Chapter

Official Financing and Growth-Oriented Structural Adjustment

Editor(s):
Mohsin Khan, Morris Goldstein, and Vittorio Corbo
Published Date:
September 1987
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Author(s)
R.H. Carey

This paper considers the relationships between official financing (both bilateral and multilateral, concessional and nonconcessional) and growth-oriented structural adjustment programs. It is organized as follows. The first section offers some broad perspectives on the nature and significance of the financial and institutional challenges. There follows a section on the financing/adjustment and growth position of three groups of developing countries identified in current Fund tabulations: 15 highly indebted countries, sub-Saharan Africa, and (as a point of reference) countries without recent debt-servicing problems. This section attempts to place the role of official financing in the context of the current problems of the main groups of developing countries undertaking growth-oriented structural adjustment programs. Next are two sections on the supply of official finance, the first offering some general macroeconomic observations, the second a “flow by flow” analysis of issues and prospects by source of finance. The final section deals with policy and operational improvements that might enhance the role of official financing in contributing to growth-oriented structural adjustment. Some questions about longer-term directions are also raised.

Introduction: Perspectives on Official Finance and Development in the Mid-1980s

In the mid-1980s, official development finance—bilateral and multilateral aid and nonconcessional lending—is providing no less than 70 percent of the net financial resource flows to developing countries (Table 1). This proportion has leapt from 35 percent at the beginning of the 1980s, and from 45 percent in the early 1970s. Indeed, one has to go all the way back to the early 1960s, before the postwar revival of the international capital markets, to find official development finance playing a comparable role in the financing of developing countries.

The 1980s have brought other notable shifts in the pattern of financial flows to developing countries. Multilateral flows, concessional and nonconcessional, now constitute 24 percent of total flows, up from 10 percent in 1980 (and only 4 percent in 1960). Officially provided or supported export credits, which accounted for some 10-14 percent of flows throughout the 1960s and 1970s, have tumbled in the 1980s, on a net basis, to around 2 percent of the total.

Table 1.Pattern of Total Net Financial Flows to Developing Countries: Main Components, 1960-861(In percentage shares)
1960-61197019751980198519862
Official development finance594645356072
of which:
DAC bilateral aid482817142733
OPEC bilateral aid210733
Multilateral aid25761012
Multilateral
nonconcessional lending23441012
Export credits1413101322
Private flows274145513826
of which:
Direct investment1918209912
Bank sector6152138164
Bonds21162
Source: OECD data bank.

The background to these shifts in the pattern of development financing in the 1980s is of course the dramatic rise in private bank lending to developing countries, beginning in the late 1960s, to a high (and unsustainable) peak in the early 1980s, and its subsequent dramatic decline. Current evidence suggests that the private international bank sector is now barely maintaining a net flow of new lending to developing countries as a group. Net lending to some 20 creditworthy developing countries, mainly in Asia, is continuing; the aggregate picture is dominated however by the reduced bank flows to “problem” countries.1

Private direct investment has played, on the whole, an apparently passive role in this saga, providing about the same volume of flows (i.e., at constant prices and exchange rates) in the mid-1980s as in the early 1970s, thus losing relative position in the overall financing pattern. Episodic increases in direct investment throughout this period indicated the continuing potential of this form of external financing, however, and there was significant use of bank loans and export credits in association with direct investment.

These changes in the pattern of financial flows to developing countries are intimately related to recent economic trends and events in both developed and developing countries, in ways with which we are all only too familiar. The current relative dominance of official development finance is explained, of course, by the fact that a significant number of developing countries have lost their creditworthiness vis-à-vis the private capital markets (and often vis-à-vis official export credit agencies as well). This situation is itself only an indication of the more fundamental reality—that financing and development processes have gone seriously astray in an important range of developing countries, including both more advanced and less advanced countries.

Against this background, what we are witnessing is not just a rearrangement of the pattern of financial flows, but an important new phase in the 40-year record of development cooperation and official financing.

What, fundamentally, is new?

First, a diverse range of actors is being called upon to respond to a large number of specific country situations with a degree of rapidity, flexibility, and coherence not previously a notable feature of development financing processes. Second, the nature of current development problems demands a program approach to the delivery of development assistance and finance, rather than a project approach. In more technical economic terms, there is a general equilibrium problem involving the use of all resources in the recipient economy, and development assistance and other financing agencies cannot divorce themselves from that overall context.

Flexibility and program approaches have by no means been absent from the development cooperation scene. Major changes in the allocation of aid, both geographically and sectorally, have taken place, while program aid has a long history. It would nevertheless not be inaccurate to characterize the development assistance process, both bilateral and multilateral, as having evolved mainly along incremental and project lines. It is also fair to say that the concept of policy-based lending, in any broad, concerted form at least, has not been a part of the “culture” of development cooperation. Even the World Bank has, in the past, kept the policy dialogue with its borrowers on a discreet, partial equilibrium basis. On the whole, the development cooperation industry has been prepared to leave it to the Fund to take the general equilibrium approach, focused on key macroeconomic prices and other variables, having itself neither the orientation nor the competence to handle this difficult task.

To this background must be added a further complication in the case of assistance to the poorer aid-dependent developing countries. Institutionally, the “common aid effort” has become enormously complex, with some 24 donor governments, 10 multilateral development banks and funds, 19 United Nations agencies, and several hundred nongovernmental organizations all interacting at different points and levels with recipient country authorities and employing different terms, operating techniques, and procurement conditions.

In the Organization for Economic Development (OECD), the Development Assistance Committee (DAC) has devoted much effort over the last three years to confronting the need for change in established practices and philosophies to meet the demands of the new development challenges. A set of conclusions released publicly by DAC Aid Ministers and Head of Agencies following their annual High Level Meeting in December 1986, under the title “Aid for Improved Development Policies and Programs and Implications for Aid Coordination”2 sum up the results of three years of discussion and constitute, in a sense, an extraordinary mea culpa on the part of developed country donors. Two major self-criticisms are implicit:

  • the complexity of the aid process has overwhelmed the administrative capacities of the smaller, poorer recipient countries, weakening their central accounting and control functions and thus contributing to a lack of coherence in resource allocation and public budgetary processes;

  • lack of attention to the policy environment, far from enhancing the autonomy of the recipient governments, has helped to undermine it.

When the situation is expressed bluntly in these terms, it becomes more evident that the measured rationalism of the DAC’s prescription for rectifying these damaging faults amounts to a truly radical and important manifesto for the reform of the aid process. The “firm resolve by aid leaders to work with other donors and recipient countries to relate their individual aid activities more closely to carefully appraised and jointly reviewed programs and policies” involves, as becomes apparent from a reading of the agreed aid coordination principles, a demanding agenda for changes in organizational orientation and practices.

In other words, growth-oriented adjustment in aid-dependent countries is not simply a question of financial and economic issues. Even more fundamentally, it requires solving complex problems of public administration and political cooperation, both domestic and international in scope.

It has thus become clearer than ever that the effective delivery of development assistance is inherently an immensely difficult undertaking. Contemplating the inherent problems of the aid process, Charles Kindleberger, nearly 20 years ago, asked the question whether the resurrection of the international capital market might provide a better medium than aid for the provision of foreign capital needed for developing country growth.3 His review of this question provides a useful transition in this introductory overview to the role of official financing in meeting the current problems of the more advanced overindebted countries. Kindleberger took the view that in the long run it was desirable that private lending, in debt form, should replace some or most aid and official lending, and that it conceivably could. The case he made provides interesting reading today:

The allocation of a portion of internationally available capital would be made by a market process—the “invisible,” rather than the “visible hand”—thereby relieving the political process of a disagreeable task. Conditions for borrowing would be determined by neither projects nor programs that were imposed by the lenders and that interfered with the sovereignty of the borrowing country. These conditions would be volunteered by the borrower, and they would be in accord with the market’s requirements as determined by the borrower and the investment bankers underwriting its loans. Where the market misjudged the creditworthiness of a borrower and default occurred, private negotiations of the Council-of-Foreign-Bondholders type would ensue without the external diseconomy implied by a single cohesive set of lenders whose condoning of one default implied license for all. (A reference to multilateral development banks.)

