The Governors of the Bank Group have strongly endorsed President Robert S. McNamara’s call to increase the resources available to the Bank, the International Development Association (IDA), and the International Finance Corporation (IFC) to meet the “urgent need” of the developing nations.
But the Governors laid even more stress on the need for increased economic activity in the industrial nations to lead the developing countries out of the “paralysis” forced on them by a stagnant international economy.
The Chairman of the Meetings this year was Venezuelan Minister of State in charge of Coordination and Planning, Dr. Gumersindo Rodriguez; next year, at the Thirty-First Annual Meetings in Manila, the Chairman will be from the Syrian Arab Republic. Dr. Rodriguez opened the meeting by urging “an appropriate expansionary policy in the industrial countries” and increased external assistance as key factors in “overcoming the present conditions of deprivation and despair that beset the developing nations.”
The Governors placed great emphasis on the importance of increasing the developing nations’ abilities to import through greater resource transfers, improvements in international trading arrangements, and access to private capital markets. They commended the Bank’s increased lending in fiscal year 1975, and welcomed the establishment of a one-year intermediate financing facility—the Bank’s Third Window.
The Governors commended the Bank’s increased lending to rural areas under the strategy of bringing development to the “absolute poor” first outlined at the 1973 Annual Meetings in Nairobi. Thirty percent of the Bank’s lending in fiscal year 1975 was directed to rural areas.
They also welcomed Mr. McNamara’s announcement of a new urban initiative, aimed at helping some 200 million people living in “unspeakably grim” city slums, although Governors representing Canada and the Nordic countries urged a cautious approach to maintain a balance between rural and urban programs.
Economic threats identified
In his opening address, Mr. McNamara asked for a major increase in the Bank Group’s resources to help counter the “ominous” threat posed to development by continued inflation, deteriorating terms of trade, the high cost of petroleum, and the prolonged recession in the Organization for Economic Cooperation and Development (OECD) countries.
The “principal victims” of a deteriorating world economy were the one billion people of the poorest nations, he said. Their already low per capita incomes declined in 1974, are likely to drop again this year and rise only marginally, at best, by the end of the decade.
The middle-income developing countries, which had so far staved off the full impact of the world slump through emergency measures, also faced the likelihood of huge trade deficits and declining per capita incomes this year, he added.
“The most immediate and pressing problem in the global development scene” was the need for increased foreign exchange flows “to help offset these adverse forces,” he told the Governors. Present transfers would have to double by the end of the decade to bring developing country incomes up to the targets of the United Nations Second Development Decade.
The likeliest source of such transfers, he said, remained the OECD countries, which could bring Official Development Assistance to the necessary level by dedicating only “a minor fraction of the incremental wealth” earned as their economies recover. The Organization of Petroleum Exporting Countries (OPEC), which provided about one sixth of the concessional assistance supplied to the developing countries in 1974, faced falling current account surpluses which would make the maintenance of their aid levels more difficult, added Mr. McNamara.
Lending to be increased
The Bank Group planned to raise lending “to the maximum level consistent with our capital structure, the availability of funds, and the creditworthiness of our borrowers” in mounting “the largest program of financial and technical assistance to developing countries ever undertaken by a single agency,” he said.
The Bank’s lending commitments, already raised from $4.5 billion in fiscal year 1974 to $6 billion in fiscal year 1975, are expected to reach $7 billion in fiscal year 1976, and total $40 billion for fiscal years 1976-80.
This program “still falls far short of meeting the full scope of the capital needs” of the developing countries, said Mr. McNamara. Thus, he sought a substantially increased Fifth Replenishment of IDA’s resources, and a selective increase in the Bank’s subscribed and paid in capital in line with proposed increases in the IMF’s quotas. The capital increase would include greater participation by the OPEC countries, reflecting their increased economic strength.
For the longer run, Mr. McNamara said the Bank would work toward a general increase in its capital, as well as that of the IFC whose “catalytic role in mobilizing additional private investment in the developing countries takes on even greater importance in a period of capital shortage.”
The “Third Window”
As an interim measure, the Bank’s Third Window would use donor country contributions to subsidize the lending of money raised by the Bank in the world’s capital markets. Twelve countries have offered contributions enabling a $500 million operation at lending rates midway between the Bank’s 8½ per cent and the IDA’s interest-free credits. Mr. McNamara expressed the hope that further contributions would allow the operations to be raised to the $1 billion level.
The Governors strongly supported early action to substantially increase the Bank Group’s resources. The Bank’s Executive Directors began discussions of a selective capital increase in late July. Several Governors felt that a selective increase represented “the barest minimum,” and should be quickly followed by a general increase in the Bank’s capital. Many Governors felt that participation and representation in the institutions should be adjusted to reflect the growing international economic strength of the capital surplus oil exporting countries, but that these adjustments should not be made at the expense of the non-oil producing developing countries.
“The Bank has come to a watershed in its activities,” said Australian Treasurer Bill Hayden, promising that his country would “display an active and constructive attitude” in increasing the Group’s resources. “Should these exercises not be successful, the role of the Bank as a multilateral aid agency would necessarily be diminished. Such a development could well be disastrous for the developing world.”
Developing country spokesmen saw “an impelling need” for the Group to expand its development resources. “In order for the World Bank Group to realize its full potential and to make it more capable of meeting the growing challenge of development, it is imperative that its resource base and lending capacity be increased significantly,” said Nepal’s Minister of State for Finance, Bhekh B. Thapa.
The industrialized countries were near-unanimous in supporting increases in the Group’s development lending capability, although the Japanese Finance Minister, Masayoshi Ohira, noted the “difficult balance of payments and fiscal position” of many countries and hoped “the World Bank will duly take this situation into account in formulating its lending program.” The United States, too, cautioned that maintaining the soundness of the Bank’s financial position in an increasingly capital-scarce world demanded a clear understanding of its lending priorities and their implications for its capital structure.
