A conversation with Mr. Clausen: Charting the World Bank’s course for the 1980s

This paper highlights that on September 29, 1982, the International Bank for Reconstruction and Development (World Bank) began to offer discount notes under a short-term borrowing program approved by its Board last July. The Bank anticipates that in fiscal year 1983, it will have outstanding up to US$1.5 billion in short-term discount notes and that it will borrow about US$8 billion in the fixed-rate medium to long-term markets. The initial offering of notes is being made in the U.S. domestic markets.


This paper highlights that on September 29, 1982, the International Bank for Reconstruction and Development (World Bank) began to offer discount notes under a short-term borrowing program approved by its Board last July. The Bank anticipates that in fiscal year 1983, it will have outstanding up to US$1.5 billion in short-term discount notes and that it will borrow about US$8 billion in the fixed-rate medium to long-term markets. The initial offering of notes is being made in the U.S. domestic markets.

The President of the World Bank interviewed by Finance & Development

F&D: Do the recent changes in Bank policies and emphasis indicate a shift in Bank policy or do they simply reflect an adjustment to new circumstances? Would you comment first on the financial changes and, second, on the emphasis on the role of the private sector?

Clausen: I would say the changes in our policies are evidence of some shift in emphasis and also represent an adjustment to changed circumstances. Let me deal with the financial changes first. The front-end fee of 1.5 per cent on new IBRD loans and the increase in charges for IDA credits are nothing more than a reflection of the external financial environment in which we are operating. The World Bank has US$31 billion of unfunded commitments on which, when disbursed, we will receive interest averaging 8.75 per cent. That is locked in place. Yet to fund those contractual obligations the last $12 billion or so that we borrowed in the marketplace was at a cost above 10.5 per cent. You can see the nature of the problem. To meet the increasing needs of our member countries our borrowing program is growing: $5.7 billion in fiscal year 1981, $8.5 billion in 1982, around $9.3 billion in 1983, and $10 billion next year. The appetite is growing for fixed-rate long-term loans. But in today’s economic environment, the sources we can tap for our long-term funds are not growing. That is why we obtained, on July 1, 1982, permission from our Executive Board to go to the short-term market—the one market that is growing—for borrowings of up to $1.5 billion outstanding at any one time. All of our borrowings have to be approved by the minister of finance of the country whose currency we are seeking. Permission to borrow on a short-term basis is not available in very many countries, but we have a ten-year approval authority from the Secretary of the Treasury of the United States and, of course, the dollar market is the principal short-term market.

The Bank Board addressed what I call the mismatch of commitment versus borrowing rates earlier this year. In the past we fixed the interest rate on our loan commitments at the time of commitment and the rate remained constant for the life of the loan, but we disbursed over a period of years as a project was being implemented. It may have taken as long as seven years to complete disbursement on, say, a hydroelectric scheme or a big dam. Therefore, the rate that was fixed at the time of commitment bore no relationship to the real rates the Bank paid on funds borrowed at the time of disbursement. We asked the Board to examine that mismatch and the Board approved a new policy for all IBRD loans negotiated after July 1, 1982.

Under this policy, the interest rate on the outstanding amounts of loans will change every six months according to a variable rate based upon a change in the cost of the Bank’s entire “pool” of borrowings, which contains a variety of currencies, at different rates and maturities. We established the pool to begin with at $8.5 billion, which is the previous 12 months’ borrowings. Borrowing in the first 90 days of this fiscal year has been slightly less than $3 billion. So $11.5 billion of borrowings are in the pool already. An additional charge, or spread, of half a percentage point over the cost of that pool determines the rate of interest charged our borrowers. I think that the pool system will be much easier on the borrowing country than any other arrangement. In order to have access to the markets for increased borrowing we have to show a profit. Our bonds pay the finest rates. We have the highest credit rating of any nongovernmental institution in the world. We must protect that reputation, and our profits will help protect it.

“… our governments should take a closer look at the constraint imposed by the $60 billion notional planning figure and find ways in which we can enlarge our lending program. By the same token we should also find ways in which we can complement the resources that we have … to encourage other investment flows to be associated with our development assistance.”

F&D: You had mentioned the growing appetite of borrowing member countries and the need for more resources. There was some concern at the Bank Annual Meeting in Toronto about the somewhat limited real growth in the Bank’s planned lending program of $60 billion over fiscal years 1982/86. Will it be sufficient?