More significant, perhaps, the sensible fiscal management needed to restore creditworthiness in the international capital market is the same management needed for effective economic growth. Applied impersonally, rather than by paternalistic officials of international institutions, such management and governmental borrowing from the private international capital market raise a prospect of enlisting local capital in national growth efforts, initially in roundabout, and ultimately in direct, fashion. (The last phrase refers to resident-owned capital held abroad.)

Subsequent history in the 1970s seemed to bear out Kindleberger’s judgment. (A wave of developing country lending funded from the emerging Euromarkets was indeed underway as he wrote in the late 1960s.) And it is a fact today that a number of developing countries have successfully graduated from being aid financed to being debt financed, with the benefits of greater autonomy as described by Kindleberger. But the existence of the debt problem indicates that the Kindleberger system did not entirely work out in the real world. The restoration of creditworthiness in the heavily indebted countries, that is, growth-oriented adjustment, requires, as this symposium bears witness, a considerable and sustained effort of international cooperation, to support domestic policy efforts. The Kindleberger system, as clearly described in the quoted text, dealt with debt problems and recovery in a different way, through a default mechanism. What has been missing to date in the current situation is a workable default mechanism for bank debt with benefits that outweigh the costs in a way which makes a creditor/debtor deal possible. The absence of such a mechanism not only makes it difficult to clear away past mistakes, but is obviously complicating the “sensible fiscal management” in the debtor countries that Kindleberger cites as the route back to both creditworthiness and growth.

The purpose of this digression is not to argue the merits of writing down bank debt to market values. The facts are, simply, that there is no consensus at present as to how this could be done without causing unacceptable damage to the financing process. Rather the point to be made is that policy-based lending by official institutions to support growth-oriented adjustment in overindebted countries is, to a degree, a response to the absence of a workable default mechanism as part of an orderly restoration of creditworthiness. If at the same time, “sensible fiscal management” and a return to creditworthiness are rendered more difficult by the absence of a default mechanism, as may be the case when debtor governments are unable to solve the fiscal problem presented by interest payment obligations amounting to a significant slice of GDP, then there are reasons for believing that policy-based lending to highly indebted countries could be a somewhat frustrating business in the short run.4

In other words, while policy-based lending may be a necessary condition for the resumption of voluntary private lending, it may not by itself be sufficient to bring this about. This is the quandary for policy at this point.

It would not, however, be appropriate to judge the merits of policy-based lending by official agencies to support growth-oriented adjustment strategies only on these grounds. While a question mark may still rest over the proximate objective of restoring creditworthiness, there is little doubt that the concept of policy-based lending is bringing a much improved focus to long-run development policies and development cooperation. This is both necessary and likely to be of lasting significance.

Drawing together the various strands of this introduction, the underlying message is that institutional problems and the functioning of capital transfer processes lie close to the heart of the development financing challenges of the 1980s. The analysis which follows in this paper needs to be seen in this light.

Adjustment, Growth, and Official Financing

Before considering issues and prospects in relation to the supply of official finance for growth-oriented structural adjustment it will be useful to look at the situation of the main target groups, in the aggregate, in order to develop an idea of the financial magnitudes and “needs” involved. A range of adjustment, growth, and financial indicators for the period 1978-87 is presented in Tables 2-4 for three country categories—15 heavily indebted countries, sub-Saharan Africa, and “countries without recent debt-servicing problems.” (The latter serves to throw into relief the scenes that emerge from Tables 2 and 3.) It is essential, of course, to acknowledge the diversity, indeed the specificity, of individual country situations within the groups and hence the inevitability of a case-by-case approach for substantive, not simply operational, reasons. But some general analysis is possible.

What the statistics show about the recent history and current situation of the heavily indebted countries (the original Baker Group) and sub-Saharan Africa is mostly already familiar. The following points stand out:

  • Striking adjustments have taken place in all three country groups.

  • Current account deficits as a proportion of GDP more than halved in sub-Saharan Africa and the “non-problem” countries between 1981 and 1984, with remarkably little impact on ensuing growth rates, except for a two-year transition in sub-Saharan Africa. (The growth rate in sub-Saharan Africa was and remains, however, unacceptably low.) Gross capital formation has fallen in both of these groups, but not too drastically.

  • In the heavily indebted countries the current account deficit, a massive 30 percent of exports of goods and services in 1981, was eliminated by 1984. Gross capital formation fell from 25-27 percent of GDP before 1981 to 17-18 percent after 1983. Real GDP growth resumed after 1984, but remains distinctly lower than pre-1981 performance and well below long-run potential and social requirements.

  • Between 1978 and 1982, as debt built up rapidly and interest rates rose, interest payments climbed very sharply in all the groups, multiplying by three in sub-Saharan Africa and the “non-problem” countries, and by four in the heavily indebted countries. In sub-Saharan Africa and the heavily indebted countries this provoked subsequently a virtual cessation in private lending (“other borrowing”) and had to be accommodated by fairly drastic import compression, especially in the heavily indebted countries dependent on capital market finance. In the “non-problem” countries, private lending continued (1984 representing a fall in demand rather than supply), and the significance of non-debt creating flows and official lending provided further stability. Import compression was not therefore necessary to accommodate the much higher interest bill. Consumption could continue to rise, whereas it had to fall in sub-Saharan Africa and in the heavily indebted countries.

  • All groups had large gains in export revenues from the commodity and oil price boom of 1979-80; all suffered revenue losses in the recession of 1982 and all benefited from the recovery of 1984. But the “non-problem” group clearly gains from its capacity to generate non-commodity export income while the “flat” export revenues since 1982 of the sub-Saharan and heavily indebted groups reflect their dependence on commodity and oil exports.

  • Indications for financing and capital imports differ sharply between the three groups.

  • The “non-problem” countries retain the capacity to sustain a significant trade deficit and hence maintain import growth while meeting the rising interest bill, which is the corollary of continued capital importing, (The income-generating debt accumulation process is alive and well in a major part of the developing world!) Capital imports are not, however, as important as they were in the 1968-77 period in relation to GDP, reflecting both improved domestic savings capacity and a rational response to higher real world interest rates.

  • The heavily indebted countries have ceased to be net capital importers. Their aggregate current account is in balance. A large trade surplus has had to be generated through reduced domestic consumption and investment in order to meet interest obligations. Following the marked fall in international interest rates in recent years, interest payments in 1986 are still expected to represent about 6 percent of their collective GDP in 1986. (This figure varies from 9 percent in the case of Chile to 3 percent in the case of Nigeria.) The interest bill is being paid for by an historically large transfer of real resources in the form of reduced absorption of imports rather than increased exports.

  • Sub-Saharan Africa remains a major capital importer, financed now almost exclusively by official development assistance. In fact the region is now much more dependent on external finance than in the 1968-77 period, reflecting the greatly increased focus of the development community on this region over the last decade.

