matter of great concern to many developing countries. Second, he said that, while he realized that sharply conflicting views were held on the desirability of a link between SDR’s and development finance, no other subject had been referred to so often during the meeting, and the Bank would be prepared to assist in any study of the matter undertaken by the Fund. Third, he welcomed the support from both developed and developing countries for an international investment insurance plan; shortly after the Annual Meetings the Executive Directors, meeting as a Committee of the Whole, would review the position. Fourth, while member Governments held divergent views on the subject of more flexible lending policies, particularly as far as nonproject lending and the financing of local currency expenditures were concerned, and while the freedom of action of both the Bank and IDA was limited by their Articles of Agreement, so much interest had been expressed in the subject that the Bank would make a full re-examination of it within the next few months. Fifth, he welcomed the declared intentions of most of the members to try to reach agreement on the untying of bilateral development loans; the Bank was prepared to help in working out such an agreement and in formulating procedures for giving it effect.

The Bank Group, which had emerged from the 1969 meetings committed to the study of the Pearson Commission recommendations, thus found itself at the end of the 1970 meetings with a further heavy agenda of study. This aspect of its role was well characterized at the very beginning of the meeting when the Danish Prime Minister, Mr. Hilmar Baunsgaard, welcoming the delegations, quoted a modern Danish poet as follows:

We shall have to evolve problem-solvers galore since each problem they solve creates ten problems more.

The General Mood

The general mood of the meetings could be described as one of constructive realism—of realism because there was no disposition to minimize the difficulty of narrowing the gap between the rich and poor countries as long as the population problem made it necessary for nations, like Alice in Wonderland, to run fast to stay in the same place; constructive because of a willingness to think more in terms of concerted action than of national or group interests. Such a willingness could help to reduce the effect of what Mr. McNamara called “too many millennia of tribal suspicion and hostility . . . still at work in our subconscious minds.” Pointing out that no more than a 5 per cent shift of expenditure from arms to development aid was needed to bring the Pearson target for official development assistance within sight, he added, “There are really no material obstacles to a sane, manageable, and progressive response to the world’s development needs. The obstacles lie in the minds of men.”

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