Greater IFC role urged
The United States—repeating a proposal made at the Seventh Special Session of the United Nations General Assembly on economic cooperation—also urged a major increase in the IFC’s funding “permitting that organization to serve as a more effective catalyst for growth of the private sector in developing countries.”
“Arrangements should be made in the next few months to give the International Finance Corporation better tools to assist the domestic private sector and to make the IFC a full partner in the Bank Group,” said U. S. Treasury Secretary William E. Simon. He suggested that the IFC should “act aggressively” to bring international companies and national authorities together for increased mineral production, and develop a “new investment trust, so that equity shares in joint ventures can gradually be purchased by private individuals and firms in developing countries.”
A Fifth Replenishment of IDA’s resources drew particularly strong support from the Governors, a number of whom expressed hope that the new capital surplus countries would participate substantially in the exercise. Belgian Finance Minister Willy De Clercq said he hoped a speedy and substantial replenishment could be accomplished “through full cooperation between the traditional aid donors and the oil-exporting countries.” The Indian Finance Minister, C. Subramaniam, called for the industrial countries to “not only reaffirm, but also substantially enlarge” their traditional participation in IDA.
“Without IDA financing,” Kenyan Finance and Planning Minister Mwai Kibaki said on behalf of the African countries, “membership in the Bank for the majority of African countries will be meaningless.”
Welcoming the establishment of the Bank’s Third Window, a number of Governors felt that it should be made a permanent Bank lending facility, its size increased, and its eligibility criteria broadened to include the middle-income developing countries.
Aiding urban poor
Mr. McNamara also outlined an expansion of the Bank’s fight against “absolute poverty” to add the urban poor to the rural target group. The approximately 200 million city dwellers in developing countries now earn less than $75 per capita a year. Their number is expected to increase by almost 1.1 billion in the next 25 years.
The concept of broadly based development projects bringing substantial economic returns from relatively small per capita investments “works in the countryside,” he said. “It is an approach that we believe can work in the cities as well.”
“Measures that will remove barriers to their earning opportunities and improve their access to public services” are needed to assist the urban poor to increase their productivity, said Mr. McNamara. He went on to list more jobs in the modern sector, increased earning opportunities in traditional, informal occupations, equitable access to public utilities, transport, education and health services, and realistic housing policies as key components in curing “the pathology of poverty in the cities.”
“Any serious effort in solving the problems of urban development will clearly involve a number of sensitive and difficult political choices,” he said. “Those, of course, are for governments to make, not for the Bank.”
Although the Bank can finance “only a very small proportion of the necessary investments,” aiding governments in identifying and overcoming urban poverty problems and redirecting and expanding its own urban effort “will be a major objective of our five-year program,” said Mr. McNamara.
Recession versus inflation
Despite the importance given to increasing development aid, many Governors felt that an early revival of world demand through expansionary policies in the industrial countries was the most important factor in restoring the momentum of development. Some, including the Governors for the United States, Japan, and the Federal Republic of Germany, cautioned, however, that expansionist policies still carried the danger of renewed inflation.
“The basic cause of the further deterioration in the external position of the developing countries is the worsening of the economic recession in the industrial countries,” said Dr. Rodriguez in his opening remarks as Chairman, adding that the “solution” lies “in promoting a suitable expansionist policy in certain countries of key significance for the world economy.”
His feelings were echoed in the statements of Korean Minister of Finance Yong Hwan Kim, who said that “it seems indisputable that the most urgent thing is for the industrial countries to make all-out efforts to reflate their economies,” and by the British Chancellor of the Exchequer, Denis W. Healey, who felt that “recovery is now the overriding priority facing the world economy.”
The stabilization of commodity prices and developing countries’ export earnings at “equitable” levels was also stressed by many Governors from both developed and developing countries. They urged the Bank’s participation in commodity stabilization, buffer stock financing, and export and credit guarantee programs.
Governors representing African and Asian countries also asked that the Bank’s program lending and its financing of the local currency costs of projects be increased.
Among others, Panamanian Planning and Economic Policy Minister Nicolas Ardito Barletta speaking on behalf of 19 Latin American countries and the Philippines, saw the private capital markets as another important channel for development resources, and urged a continuation of the Development Committee’s studies on improving access to these markets through such mechanisms as multilateral guarantees.
Greater voice for poor nations
A number of developing country Governors and Danish Minister for Foreign Economic Affairs Ivar Nørgaard, representing the Nordic nations, felt that the Bank’s own decision-making processes should be adapted to give better representation to the views of the poorer countries. “There should be an increase in the representation on the Board of Directors for the developing countries to give Third World countries parity,” said Franklin E. Hope, Guyana’s Minister of Finance, speaking on behalf of five countries associated with the Caribbean Community. The Bank should also “increase the representation of developing countries in its managerial staff,” he said.
A strengthening of international organizations such as the Bank Group, increasing development resources through greater private and official capital flows, and stabilizing export earnings at “equitable levels” were seen by the Chairman as components of a new relationship needed to change the “deep-rooted structural imbalances” between the rich and poor countries that have caused “an extensive waste of human capital that is destroying the main wealth of society.”
“All of us here are looking toward a different international economic order—and a better one than has so far held sway over the vast majority of the people who live in the different continents of this planet of ours,” Dr. Rodriguez said.
The World Bank Annual Meetings
The report in this issue of Finance & Development on the Bank Annual Meetings is greatly condensed, touching only upon a small portion of the speeches and proceedings. A more complete record, Summary Proceedings, is available now in English and will be available in February in French and Spanish free on request from
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