  • The Fund lending cycle of the first half of the decade seems now to have run its course. The repayment phase is beginning and is assuming some significance in the heavily indebted countries, but more particularly in sub-Saharan Africa, where the current level of Fund charges and repurchases from the Fund, at 7 percent of export earnings, indicates a problem area.

Table 2.Adjustment and the Financing Mix, Fifteen Highly Indebted Countries, 1968-871(In billions of U.S. dollars)
Average
1969-781978197919801981198219831984198519861987
Adjustment
Exports68.694.2127.1126.1111.5111.1123.4119.298.6101.5
Imports76.996.1122.7133.6108.382.880.278.475.783.3
Trade balance-8.3-1.94.4-7.53.228.343.240.822.918.8
Net interest payments-11.0-17.1-25.1-37.0-45.5-41.5-46.0-44.0-38.2-35.8
Current account-24.6-24.6-29.550.3-50.6-15.2-0.6-0.1-11.8-14.0
Oil trade balance21.936.834.329.527.633.332.223.626.3
Current account as percent of
exports of goods and services-16.1-28.1-20.5-18.3-30.6-35.6-11.2-0.4-0.1-9.2-10.6
Gross capital formation
as percent of GDP27.024.924.724.522.318.217.416.517.817.6
Real GDP growth6.13.46.15.00.5-0.4-3.42.23.13.53.2
Real GDP growth (per capita)3.60.63.12.6-1.6-2.7-5.5-0.10.91.41.2
Financing
Non-debt-creating flows5.37.86.27.47.54.34.25.54.35.1
Net external borrowing32.534.849.165.248.624.615.13.73.016.3
Long-term official3.63.04.56.53.711.38.18.09.510.0
Other borrowing29.431.743.257.330.72.44.2-2.7-7.28.9
Reserve related-0.50.21.31.414.215.72.8-1.60.7-2.6
Use of reserves-6.6-13.1-8.88.323.0-0.5-12.9-3.0-6.8-4.8
Memo Items
Use of Fund credit2-0.60.10.51.22.26.33.31.8-0.10.4
Fund charges and repurchases
from the Fund as percent of exports of
goods and services3-0.60.90.40.40.50.91.21.53.03.8
Source: International Monetary Fund, World Economic Outlook, April 1987.
Table 3.Adjustment and Financing Mix in Sub-Saharan Africa, 1968—871(In billions of U.S. dollars)
Average
1968-771978197919801981198219831984198519861987
Adjustment
Exports16.820.523.821.320.019.721.320.621.222.4
Imports19.222.027.526.624.321.420.419.921.124.4
Trade balance-2.4-1.5-3.7-5.3-4.2-1.81.00.7-1.9-1.9
Net interest payments-1.2-1.8-2.7-3.0-3.3-3.1-3.7-3.8-4.3-4.8
Current account balance-5.6-5.58.4-9.9-8.6-5.9-3.5-3.3-5.9-6.3
Oil trade balance0.5-0.9-1.1-0.50.10.91.61.50.40.4
Current account as percent of exports
of goods and services-14.3-27.0-21.8-28.4-36.8-34.2-23.8-13.5-13.1-21.9-21.9
Gross capital formation as percent
of GDP21.117.317.617.716.714.714.715.117.118.9
Real GDP growth3.41.92.13.02.40.6-0.72.03.04.83.2
Real GDP growth (per capita)0.6-0.7-0.9-0.2-0.52.2-3.6-0.80.10.90.2
Financing
Non-debt-creating flows2.83.44.14.03.73.93.94.04.75.9
Net external borrowing4.85.68.49.28.16.93.64.26.85.7
Long term official2.24.94.04.85.13.95.43.74.24.9
Other borrowing2.00.24.42.00.71.3-2.5-1.43.21.1
Reserve related0.70.52.42.21.70.71.9-0.60.3
Use of reserves0.1-0.2-0.10.40.5-0.3-0.1-0.6-0.7-0.3
Memo Items
Use of Fund credit20.20.40.31.60.71.30.40.2-0.3-0.7
Fund charges and repurchases from the
Fund as percent of exports of goods and services30.70.90.91.21.42.03.14.25.46.3
Source: International Monetary Fund, World Economic Outlook, April 1987.
Table 4.Adjustment and Financing Mix in Countries without Recent Debt-Servicing Problems, 1968-871(In billions of U.S. dollars)
Average
1968-771978197919801981198219831984198519861987
Adjustment
Exports130.4169.6214.5229.9223.0230.4261.4260.7280.9312.8
Imports155.0196.7253.3275.5265.7268.9280.3284.8297.4329.1
Trade balance-24.6-27.0-38.7-45.6-42.7-38.4-18.7-24.1-16.5-16.0
Net interest payments-8.8-13.3-18.2-23.8-26.0-24.3-27.6-29.3-29.4-28.9
Current account-16.4-14.8-21.0-30.8-27.9-27.4-13.4-17.0-5.4-5.9
Oil trade balance2.21.5-1.3-3.4-3.8-2.32.11.7-0.3-0.4
Current account as percent of exports
of goods and services-7.8-9.8-6.8-7.6-10.2-9.4-9.1-4.0-5.1-1.5-1.5
Gross capital formation as percent
of GDP29.028.628.127.126.826.326.426.826.526.2
Real GDP growth5.98.04.14.84.94.26.26.95.35.14.4
Real GDP growth (per capita)3.75.82.22.83.12.24 35.03.63.32.6
Financing
Non-debt-creating flows10.212.714.214.813.615.714.620.318.918.0
Net external borrowing19.428.338.448.634.433.323.526.221.615.5
Long term official7.38.410.615.215.612.214.06.411.611.9
Other borrowing12.120.827.430.315.718.29.320.810.64.6
Reserve related0.1-0.90.43.32.83.10.6-1.40.10.6
Use of reserves-7.2-9.6-10.4-6.5-4.9-6.7-5.2-5.4-2.3-4.7
Memo Items
Use of Fund credit20.1-0.10.93.12.73.31.0-1.3-0.91.4
Fund charges and repurchases from the
Fund as percent of exports of goods and services30.50.40.40.40.40.50.70.80.91.0
Source: International Monetary fund, World Economic Outlook, April 1987.

What conclusions might be drawn from this analysis for the two target developing country groups regarding the role of official finance in restoring the growth process? Something might perhaps be said along the following lines, again, not entirely unfamiliar.

In the heavily indebted countries, growth will generally require a restoration of gross capital formation, and a reduction of the huge non-oil trade surplus. (The reduction of the trade surplus in 1986 and 1987, indicated in Table 2, largely reflects the fall in oil prices, as indicated by the oil trade balance.) It is obviously unreasonable for this group of countries to have moved so far away from its 1968-77 profile as a capital importer. At the same time, even the falling level of interest payments (owing to interest rate declines and a halt to the buildup of debt) is proving a strain. From this point of view there is still little capacity for further debt accumulation. One part of the answer would appear to be a quantum leap in the productivity of investment. Large scope certainly exists here, and policy reforms are going in this direction. But they would need to go much further. And how much extra growth can be squeezed out of existing investment levels? Another part of the answer would be a reflow of flight capital. But until internal equilibrium and growth are clearly restored in a sustainable manner this is unlikely.

These considerations no doubt contribute to the continuing reticence of voluntary (and involuntary) lenders. Expansion of official lending then comes into view as a ray of hope. But in the absence of a fairly rapid restoration of debt-servicing capacity and more normal private flows, an official lender intending to operate on any significant scale would quickly become exposed. In essence, the policy quandary identified at the conclusion of the previous section of this paper seems to be confirmed by the numbers in Table 2. A cautious approach to the expansion of official lending, on a case-by-case basis, in step with domestic policy reforms, seems not only prudent, but essential, in these circumstances. And as suggested in the previous section, it unlikely to be a sufficient condition for the return to financial and economic health.

