Journal Issue

The challenge of development today: An interview with the Senior Vice President, Operations, of the World Bank

International Monetary Fund. External Relations Dept.
Published Date:
September 1983
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F&D The Bank has always prided itself on its ability to respond flexibly to the needs of its members. Broadly speaking, how is the Bank responding to the needs of its members in present circumstances?

Stern The problems of the developing countries in the last three years have changed dramatically in character and complexity, and they have changed very differently for different sets of countries.

For the countries in Africa and, indeed, for least developed countries generally, the problems began to develop sometime ago. The situation has deteriorated further in recent years. Some African countries have had terms of trade losses in two years of more than 25 per cent; and aid programs, with few exceptions, are stagnant, if not declining.

The Bank issued a report on sub-Saharan Africa two years ago which identified some very basic structural problems in Africa. In the report we outlined what the Bank and the international community could do to help. Since then the difficulties in Africa have been aggravated by the worldwide recession, which has continued much longer than anybody had anticipated.

In the face of these difficulties many countries in Africa today are following the kind of general structural changes that we talked about in the Africa report. We have continued to bolster that effort by increasing the share of African countries in total IDA lending— it now stands at about 34 per cent—by changing our lending program to focus on quick-yielding projects, particularly in agriculture; by expanding our lending in explicit support of structural changes at the national or sectoral level; and by expanding our staff—for economic analysis and policy advice—in both African regions of the Bank. We also have expanded our lending for technical assistance in Africa, which now constitutes a very substantial proportion of our total lending, with emphasis on assistance in planning, project evaluation, and debt management; and we started a new program for seconding Bank staff to assist IDA countries.

In the middle-income countries the problem is very different. There it is a question both of structural changes and, at the moment, of access to capital. The Bank is constrained in terms of how much it can lend each year and how rapidly its lending can expand. In the middle-income countries we have focused on financial support of structural changes through our structural adjustment lending and on changes in the composition of our lending program to increase disbursements in the near term. The past year has been particularly dramatic in that regard. About 10 per cent of our lending program is now in the form of structural adjustment loans. We have introduced such lending in Yugoslavia, for instance, to help, along with the Fund, the commercial banks, and the Bank for International Settlements, in putting together a policy reform package. And we have had repeater structural adjustment loans in Turkey, Jamaica, Thailand, Korea, and the Philippines. Where we don’t have structural adjustment loans, such as in Brazil or Mexico, we have restructured our lending program significantly. In both countries we have expanded lending for working capital to finance import requirements for exporters and to provide capital for small- and medium-scale enterprises. All these operations will result in disbursements in a fraction of the time of normal project loans.

In the higher-income countries our ability to lend is constrained by the policy of limiting our lending to them. But here, too, we have been very active in helping them to formulate (again, in most cases, in cooperation with the Fund) the basic programs for structural change which they have to undertake.

In general, if you compare not only our lending levels but also the composition of our lending program today with what it was three or four years ago, there is a very dramatic shift to financing of activities which are relatively quick disbursing and focused on (1) more effective utilization of existing capacity rather than starting new investments, (2) maintenance and rehabilitation of existing capacity, and (3) energy, to reduce demand for energy through conservation and to help countries achieve greater self-sufficiency.

F&D You didn’t mention the question of external debt. The Bank, with the Fund, has stepped up its assistance in this area in a number of ways. Some people have suggested that all these efforts “to save countries from bankruptcy,” as they put it, will only postpone the problem. Could you react to this charge?

Stern Well, if you manage to postpone a problem long enough you can also say you have solved it! The question really is whether or not the debt problem of some middle-income countries is a long-term feature; that is, to what extent is it a structural as against a liquidity problem? I think two or three points are worth making. First, the Bank, the Fund, and the BIS need to do more to get the data base firmed up. I think that is important. But it is really not the lack of adequate statistics which has led to current problems. It is a set of policies. To what extent unsustainable policies have led to problems differs very much across countries. In some countries, clearly, borrowing was in excess of what was feasible. Investment programs were too large. And there was an unjustified euphoria about long-term prospects, in some cases based on the proposition that oil prices would never go down. This allowed countries, in an era of substantial liquidity in the commercial banking system, to borrow for investment programs that were excessive and, to some extent, maintain consumption levels through subsidies. But these cases don’t constitute the bulk of the problem.