Clausen: That $60 billion target was determined largely in the light of the General Capital Increase that was launched October 1, 1981. At that time, the People’s Republic of China had barely started borrowing from the Bank. Nor did the target take into account the possibility of a shortfall in IDA funds, which would call for a greater proportion of IBRD funds in loans to those countries that are able to borrow on a blend of IBRD and IDA terms. Also, at the time the $60 billion figure was set, no one had realized the severity of the economic malaise that we would be facing on a global scale, nor had anyone realized that official development assistance would be dropping in real terms. And, no one had realized at the time that because of the unusual international economic problems, commercial banks would become more subdued in their lending.

Shouldn’t we, as a development institution, adjust our policies to be more sensitive to the times and enlarge our lending program? We in management believe that our governments should take a closer look at the constraint imposed by the $60 billion notional planning figure and find ways in which we can enlarge our lending program. By the same token we should also find ways in which we can complement the resources that we have—human and financial—to encourage other investment flows to be associated with our development assistance.

F&D: Coming back to the private sector emphasis, is it a change in policy?

Clausen: Absolutely not. Our principal window to the private sector, the International Finance Corporation (IFC), was established in 1956. It has helped a growing number of countries establish a stronger private sector. IFC is assisting more countries these days than before. In addition, a large proportion of the beneficiaries of IBRD and IDA lending are in the private sector. Very clearly, development in the interdependent world of today is far more complex than in the past. Therefore it needs a better coordination of all the available resources. Development demands greater resources than an individual developing country can generate within its own confines or even from official external sources, and in countries which do favor the private sector, why not use the private sector for development purposes?

F&D: Your proposal for a Multilateral Investment Insurance Agency has aroused much interest. How will it benefit developing countries?

Clausen: As I mentioned earlier, we are in an era now where donor government budget constraints are impeding the flow of official development assistance. We have to make a serious effort to find ways to remove the obstacles that stand in the way of nongovernmental investment resources, thereby enlarging the flow of funds to developing countries. That is the rationale for examining constraints on the private sector.

Generally, the principal constraint is fear—fear of political risks, expropriation, nationalization, changes in the rules after an investment is made, and changes in the rules for repatriation of earnings. All of which suggests to us the need to find ways in which we might be helpful in moderating or removing some of the obstacles facing foreign investment. That is the rationale for multilateral investment insurance.

There are only a few countries that have their own political risk investment insurance available to their investors and exporters, and there are no official reinsurance or coinsurance schemes. There is some coverage in the private sector but with projects getting more expensive and bigger, the political risks are so large that they cannot be handled by government entities or national investment institutions. We have been exploring a multilateral investment insurance scheme that could build on the existing national and private schemes to set up a global scheme. The objective is to increase the flow of funds from the private sector.

The multilateral investment scheme is not a new idea. It was presented in the Sixties and early Seventies by the IFC and the World Bank. But conditions are far different today. The previous schemes were involved and elaborate, and they never got launched. We are going to be less ambitious. We are not going to displace anything but to complement the existing schemes, starting small, with perhaps 12–15 countries—some OECD countries, some OPEC countries, and some Latin American countries. Over time, other countries may find it to their advantage to join, depending upon investment opportunities.

Today, the flow of private investment differs from the patterns of yesteryear, when it went from the developed to the developing countries, on a one-way street. Investment flows today go from developing to developing, and from developing to developed countries as well. The major flow is still from developed to developing, but it is now a two-way flow. Investment should also be thought of in a global sense. Hence, we have been emphasizing the need for a global investment code, a framework which would provide a GATT-like arrangement for investment. It would provide a clearer understanding of the rules of behavior for host countries inviting investment and for investors considering it. There are several schemes in existence—within OECD, the Arab nations, and in the Pacific Basin—but there are no links between them. We need a global scheme that would encourage private investment across national boundaries.

All these changes and ideas are just a continuation of an evolutionary trend. I think that the Bretton Woods institutions must be sensitive to changing times so that we can be more effective.

F&D: Do you see cofinancing as a complement to or a replacement for Bank lending? Why is it important today?