The case of sub-Saharan Africa produces a different analysis but perhaps not very different conclusions. This region is importing capital at a rate well above the 1968-77 profile, and is producing less growth with it. Different commodity prices then and now provide some explanation, but not a complete explanation. Even given the need for higher capital formation, is it desirable for the region to become even more aid dependent than it already is? While a few countries have reached the limit and beyond of their debt-servicing capacity, many still have manageable interest bills. But there is a lack of ability to attract new commercial finance. These considerations suggest that the overriding priority in sub-Saharan Africa must be to improve the productivity of these economies and to start restructuring away from the trap of commodity dependence. The record suggests that there is considerable scope for retargeting existing aid and investment activities. Higher aid flows may also be necessary. But the undesirability of moving even more in the direction of aid dependence suggests that this should be carefully restrained. Reforming the aid process along the lines of the DAC Guiding Principles is of high importance, in association with domestic policy reform.

Close consideration of the actual situations in the heavily indebted countries and in sub-Saharan Africa indicates therefore not only the necessity for policy-based official financing in support of growth-oriented structural adjustment, but also the limits to the amount of financial commitment that can be justified on the part of official agencies, in the absence of success in relaunching growth and private financing on a sustainable basis. On the other hand, official financial support will need to reach certain critical minimal levels if medium-and long-term growth-oriented adjustment strategies are to be feasible, politically or economically. The development financing community must somehow find its way along this narrow path.

Supply of Official Finance I: A Macroeconomic Perspective

Institutional Factors, Policy Concepts, and the Allocation of Aid

In considering the possible availability of official financing for growth-oriented adjustment programs, some basic factors need to be taken into account. First, in contrast to market-driven financial flows to developing countries, official finance has a high degree of stability. This derives partly from its long-term orientation, but, and this is important to the present discussion, more central is the fact that decisionmaking occurs through relatively slow-moving political processes. On the mutlilateral level, decisionmaking can be particularly prolonged and subject to limits imposed by negotiating dynamics and burden-sharing issues.

The problem then is how to get the official development finance “industry” to respond quickly and sufficiently to new requirements such as supporting growth-oriented structural adjustment, not just at the level of rhetoric, but at the level of funding and operations. The two years following the emergence of the debt problem in 1982, before the World Bank and the bilateral donors began to formulate a real response, have been viewed by some as an unfortunately long lag. Obviously there is likely to be more public impulse for fast reactions by donors when humanitarian concerns, such as the famine in Africa, are involved than when complex economic and financial problems arise. The two-year lag in any case could partly be explained by the original diagnosis that the debt crisis was mainly a liquidity problem. On this basis, the Fund, which is designed to move quickly on liquidity problems, was much faster off the mark in low-income Africa than was the Bank. While the availability of Fund finance made an important contribution to African economies at a critical time, in retrospect, the terms of Fund finance were inappropriate to many of these cases and now constitute a burden that will have to be absorbed somewhere in the development finance system (though a part will be met through the Fund’s new Structural Adjustment Facility).

The redefinition of the debt strategy in late 1985, introducing growth-oriented structural adjustment with a medium-term horizon, provided a concept around which the development community could build a solid and coherent response. This concept holds the promise of being one of those basic ideas that alter the direction of the development effort. Infrastructure development, integrated rural development, and basic human needs are among the ideas that have had such influence in the past. Growth-oriented structural adjustment has the particular merit not only of being appropriate to the times but of being considerably more comprehensive than previous “ruling concepts” and capable of bringing to the aid effort flexibility and economic coherence in a degree missing in the past. This goes back to the points emphasized earlier in the paper. There needs to be a continued effort to develop the concept into a set of operational principles that reach deeply into the orientations and programs of development agencies.

More effort will also be needed to demonstrate how growth-oriented structural adjustment connects with basic long-term development goals. A danger presently exists that donor agencies anxious to establish clearer long-term “development” goals for aid could set up too sharp a dichotomy between development and structural adjustment. Studies that show the relationships between structural adjustment and improvement of income distribution and prospects for the poor might be particularly important in demonstrating that adjustment can be a potent form of development, especially as longstanding policy distortions are unwound.

Changing the orientation of development agency approaches and operations is thus an important supply-side response. Another response is the use of special multilateral funds, such as the Bank’s Special Facility for Africa and the Fund’s Structural Adjustment Facility. This technique can marginally shift the allocation of aid but not increase overall aid volume. It is a way of concentrating funds on a particular problem, with appropriate delivery techniques and terms. There is likely to be a case for renewing the Special Facility for Africa on these grounds, and it is probable that some donors will make such a proposal. Nevertheless, there is also a certain reserve among donors about special funds in principle (problems have arisen in the U.N. system with the impact of voluntary funds that can undermine collectively agreed priorities). And there is also the possibility of a reaction at a certain point to the degree of priority accorded to countries with growth-oriented structural adjustment programs in the allocation of scarce aid resources and to a lesser extent perhaps (because they are more readily expandable), the lending limits of multilateral development banks. The point is being made with increasing frequency by some donors that the majority of the world’s poor live in Asia and that South Asia in particular is a region that should not be allowed to fall into relative neglect. It will need to be recognized therefore that, with relatively fixed financial resource constraints, a limit will exist on the priority that can be given to adjustment programs.

Against this background it should be noted that a major shift in the geographical allocation of aid toward sub-Saharan Africa had already taken place before the “adjustment” crisis arrived. The proportion of aid going to sub-Saharan Africa had risen from 10 percent in 1960 to 20 percent by 1970 and 30 percent by 1983. This share is likely to represent a plateau for some time, especially given the degree of aid dependence it has generated. (On average about 10 percent of sub-Saharan GDP is provided by aid, and some countries have hit a ratio of 20 percent.) Reorientation of aid use in sub-Saharan Africa will therefore be all the more important.

Macroeconomic Considerations: Resource Transfers and Financial Intermediation by Official Agencies

A particular concern in the present context is the phenomenon referred to as the “reverse transfer of resources” from the developing countries to the developed. This phenomenon arises from the fact that swollen interest bills have overtaken shrunken new net lending in the heavily indebted countries. A normal debt accumulation process eventually will generate annual interest payments in excess of new lending. The problem arises when income generated by the capital inflow is not sufficient to pay the interest and also allow rising consumption. A reverse transfer of resources of an “abnormal” character then takes place as consumption and investment are squeezed in order to pay, by forgoing real resources, interest obligations that cannot be financed by net capital inflows.

There is unfortunately much loose talk now about the reverse transfer of resources from developing countries to developed countries. It is a phenomenon concentrated almost entirely on the heavily indebted countries as Tables 5-8 show. All other developing countries, including those in sub-Saharan Africa, continue to have a strongly positive net financial transfer in the aggregate (although a few individual countries, including in Africa, may have negative financial transfers).

What, if anything, can or should official agencies do about this problem? It is essentially a macroeconomic phenomenon caused, on the one hand, by previous waste of capital and by capital flight resulting in loss of creditworthiness and, on the other hand, by high real world interest rates. Insofar as it is an institutional problem, it reflects the lack of a viable default mechanism as argued earlier in this paper.