In many countries, adjustment measures were taken—balance of payments deficits were reduced, investment programs were pared, and subsidies were reduced or eliminated. But the depth of the recession simply was more profound than anybody had predicted (or, I think, could have predicted). So you find a lot of countries today in debt servicing difficulties. Historically, as you know, that’s not a unique phenomenon. I think it would be a mistake for the world to conclude that all borrowing, or borrowing at these kinds of levels, was necessarily a bad thing. The borrowing helped to cushion the oil shocks, to finance structural changes in many countries, and, not incidentally, to help maintain demand for OECD exports in the mid-1970s.

The developing countries obviously need, and will continue to need, a substantial amount of external capital. We mustn’t become unduly pessimistic as a result of the current difficulties, which come at a time of the worst economic stagnation since the Second World War. For the future it is important that all of us— the international institutions and especially the other lenders, official and private—understand the distinction between the difficulties countries have run into by reason of poor policies and inadequate management and the difficulties caused principally by external factors. My view is that the problems of many countries are due to external factors and that these debt servicing problems will become manageable when growth resumes. There are now some encouraging signs that this has begun to happen.

But we all have also learned a lesson that the more traditional indicators of debt servicing are not as irrelevant as they were perhaps thought to be in the latter part of the 1970s, and that domestic policies can provide clear indications of whether countries are likely to get into debt difficulties well before they get to a balance of payments crisis.

F&D Moving to lending policies, would it be fair to say, as some critics have, that the emphasis of Bank lending has shifted away from poverty alleviation?

Stern I think there is no doubt that investment priorities in developing countries have changed in the last several years. Almost without exception, countries today are engaged in crisis management—they all face very severe budget difficulties which have a direct impact on how much they can spend on the social sectors, such as education and health. There is today in most countries a reduction in investment programs so severe that there is almost no financing for new projects. In such cases, investment programs simply provide financing to complete investments already started. As a result of that our lending patterns also have shifted.

It is true that the emphasis on structural adjustment lending, and on the maintenance of existing capacity, has reduced lending for some other activities. That is inevitable. But it is certainly not intended, either by the countries or by ourselves, as a shift in policy. It is a response to current circumstances. Indeed in our policy dialogue associated with structural adjustment loans and similar type of lending, the Bank stresses the importance of maintaining efficient investments in the social sectors so that poverty groups in the country are not ignored and that the longer-term investments in education and human resource development are not neglected. For instance, in structural adjustment loans, housing programs have been revamped to reduce subsidies to higher-income groups and make units available to low-income groups; land tenure programs have been strengthened, education expenditures have been restructured to reduce unit costs while expanding coverage, and family planning programs have been supported.

F&D When you move out of this phase of crisis management, as you called it, do you foresee any further shifting of Bank lending priorities, and if so in which way?

Stern If you are still talking about the poverty objective, approximately a quarter of our lending has been in the agricultural sector. That continues to be a broad goal. Within that, we continue to pursue export-oriented projects, with maximum emphasis on smallholder participation and peasant agriculture, as distinguished from large-scale irrigation or plantation agriculture. We have also, in recent years, shifted emphasis toward the energy sector, which, in the long term, should represent up to 25 per cent of our total lending. Dependence on energy imports is perhaps the single most important factor in reducing the capacity of low-income countries to place more emphasis on investment programs directed toward lower-income groups.

We also intend to increase our emphasis on education and training, particularly in sub-Saharan Africa and other least-developed countries. I think it has always been clear, but it has recently become even more vivid, that in these countries there are, in fact, major barriers to efficient growth as a result of the continued paucity of technical and managerial skills, and local institutions with managerial and analytical capacity. While capital is a problem in these countries, the effective use of that capital, and indeed the ability of these countries to obtain the necessary volume of capital in the future, is virtually dependent on substantial strengthening in these areas.

F&D One of the more specific recent initiatives of the Bank is the Special Action Program. Is the SAP designed as a short-term answer to short-term problems, that is, to keep some growth going while prospects are bad? Or will the Bank permanently finance a larger portion of project costs in priority sectors, for instance?

Stern Well, essentially it is the first, a response to current economic problems. When we presented our Special Action Program to the Board of Executive Directors, we proposed this program for the next 18 to 24 months and indicated that we would expect to terminate it at the end of that period if economic conditions evolved as we were then projecting.

