- Saíd El-Naggar
- Published Date:
- September 1987
Everyone present has undoubtedly taken note of the historical sequence of the development of the facilities that the International Bank for Reconstruction and Development and the International Monetary Fund offer. I think that they will treat the subject in great detail in their comments. Therefore, I will not talk much about what is in the paper. I will discuss certain issues related to the Bank and the Fund in general.
As is well known, these two institutions were created after World War II for a specific group of countries. During that period, there were 45 or 46 countries, most of which were industrialized or partially industrialized. The problems that were identified at that time, whether related to the balance of payments or to development, were clearly defined with respect to the Bank. It can be deduced from its name that the primary purpose was related to reconstruction. The Fund handled a limited number of problems, all of them short term. The demands on the resources of these two institutions, except for those related to reconstruction, were not great. Membership at the time was limited to a small club of countries. At that time, it was not expected that the number of countries would increase as much as it did, nor that later, countries with profound problems requiring many years and great efforts would join the Bretton Woods institutions. Thus, it was necessary, with the passage of time, that the policies of the Fund and the Bank change in order to correspond to these developments.
The purpose for which these two institutions were founded is quite different from their purpose today. This purpose was to serve a certain kind of country and to treat a certain kind of problem. This is the first point. The second point is that the philosophy on the basis of which these two institutions were founded was a capitalist philosophy based on economic freedom, the absence of state intervention, except to provide basic facilities, and letting the private sector work in the productive sectors. Therefore, there was no occasion for these two institutions to intervene in the domestic affairs of the countries. The role of the Bank was limited to providing loans for certain projects or for reconstruction. The role of the Fund was limited to offering loans to governments directly so that they could regulate their balance of payments. The philosophy was a philosophy of economic freedom. This has also radically changed in recent times. The developing countries, especially those that have recently become independent and those whose economic resources are limited, cannot operate according to this philosophy of economic organization. The governments had to intervene fundamentally in their economies and work to achieve goals that were not considered when these institutions were established. The governments of developing states intervene to achieve various social goals that the governments of the industrialized countries do not deal with in their societies, such as providing education, health, and employment, even if this causes a deterioration in the balance of payments and other problems.
At the same time, we find that the productive sectors of these countries are extremely limited and are unable to support the balance of payments. This causes a profound structural problem that is found in a large number of countries. Perhaps 60 percent of the members of the Fund fall into this category of countries.
In addition, when the World Bank began operating in order to serve the goals of development, it concentrated on programs, as Mr. Mohammed pointed out. Then it began to concentrate on funding projects. Recently, the proportion of nonproject lending rose to about 40 percent of total lending. This is certainly a significant change.
However, the implementation of programs is by nature long term. The longer they take, the harder it becomes to implement them with the assistance of the Fund, since this assistance is usually short term. The process of development in the developing countries that lack productive sectors cannot take place quickly. Therefore, long-term financing must be provided as a palliative by the Fund from time to time. I do not think that the problem will be solved in the near future.
The third point relates to the catalytic role of the World Bank and the International Monetary Fund. Both institutions have begun to make use of resources other than their own. This change also has profound effects from the point of view of the caution exercised by the two institutions with regard to the funds that they borrow from banks and from countries. This explains why conditionality has recently hardened and why these institutions are somewhat hesitant to commit these resources.
The fourth point, which has been made by Fayqa Al-Rifa’i and others, relates to the industrial countries. It is a fact that imbalances in the developing countries are largely caused by certain policies pursued by the industrial countries. The latter have their own methods of adjustment and their exchange rate policies are effectively beyond the control of the Fund. From a practical standpoint, surveillance by the Fund is therefore limited to the developing countries. Why don’t we hear about the problems of regulating exchange rates? Because they are left to the forces of supply and demand in the market and are automatically adjusted with limited intervention. The Group of Five will meet soon and will take decisions, the effects of which will quickly reach the markets. However, they will not take into consideration the repercussions on the developing countries. When interest rates skyrocketed to 20 percent in the early 1980s, the impact was much more felt by the developing countries rather than by the industrial countries.
I would also like to discuss an issue that Mr. Mohammed raised in his paper, namely external indebtedness. As is well known, this indebtedness has become aggravated, and I think that the most recent estimate that we are hearing is that it has reached 1,000 billion dollars. It has become difficult for the developing countries to solve this problem, and I think that it cannot be solved without measures that include financial assistance and debt forgiveness. This may sound incongruous coming from someone who is from a creditor country, as I am. This problem is becoming more serious in view of the fact that presently there is a reverse flow of financial resources from developing to industrial countries. Obviously, this is contrary to the normal flow of financial resources, which should be in the opposite direction. We call for an increase in the exports of the developing countries, because the reason for these debts is that the developing countries have imported more than they have exported during the last three or four years. Imports are still greater than exports. Therefore, there have to be debts. One of the solutions, if it can be achieved, is to expand significantly exports from these countries. But the problem is not an easy one, given the slow growth and high level of protection in industrial countries.