Clearly, it is important that official agencies should maintain and where feasible increase net disbursements of aid and loan finance. It is not conceivable, however, that they can much affect the net financial transfer situation that obtains today in the heavily indebted countries. Neither is it fundamentally relevant to the functions of official development agencies, whether they are individually providing a net financial transfer to developing countries, in the sense that their new lending exceeds their receipts of both amortization and interest payments. The World Bank provides such calculations on a regional basis in its Annual Reports and makes use of the concept in other contexts as well. It is very doubtful, in the view of this author, whether such considerations should play a role in the analysis of the Bank’s contribution to development financing. It is a partial equilibrium approach to what is very much a general equilibrium question. An attempt by the Bank to maximize its net financial transfer to developing countries would carry undue financial risks before very long.

Table 5.Net Financial Transfers, All Developing Countries, 1980—861(In billions of U.S. dollars)
1980198119821983198419851986
1.Net inflow210912510683797580
2.Investment income, debits-54-71-84-74-78-73-62
Balance A (1+2)55542291218
Of which: Banks9-13-16-31-31-31
Other sources46543525323349
3.Net outflow3-3-12-10-7-10-8-10
4.Investment income, credits20262519211813
Balance B (3 +4)1714151211103
Balance C(A + B)72683721121221
5.Capital flight, net4-31-36-31-23-19-16-13
Balance D (Balance C + 5)41326-2-7-48
Memo item:
Net flows (1 + 3)1061139676696770
Net investment income (2 + 4)-34-45-59-55-57-55-49
Balance C (net financial transfer)72683721121221
Source: OECD data bank.

Overall resource transfers to developing countries are determined by macroeconomic conditions—growth prospects in developing countries and savings balances in developed countries. The present situation therefore owes something, not neglible, to the imbalances within the OECD area. In addition budgetary policies, insofar as they determine the rate of expansion of grant aid, help to determine the rate at which real resources can flow to developing countries. There is rather clear evidence that the relatively fast expansion of DAC aid flows in the late 1970s and early 1980s, in real terms, owed much to the general expansion of public expenditures in OECD countries in the 1970s. Conversely, present efforts to contain public expenditures as a proportion of GDP are a major reason why the growth of official development assistance (ODA) volume from the DAC is perceptibly slowing down in the mid-1980s.

Table 6.Net Financial Transfers, Sub-Saharan Africa, 1980-86(In billions of U.S. dollars)
1980198119821983198419851986
1.Net inflow11617171413L619
2.Investment income, debits5-5-5-4-5-3-3
Balance A (1+2)1112121081316
Of which: Banks-1-1-2-3-1-1
Other sources11131312111417
3.Net outflow-1-1
4.Investment income, credits111
Balance B(3 + 4)11-1
Balance C (A + B)1212131081315
5.Capital flight, net2-4-4-3-2-2-1-1
Balance D (Balance C +5)8810861214
Memo item:
Net flows (1+3)16161714131618
Net investment income (2 + 4)-4-4-4-4-5-3-3
Balance C (net financial transfer)1212131081315
Source: OECD data bank.
Table 7.Net Financial Transfers, Baker Group Countries, 1980-861(In billions of U.S. dollars)
1980198119821983198419851986
1.Net inflow255645226271917
2.Investment income, debits-30-42-52-44-46-44-37
Balance A (1+2)2522-18-19-25-20
Of which: Banks1811-2-16-23-26-23
Other Sources7112-2413
3.Net outflow-4-12-10-7-8-4-5
4.Investment income, credits81085765
Balance B (3 + 4)4-2-2-2-12
Balance C (A + B)2920-2-20-20-23-20
5.Capital flight, net3-2225-22-16-1412-8
Balance D {Balance C + 5)7-5-24-36-14-35-28
Memo item:
Net flows (1 + 3)51524219191512
Net investment income (2 + 4)-22-32-44-39-39-38-32
Balance C (net financial transfer)2920-2-20-20-23-20
Source: OECD data bank.

It is in this macroeconomic context that the special situation of Japan as a source of development finance can best be considered. This is a relevant issue because the huge size of the Japanese savings surplus has given rise to proposals that part of it could be directed toward the developing countries, and particularly the heavily indebted countries. There is even a view that Japan could remain indefinitely as a structural surplus country, with the role of supplier of capital to the developing countries. The problem with this view is that what use is made of Japanese savings depends on macroeconomic policies in other OECD countries as well. We know that at present it is helping to finance the U.S. current account deficit. Should the U.S. deficit decrease significantly, it might be expected that world interest rates would decline. That in itself might curtail the capital outflow from Japan to a certain extent. With world interest rates lower, developing countries would be able to absorb more of the remaining Japanese surplus. This could be part of the answer to restarting the lending process to heavily indebted countries. But it could happen through world capital markets and would not in principle require a particular decision by the Japanese authorities. The recent offer by Japan to the World Bank of further access to the Japanese capital market may have more an optical than a real significance in an integrated world capital market, if it is assumed that there is no impact on the Bank’s lending levels. (The offer of an accompanying grant equal to 10 percent of the capital raised is, of course, a different matter.) A slightly different question arises over the Japanese loan of 3.6 billion SDRs to the Fund. This may enable the Fund to raise its lending to developing countries, but this is difficult to judge on present information.

Table 8.Net Financial Transfers, Total Developing Countries (Excluding Baker Croup Countries), 1980-861(In billions of U.S. dollars)
1980198119821983198419851986
1.Net inflow254615457525663
2.Investment income, debits-24-29-32-30-32-29-25
Balance A (1+2)30322227202738
Of which: Banks147-6-13-24-25-27
Other sources16252840445265
3.Net outflow31-2-4-5
4.Investment income, credits1216171414128
Balance B (3 + 4)131617141283
Balance C(A + B)43483941323541
5.Capital flight, net4-9-11-9-7-5-4-5
Balance D (Balance C + 5)34373034273136
Memo item:
Net flows (1 + 3)55615457505258
Net investment income (2 + 4)-12-13-15-16-18-17-17
Balance C (net financial transfer)43483941323541
Source: OECD data bank.

A more meaningful decision by the Japanese government would be to make a major increase in the budgetary allocation for grant aid. A new target for increased aid has indeed been decided, but the grant portion has been limited by the general stance of Japanese public expenditure policy. As a result it is not clear that Japanese aid performance in relation to GDP (relevant not just in terms of aid targetry but in terms of disposal of the Japanese surplus) will increase by very much in the years ahead, especially since Japanese aid planning is conducted in terms of objectives expressed in U.S. dollars.

In sum, therefore, the key issue is the future size of the Japanese current account surplus in relation to the current account position of other OECD countries. It is this, rather than any explicit decisions by the Japanese authorities about intermediation, which will most influence the price and availability of capital to the developing countries. If, however, circumstances develop in which a Japanese surplus was to persist in the context of recessionary conditions in the world economy and deepening financial crisis in developing countries, then some kind of special multilateral facility, funded directly or indirectly on the Japanese capital market, might have a role to play.

Supply of Official Finance II: Prospects and Issues by Category of Finance

This section sets out the various forms in which official financing is made available to developing countries and provides some comments on prospects and issues in relation to the financing of growth-oriented structural adjustment programs. This can be done relatively briefly since many of the issues have already been raised in earlier parts of the paper. Tables 9-11 contain data on the magnitude and composition of financial flows to developing countries, distinguishing among official development finance, officially supported export credits, and private financial flows.