There are various aspects to the Special Action Program. Some of them will be permanent, such as the measures intended to accelerate disbursements of otherwise quite conventional projects. We had started to do some of that before the SAP was approved by the Board and the SAP really accelerates what we had been doing. But some other aspects, such as supplementary financing for ongoing projects, are intended to be a response to a temporary problem. It seems to us that it is more important to help countries complete high priority development projects and to utilize existing capacity fully than to allocate money to new investment at this stage. Requirements for this kind of financing will disappear as countries reorient their economies and as the world economic situation improves.

The third element, structural adjustment lending either for the economy as a whole or focused on specific sectors, presumably will also diminish in volume although it is not likely to disappear for some time.

F&D So, the Bank’s principle of financing only a portion of the project’s costs in order to ensure the country’s commitment through its own financing efforts remains intact?

Stern Surely. I think that is a basic principle and experience demonstrates that it is a very sound principle. The range of our participation in project financing is very large, from about 35 per cent in the middle-income countries to 90-95 per cent in the very poorest countries. Most of the potential for increasing our share of project financing affects those countries where we normally finance a relatively small share, that is the middle-income countries. It is our intention that as countries get themselves out of the current economic difficulties, they should go back to financing a larger share of their own investment programs.

“… the hope is that as the world economy revives, budgetary pressures in donor countries will become less severe and they will be able to consider adequate funding for the investment needs of the low-income countries. This is not a question of generosity; it is a basic responsibility.”

F&D Which regions or countries are likely to be the main beneficiaries of the SAP?

Stern You must recognize that the basic objective of the SAP is to increase disbursements in the next 18-24 months; not necessarily to increase loan commitments. In the IDA countries there are limitations because we already finance a very high share of project costs in these countries. Essentially, what we can do in the IDA countries is to restructure our lending program to move toward more quick-disbursing activities. But we are constrained by a severe scarcity of IDA funds.

The countries which are Bank borrowers are therefore going to be the principal beneficiaries. Loanable resources will continue to increase in real terms. Moreover, since we have only financed a relatively small share of project costs, the scope for supplementary financing is larger. Thus, the countries in Latin America, the Middle East, and East Asia will receive the largest volume of assistance under the SAP; but the more rapid disbursements in the IDA-only countries will provide some real relief to these countries as well.

F&D You mentioned structural adjustment lending. How would you evaluate the first three years or so of experience with such lending?

Stern We have done several studies of this for the Board. On the whole I think our structural adjustment lending has been very successful. In most of the countries where we have lent for structural adjustment (Turkey, the Philippines, Thailand, Korea, and Jamaica), we think these loans (which have in all cases been associated with Fund programs) have made a major contribution to introducing basic changes. They have done so by introducing greater competition in the economy through reduced levels of protection, by realigning price structures and improving the incentive framework for efficient investments, by reducing obstacles to sound investment decisions and, in the agricultural sector, by improving incentives for farmers to produce more, more efficiently, and better in line with comparative advantage. In all these countries I think the retrospective view is that these programs have been very successful.

There have been problem countries. It is true that in the lower-income countries—in Africa for instance—the results are more difficult to assess and in some cases they have not been as good as we had hoped. That is not too surprising because the capacity of these governments to introduce structural changes is more limited, their own analytical capacity is more limited, and the political situation is more difficult. So there the picture is much more mixed.

F&D Do you see an expansion in structural adjustment lending in the next few years?

Stern The Bank has, at the moment, a policy that structural adjustment and program lending should not exceed 10 per cent of the Bank-IDA annual lending volume. We also agreed with the Board that if we had requests that would lead us to increases beyond this level we would go back to the Board and present the case for raising the ceiling. It is always possible that in the next year or two we may get more requests and more effective programs than we could possibly support within the current 10 per cent limit. But my present sense is that lending for structural adjustment is unlikely to exceed that annual ceiling very much.

F&D Do you ever ask yourself whether the Bank is attempting to transfer more resources to its members than they can use productively?

Stern Yes—but that’s not a real problem. In the developing countries the need for, and the flows of, external capital are very large. Out of that flow, whether you measure it in terms of commitment or disbursements, the World Bank contributes a very small portion. And although one of its roles is to transfer resources—an important function- that certainly is not the yardstick of our effectiveness or of our contribution to the development process. There is no question that the supply of sound investment projects far exceeds, certainly today, the availability of external capital. It is true, of course, that in the lower-income countries, some people detect absorptive capacity constraints. But that’s just another way of saying that these countries are at a lower level of development of their human resources, their institutional ability, and their managerial skills and need help to make efficient use of their domestic and external resources With so much poverty still in the world, surrounded by so many problems of growth and development, it would be a major failure on our part if we could not help our members to utilize all available resources, including all we can make available, to accelerate growth.