Table 9.Total Net Resource Flows to Developing Countries, 1978-86(In billions of current U.S. dollars)
197819791980198119821983198419851986
I. Official development finance (ODF)32.837.345.746.544.942.347.548.960.0
Official development assistance (ODA)27.531.637.737.334.133.734.837.044.4
Bilateral22.125.429.929.426.626.127.028.634.4
OECD13.316.518.218.418.618.719.821.927.8
OPEC6.76.58.77.54.53.93.72.9
CMEA1.62.12.73.23.23.23.23.56.6
Other countries0.50.30.30.30.30.30.30.3
Multilateral5.46.27.87.97.57.67.88.410.0
Other ODF5.35.78.09.210.88.612.711.915.5
Multilateral3.14.14.85.76.67.28.27.9
Bilateral2.21.63.23.54.21.44.54.0
II. Total export credits15.213.717.518.014.48.35.41.51.6
OECD countries (including short term)15.013.416.717.013.77.85.01.01.0
2.62.02.42.63.0-0.3-0.8. .. .
Other countries0.20.30.81.00.70.50.40.50.6
III. Private flows60.155.866.174.358.446.932.731.221.5
Direct investment (OECD)11.913.411.217.212.89.311.77.710.0
International banking sector39.935.749.052.041.034.117.413.53.0
(including short term)17.016.026.022.015.0-13.0-6.0-10.0. .
Total bond lending4.12.01.61.31.60.70.64.52.0
Other private 14.24.74.33.83.02.83.05.56.5
Total resource flows (I + II + III)108.1106.8129.3138.8117.797.585.781.683.1
For information:
ODA grants15.118.722.221.220.320.822.822.928.5
Private grants by NGOs1.62.02.32.02.32.32.63.13.8
Fund purchases, net-1.00.52.66.26.412.55.40.7-1.0
Source. OECD data bank.
Table 10.Net Resource Flows to Sub-Saharan Africa, 1978-86(In billions of current U.S. dollars)
197819791980198119821983198419851986
I. Official development finance (ODF)7.28.911.110.811.511.212.512.916.0
Official development assistance (ODA)6.37.99.29.39.49.49.711.1
Bilateral4.45.76.76.77.06.96.87.8
OECD3.74.85.85.85.85.66.16.8
OPEC0.50.70.60.60.80.90.40.5
CMEA0.10.10.20.20.20.3
Other countries0.20.20.20.20.20.20.20.2
Multilateral1.92.22.52.62.52.62.93.3
Other ODF0.91.01.91.52.11.82.81.8
Multilateral0.40.40.50.50.60.70.80.8
Bilateral0.50.61.41.01.51.12.01.0
II. Total export credits1.42.01.91.91.91.10.20.50.6
OECD countries (including short term)1.42.01.81.81.81.00.20.5
Other countries0.10.10.10.10.1
III. Private flows3.44.32.94.23.82.20.22.02.3
Direct investment (OECD)1.01.50.11.51.00.90.40.30.4
International bank sector1.52.02.02.02.00.5-1.00.81.0
(including short term)
Total bond lending0.30.1
Other private 10.60.70.80.70.80.80.80.90.9
Total resource flows (I + II + III)12.015.215.916.917.214.512.915.518.9
Source: OECD data bank.
Table 11.Net Resource Flows to Western Hemisphere, 1978-86(In billions of current U.S. dollars)
197819791980198119821983198419851986
I. Official development finance (ODF)3.84.86.37.08.16.79.710.513.0
Official development assistance (ODA)2.73.33.84.04.24 44.75.2
Bilateral2.02.62.93.13.43.53.74.2
OECD1.62.02.32.42.72.83.03.4
OPEC0.1
CMEA0.40.50.60.70.70.70.70.8
Other countries
Multilateral0.70.70.90.90.80.91.01.0
Other ODF1.11.52.53.03.92.55.05.3
Multilateral0.91.32.02.22.32.63.63.2
Bilateral0.20.20.50.81.6-0.31.42.1
II. Total export credits2.02.85.55.33.11.40.10.3
OECD countries (including short term)1.92.65.25.02.81.70.1
Other countries0.10.20.30.30.30.2
III. Private flows35.933.844.552.439.217.917.08.14.8
Direct investment (OECD)6.67.06.89.36.33.33.62.53.6
International bank sector25.025.036.041.031.515.114.05.00.5
(including short term)
Total bond lending3.21.30.81.20.6-0.8-1.1-1.1-1.3
Other private11.10.50.90.90.80.30.51.72.0
Total resource flows (I + II + III)41.741.456.364.750.426.526.818.618.4
Source: OECD data bank.
Official Development Assistance

In the first half of the 1980s, DAC aggregate ODA has increased at 3.6 percent a year in real terms. However, as OPEC aid fell significantly over this period, global ODA stagnated. As far as prospects are concerned, a recent survey conducted by the DAC Secretariat suggests that aid growth may fall to about 2 percent a year or less in the next few years. This is in spite of the fact that about a dozen DAC countries are planning to increase their ODA/GNP ratios, in some cases quite markedly and in terms of a pre-set timetable. The 0.7 percent aid target is still proving to be a potent political force. Despite this continuing thrust on aid volume in many DAC countries, the overall outcome will be determined by aid flows from the largest donors, including the United States in particular.

The multilateral share in aggregate aid increased rapidly in the 1970s to reach about one third of the total. This appears to be relatively stable, perhaps indicating that an equilibrium has been reached for the time being in donors’ bilateral/multilateral preferences. Recent replenishments have generally met expectations and there is little reason to expect a further advance in the multilateral share in the foreseeable future.

If it can be assumed that the decline in OPEC ODA has nearly run its course, the overall outlook is that global ODA will increase at about 2 percent a year in the next few years, as compared with the zero increase in the last five years, if the indications regarding the supply of DAC ODA are borne out.

The picture suggests therefore that, as emphasized earlier, the most important contribution of aid to growth-oriented structural adjustment will come from reorientation of aid objectives and operations, improved aid coordination and faster disbursement, including the cancellation of no longer appropriate capital projects, which would free resources from often large aid pipelines. Hence the significance of the DAC principles in the attached text. Some operational issues in this regard are raised in the final section of this paper.

Multilateral Nonconcessional Lending

Multilateral nonconcessional lending through the World Bank and the three regional development banks has been the most dynamic sector of official development financing in the 1980s. Disbursements grew by $3 billion a year between 1980 and 1985, an amount which equalled in absolute terms the increase in disbursements of DAC bilateral aid over the same period. By contrast, disbursements of multilateral aid increased very little; multilateral nonconcessional disbursements are now of approximately the same magnitude as disbursements of multilateral aid. (See Table 10.) Of the $3 billion increase, $1.2 billion went to Latin America and $0.3 billion to sub-Saharan Africa. Currently the World Bank represents about 70 percent of multilateral development bank activity, the Inter-American Development Bank about 15 percent, the Asian Development Bank 7 percent and the African Development Bank 5 percent. (These shares include concessional as well as nonconcessional lending.)

The expansion of multilateral development bank nonconcessional lending in the 1980s probably owes much to the renewed bouyancy of world bond markets, part of the trend towards securitization of world financial markets. Multilateral development banks have evolved into the role of intermediator between world bond markets and the developing countries, direct bond issues by developing countries remaining rather limited in scale and restricted to a small number of issuers. The World Bank in particular has exploited financial markets with considerable skill and obtained fine borrowing terms, as well as building up healthy reserves through retained earnings derived from management of its stocks of liquidity.

If the bond sector of international financial markets continues its relative expansion, while developing country direct access to the bond market remains relatively resticted, then clearly the role of the multilateral development banks is likely to become even more important in terms of the incremental financing available to developing countries. The key question is to what extent and for how long the multilateral development banks can increase their exposure to countries to whom international capital markets remain closed. Beyond a certain point, lending in such circumstances would be bound to have an impact on the Bank’s own standing in the credit markets. In other words, significant multilateral development bank lending to the current problem countries could only continue in the medium term in the context of a general return to voluntary lending by the private sector. What would constitute significant lending and how long is the medium term? Obviously there is no clear-cut answer. The strategy enunciated at last autumn’s meeting of the Development Committee put the emphasis on “quality lending,” that is, the World Bank’s shareholders are prepared at present to push ahead, and to subscribe more capital as necessary, so long as there is reason to believe that the borrowers are making good progress in improving the productivity of their economies.

There can be little doubt that this stance, and the increased activity and leadership being provided by the World Bank in particular, is critical at this juncture to the management of the financial and development problems of the heavily indebted countries. Policy-based lending may be a little disguised form of balance of payments lending, but its development significance may be just as great, or even greater, than slower-disbursing project finance. After all, crucial policy changes have the potential to raise rates of return widely throughout the economy over the medium and long term. On the other hand what look like sound projects can be undermined, and have been undermined in numerous instances, by a general deterioration in the policy environment. The present buildup in the portion of the World Bank’s lending accounted for by policy-based loans seems to this author to be thoroughly justified from a development point of view. Apart from this longer-term rationale, there is of course the not unimportant consideration that if quick disbursing loans were not forthcoming, the World Bank’s net disbursements would be difficult to sustain in a situation where so many countries are cancelling or postponing projects.

The question nevertheless remains: for how long is this posture by the World Bank sustainable? While no precision is possible, it may not be unreasonable to think that if voluntary lending to the problem countries shows little signs of reviving in two to three years time, the present momentum in activity will have to be slowed, especially if the preferred creditor status of the World Bank and the other multilateral development banks shows signs of coming under strain.

International Monetary Fund

Fund financing has traditionally been regarded as something apart from development financing. The concept of growth-oriented structural adjustment programs has, however, brought a certain constructive fuzziness to the boundaries between adjustment finance and development finance. Given that Fund lending in the 1980s has been almost exclusively concentrated on the developing countries and given the leadership role of the Fund in the management of major debt problems, the Fund has become inextricably intertwined in the issues of development financing.

Important adaptations in Fund rules, before the onset of the debt crisis, have made this possible, namely the extended facility and enlarged access, and to a certain extent, liberalized access to the compensatory financing facility. On the basis of these provisions, developing countries drew around $30 billion from the Fund between 1980 and 1986 and currently have outstanding drawings amounting to some $37 billion. In principle, this amount is repayable over the medium term, and if the Fund’s rules regarding continued use are to be respected, there is not too much scope for avoiding the situation in which the Fund is withdrawing finance from the developing countries. This consideration makes the Fund’s position of importance to the overall financing picture in the next few years, and conversely the availability of other sources of financing becomes of interest to the Fund. The position in Africa has already been alluded to, and similar questions must be not far below the surface in the Latin American region. Obviously the “continued use” provisions should be stretched as far as possible while normal financing is not available and countries are maintaining an adjustment effort.

Another question, perhaps more serious, is whether the Fund is in a position to assist developing countries with significant further financing in the event of a serious slowdown in world economic growth in the next few years, or in the event of a rise in the interest rates of more than a point or so, or in the worst case, a combination of the two. The question may not revolve around the extent of the Fund’s resources, which can always be augumented by a quota increase or by borrowing, so much as around the scope for a further significant increase in developing countries’ obligations to the Fund. The starting point, with $37 billion already outstanding, is quite different from that obtaining at the beginning of the Fund’s recent lending cycle. What amount would be regarded as tolerable within the Fund’s roles on continued use, given that beyond a certain limit repayment schedules may begin to be viewed with some skepticism? It is probably impossible to answer this question. This would be the first time in the Fund’s history that such an issue would have arisen. It occurs as worth raising in the present context, nevertheless, since it is relevant to ask what would be the implications for the financing of growth-oriented structural adjustment programs, should the unfortunate event of a world recession emerge in the near future.

The possibility of a further issue of SDRs as a useful contribution to easing the financial difficulties of developing countries has been on the international agenda for some time. A proposal has even been made for “conditional SDRs” directed towards countries with adjustment programs. There is not space here to examine the arguments surrounding this general question, except to say that proposals aimed at concentrating SDRs on the developing countries considerably modify the intended character of this instrument. In addition, in bearing a market rate of interest, SDRs are not an attractive form of financing for the poorer developing countries.

Export Credits

Official or officially supported export credits from OECD countries have been an important financing flow for developing countries since the 1960s. There was a boom in such lending, following the first oil shock and continuing until the debt crisis erupted in 1982, a period when OECD suppliers faced weak OECD demand while developing country markets strengthened. In the latter part of this period there was fierce competition among OECD governments through the medium of interest rate subsidies, the value of which may have averaged about $5 billion annually on credits amounting to about $23 billion a year in the 1980-82 period. This extreme degree of subsidization was virtually eliminated after an agreement among OECD countries to adopt a system which automatically required export credit rates to follow market rates of interest. Nevertheless an element of competition remains through the practice of providing “mixed credits,” that is, the association of an aid grant or concessional loan with a loan at commercial rates. Negotiations on rules to contain this practice are presently at an advanced stage in the OECD.

One of the most dramatic changes in the financing picture for developing countries currently is the sharp fall in net export credit lending to virtually negligible levels. This is partly explained by reduced demand, with developing country investment programs, especially large projects, pared back by falling oil revenues (oil exporters were major users of export credits) and debt problems. It is also partly explained by reduced supply, as export credit agencies have taken countries off cover because of debt problems. But a third reason is that the wave of export credit lending of the late 1970s is now producing a wave of repayments, so that while new export credits remain significant, the net flow is much lower. This situation can be expected to unwind eventually.

There are currently two important policy initiatives in the export credit field, the first relating to the cover policies of export credit agencies, the second to the developmental quality of projects financed by export credits. These initiatives stem from concerns raised by the Fund and the Bank and involve greater cohesion among export credit agencies.

Regarding cover policies, the objective is to achieve greater harmony among the separate agencies on decisions both to withdraw cover in cases in which the financial position of a country is deteriorating rapidly and to restore cover when action has been taken by the country to stabilize its financial situation and adopt an effective adjustment program. Informal consultations are now being conducted between export credit agencies on problem cases, with briefing from the Fund and the Bank, in the margins of OECD Export Credit Group meetings. This is a loose process, with no binding agreements or even recommendations, the main objective being to ensure more mutual information on the stance of export credit agencies in relation to individual problem countries.

In the same framework, a further significant move is the initiative by the Fund and the Bank to encourage export credit agencies not to provide support for projects which fall outside public investment programs established following formal investment review processes by developing country governments in the context of structural adjustment programs. These investment programs are increasingly part of Fund- and Bank-supported adjustment efforts.

This represents an important change in the frame of reference for export credit agencies, who have traditionally seen their role as simply commercial and have resisted the idea that development criteria should influence their decisions. The experience of the 1970s, however, is that a significant proportion of projects financed by export credits have been ill-considered, not very productive, and in the final analysis have contributed, sometimes in a major way, to the emergence of debt problems. In retrospect it is clear that highly subsidized over-guaranteed lending of the kind made possible by OECD government policies in the late 1970s had a damaging impact on developing country decisionmaking and resource allocation, reducing incentives on both sides for proper project appraisal, and encouraging a bias towards capital-intensive investment. The current effort to bring more discipline on the suppliers’ side, to match the disciplines being introduced by developing countries, must surely be welcomed.