F&D It has been said that the Bank is dealing with development from “a safe distance.” Do you think the Bank should be more decentralized?

Stern Decentralization has two aspects. Within the Bank we have gone a long way in decentralizing decisionmaking for operations to the regional vice presidents, (hey, in turn, have delegated quite a lot to their unit managers. But decentralization is also sometimes thought of as taking, say, a regional office and putting it in Latin America or in Africa. 1 think we have to keep in mind several things. First, in all of these legions there are regional development banks. One of our distinguishing features is that we are a global institution. We are able to take staff and give them development exposure in different parts of the world so that we can provide experience and disseminate knowledge on a much broader base. That would be certainly very much more difficult if our regional offices were geographically dispersed.

Second, we have a Board at the Bank, which reviews each project. That again would be very difficult in a geographically dispersed set of operations. Third, our policies must be generally applicable to all of our members. Of course, they have to be applied flexibly in a lot of different country situations. But, it is very important to our shareholders to make sure that a problem is treated in the same way in, say, a Latin American country as it is in a country in Hast Asia And again, that kind of control is almost impossible if you were to take all those units and do as a private corporation does and give them their own headquarter operations in the regions. Finally, it is not true, as is sometimes supposed, that travel in a region is facilitated by being geographically located in that region. We have studied these and other options and have not found that they would either improve the development impact of our operations or our cost effectiveness.

F&D We have discussed the Bank’s lending policies and operations. To finish with a question on the financing of these operations: What is the state of play with IDA? Can one expect donors to become more generous once economic recovery takes hold?

Stern That, of course, is the critical question. Certainly the hope is that as the world economy revives, budgetary pressures in donor countries will become less severe and they will be able to consider adequate funding for the investment needs of the low income countries. This is not a question of generosity; it is a basic responsibility. But at the moment, the IDA situation is bad. IDA VII [the seventh replenishment of IDA resources], which should start July 1, 1983, will not come into effect until a year later. The $12 billion for IDA VI, which was to have financed three years of operations (fiscal years 1981-83) now has to suffice for four, though we have received supplementary resources of about $2 billion from IDA members, other than the United States. This will permit a program in fiscal year 1984 of about SDR 3 billion—in real terms less than this year’s program. As a consequence, during the IDA VI period, real resource transfers have been well below what they were expected to be, and this in a period of exceptional difficulty for the low-income countries.

We are in the middle of negotiations for IDA VII and they are very difficult, both because of the economic climate and because of the sums involved. Out objective is to have an IDA VII of 516 billion. Anything less than that really would be a shirking of responsibility by the international community. The $16 billion is little more than IDA VI continued in real terms, even though needs are clearly greater, even though China is now eligible to borrow from IDA, and even though bilateral aid programs of the major donor countries have either stagnated or been reduced with very few exceptions Japan and Italy, for example.

The kind of changes that donors have been advocating for the developing countries in recent years—a more open economy, greater reliance on market forces, more efficient management cannot happen without policy shifts, which must be supported by a growth in external capital flows. And IDA is the single most important source of such concessional flows.

The industrialized countries and the other donors simply have to take another look at what their real priorities are- not just the short-term tradeoffs but the priorities for a growing and stable world economy. In terms of their budgetary problems, a $16 billion IDA VII does not, will not, create an insuperable problem by any means, Each country’s share can be accommodated even if its economy grows only slowly for the next several years. It is a question of political judgment on priorities, not of budgetary feasibility. Too many donor countries today take the view that IDA is a burden and the developing countries can do with a good deal less of concessional support. 1 think that is a very short-term and a very unrealistic view. There are no alternatives. The developing countries have to do better themselves. But they can’t do better without external support.

F&D Have any efforts been made to encourage the more successful middle-income countries to support IDA?

Stern As you know, the membership of IDA donors has grown tremendously. The first IDA was supported by 18 countries; 33 countries contributed to IDA VI The list of middle-income countries now contributing is long it includes Brazil, Mexico, Saudi Arabia, Spam, Venezuela. Argentina, Korea, and Yugoslavia, almost all these countries are continuing their support despite their own current financial difficulties. The volume of resources the developing countries who participate in IDA can make available is limited Nevertheless these countries, whether they were former recipients of IDA or not, fully recognize that this ought to be an international effort and are doing their share.

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