A further effort to apply development criteria to the export credit process is being undertaken in the framework of the DAC, aimed at preventing the use of mixed credits from distorting the allocation of aid and undermining the developmental quality of investment. A set of guidelines has been drawn up which recommends that highly concessional packages of export finance should be available only to the lower-income developing countries and that projects so financed should be carefully appraised from a developmental point of view.

These various efforts to improve the functioning of the export credit process should help to ensure that export credits become a “cleaner,” healthier form of finance for development in the future, with a constructive role to play in growth-oriented structural adjustment.

Official Debt Rescheduling—The Paris Club

The Paris Club process for rescheduling official debt has been working overtime in recent years, proving to be an indispensable piece of machinery in the international system. In a situation where repayment obligations are mounting (the point just made about export credit obligations is relevant here), rescheduling makes an important contribution to net financial flows.

Three major issues currently face the Paris Club process. First, the problem of serial rescheduling, that is, the consequences of repeated rescheduling agreements on the debt profile of the debtor country; second, the question of if and when to make exceptional settlements, that is, beyond the roughly established norm; and third, how settlements relate to other decisions made elsewhere in the financing system in the context of country adjustment programs, that is, the interface with the Consultative Group process and Fund programs.

Serial rescheduling poses the potential problem of the snowball effect. As interest payments are included in the rescheduled amounts, the debt outstanding is continually increased. If this happens several times in succession the process can begin to create more of a problem than it solves, as in the case of the Sudan, for example.

On the question of exceptional treatment, there is a degree of latitude exhibited in Paris Club decisions, reflecting individual circumstances. But truly exceptional agreements, such as those accorded to Indonesia in 1970 and Turkey in 1980, are by definition rare and require exceptional policy changes by the debtor country. In addition, multi-year rescheduling, though endorsed in principle by the industrial countries’ London Summit meeting in 1985, has been extended in only a small number of cases since.

Relationships between Paris Club and Consultative Group discussions do not appear to have become any closer despite the evident real need for a more coherent approach to country financial programing for the poorer developing countries. There is nothing like the approach adopted for the heavily indebted middle-income countries where a target for rescheduling and new finance to be met by the London Club is part of the conditions for Fund financing to proceed. Any attempt in consultative groups to establish a broad medium-term financial and policy framework must be based on normative assumptions about official debt relief, which may not be accepted in Paris Club deliberations where other considerations are brought to bear. The question is whether more communication between these two fora might facilitate more satisfactory financial packages for aid-financed countries.

The Paris Club process should in principle be flexible enough to produce modified approaches in all three areas in cases where imaginative solutions could make a large contribution toward restoring financial stability. Is the relative absence of such decisions a sign that there are few such cases? Or is it a sign that Paris Club decisions have become caught in too narrow a frame of reference?

A more general point arises from the previous discussion of the record of export credit lending. If it is conceded that supplier countries contributed to the poor performance of export credit financed projects on a fairly wide scale, is it reasonable for creditor countries to seek to recover this lending at book values? Is this also a case where the Kindleberger critique quoted at the beginning of the paper, of the “external diseconomy implied by a single cohesive set of lenders whose condoning of one default implied license for all” might be seen to apply? Is there not a way in which creditor governments can share with debtor governments the cost of bad decisions made in the past, clearing the way for resumed normal activity?

Conclusions: Operational Problems and Looking to the Future

It is clear that, at the present stage, official finance is the thread on which growth-oriented structural adjustment programs hang, both in the more advanced and the less advanced developing countries. A principal argument developed in this paper is that while there are limits to the extent to which official sources can expand the volume of financing, both in the concessional and nonconcessional area, growth-oriented structural adjustment programs are bringing distinct and important improvements to the development financing process, correcting some of the faults that had become apparent in a development cooperation “industry” that had become increasingly complex and diffuse in the 1970s. The main improvements, which have the potential to increase considerably the positive impact of development finance, are the increased policy focus and the movement towards more coordination and discipline. On the developing country side, improvements in economic policies and administration are also working in this direction. At the same time it was suggested that official financing cannot by itself be expected to restore the conditions necessary for resumed voluntary lending, and that both private and official creditors may have to play a bigger role in opening up such a prospect. Another point emerging is that in the absence of restored “normal” financing, and especially if a world recession were to be visited upon us in the near future, neither the Fund nor the Bank may be as well placed to extend further help as they have been in the recent past. (That private financial flows might be needed to assist the proper functioning of the international financial institutions is an illustration of the degree of interdependence that now exists between official and private institutions.)

These large questions may not be susceptible to clear-cut responses at least for the present time. There are, however, two areas where there is scope for consensus and action, which deserve attention in the immediate future.

The first is aid coordination, or more particularly, the marshalling of quick-disbursing finance to support adjustment programs in poorer developing countries. The number and scope of such programs in Africa is surely an amazing phenomenon, judged in terms of prevailing attitudes in these countries only a few years ago. Donors have been waiting for this wave of change in African policy directions for some considerable time. Now that it is with us, is the donor community able to respond adequately? It is true that the DAC and the World Bank have put much effort into setting out the requirements for a coherent, effective response. But the changes required in donor practices are considerable; there is a “cultural” factor as well as a policy factor, with strongly embedded interests and staffing geared to different needs.

Donors have, in the United Nations context, undertaken to ensure that the financing needs of individual country adjustment programs are met. (They have been reticent, however, about meeting any global estimate of African financing needs.) But according to the World Bank, donors are lagging behind the pace of policy reform in Africa, so that courageous country programs are underfinanced. In addition, there are complaints from African governments that the policy dialogue is becoming impossibly burdensome with too many actors and procedures and too little coordination in the construction of financing programs.

What, if anything, can be done to cut through such problems? There is unlikely to be an easy answer. Clearly there is a monitoring problem. At the risk of adding yet another actor to the scene, is there a role for a monitoring agent, perhaps a “friend of the Consultative Group,” who might keep track of the financial situation and make contact with individual members when performance appears to be falling short of what is needed? One thinks, in this regard, of agents who might parallel the role which the then OECD Secretary General, in cooperation with a German Minister, took in coordinating bilateral support for the Turkish adjustment program in 1979-80.

Finally, in looking to the future, the present heavy weight of official financing in total financial flows to developing countries is hardly desirable in the longer run. For one thing, a significant expansion of capital flows to developing countries will only come from private sources. For another, the development of diversified, pluralistic economies which should be the ultimate objective of growth-oriented structural adjustment, even in poorer countries, requires an enterprise economy with private financing playing a key role. Hence positive action to assist movement in this direction should be an important element in development cooperation. The extension of International Finance Corporation programs, the policy role of the Multilateral Investment Guarantee Agency (MIGA), and targeted activities by bilateral agencies will all be helpful in this regard and should be seen as laying the basis for a different financing pattern than those of the past or the situation we have at present.

Note: This paper is written and presented on the author’s own responsibility and does not necessarily reflect the views of the OECD, Factual data and analysis draw upon the on-going work of the OECD’s Development Cooperation Directorate.

The Republic of Korea has announced an intention of reducing its net indebtedness over the next few years. Thus bank flows to this creditworthy country may also be negative in the near future.

OECD, Press Release A(86)61, Paris, December 2, 1986.

See “Less Developed Countries and the International Capital Market,” printed as Chapter 17 of Charles Kindleberger, International Money (London: Allen and Unwin, 1981).

For an analysis which, based on a “transfer-problem” framework, places the emphasis on fiscal adjustment rather than balance of payments adjustment as the central issue in current debt crisis situations, see Helmut Reisen, “On the Transfer Problem of Major Developing Country Borrowers,” OECD Development Centre (Paris), forthcoming.

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