Clausen: Cofinancing should be additional. It should not be a substitute for Bank lending. Today, you have some commercial banks pulling out of lending to developing countries when they shouldn’t. You have official development assistance flows being reduced because of budget constraints in donor countries. So, we must find some way to generate additional flows for development projects in less developed countries. Infrastructure—ports, roads, railways, and so on—is the preamble for the growth of the private sector.

To associate commercial banking flows with that kind of development by changing some of our operational and legal rules is not a change in our emphasis. The Bank has undertaken cofinancing with other development banks for many, many years, and with commercial banks for almost ten years. My former institution, Bank of America, was the first commercial bank to cofinance a project with the World Bank. I guess my interest in cofinancing has come from that: I liked it then as a commercial banker; I like it now as a development banker.

There are two ways in which we can enlarge the flow of funds. First, by lowering the risk to the commercial banks. That would certainly not hurt the pricing of the loans and could also extend the terms, because commercial banks would syndicate the loan, whatever the amount, normally giving it a seven or eight year maturity. We are helping our borrowers by associating those commercial funds with a project that we are managing, one that will have an economic return of at least 10 per cent to the country and is within the framework of priorities for that country. Second, cofinancing would help extend the maturities of the loans by 18 months or two years, thus helping the debt management of the borrowing country by improving its debt structure. That is the rationale for cofinancing, and I hope we will get Board approval for it.

F&D: Although an agreement on IDA financing was reached in Toronto, there seems to be a dichotomy in some donor countries between recognition of IDA’s effectiveness and cutbacks in its funding. This may be partly due to the fact that the Bretton Woods generation seems to have been displaced by a new generation of opinion leaders. Do you think the Bank ought to be doing something to address this new generation in donor countries?

Clausen: Yes, we need to do a lot. Governments have changed. Generations change. IDA is 22 years old. The purpose of our new publication IDA in Retrospect was to address this problem of understanding the meaning of aid. [See article on page 22 by Shahid Javed Burki and Norman Hicks.] Concessional development assistance is in short supply, particularly in present conditions when it is sorely needed. Countries that have access to international markets by virtue of their creditworthiness have more flexibility than countries that either do not generate sufficient funds internally to finance their economic development or are totally reliant on external resources. But this latter group of countries does not have access to the international capital marketplace; they are not eligible even to borrow from the IBRD. Their only recourse is concessional assistance on a bilateral or multilateral basis. Since IDA is the largest single source of concessional development assistance, the curtailment of resources to IDA has caused difficulties. It was difficult enough before, but it is even more so now when fewer resources are available to meet the greater needs of the poorest of the poor countries.

IDA financing was our single greatest issue in Toronto. I would say for the foreseeable future, IDA is going to remain the single greatest issue for the World Bank. In August 1981, 12 months before Toronto, IDA-6 (the sixth replenishment of IDA resources by donor countries) became effective, after a delay of more than one year. The fact that it is now launched shows great international understanding. Second tranche payments are in and committed for almost all countries, except for the United States. All countries will make their commitments to IDA-6 over three years, except the United States, which is going to make them over four years. In addition, for fiscal year 1984, which will be a transition year before we get to IDA-7, these countries will provide another $2 billion. Countries will make those resources available to IDA or in a special or parallel fund. I was very pleased with these results; not satisfied, but pleased with the fact that there was understanding on IDA financing and recognition of the needs of the poorest of the poor countries that were counting on a continuation of IDA funds.

At Toronto, it was also agreed that we could start the negotiation for IDA-7, in November 1982, here in Washington. Difficult though the environment may be when we start the negotiations, it is important that they are successful. Our institution is making every effort to make people understand that. IDA in Retrospect was an attempt at that.

What are the lessons that we have learned in the last 22 years? IDA is not perfect. No one is suggesting it was. On the other hand, the overwhelming weight of IDA’s efforts has been constructive. Completed IDA projects have generated an economic return to the borrowing countries of, on average, 17.9 per cent. Completed IBRD projects have generated an economic return of 17 per cent. We note the higher IDA returns in South Asia than in Africa, 22.5 per cent in South Asia versus 14 per cent, on average, for Africa. This confirms the need for more attention to the poorest of the poor countries.

“… for the foreseeable future, IDA is going to remain the single greatest issue for the World Bank.”

F&D: Do you think that the Bank is doing enough in assisting countries to monitor their external debt?

Clausen: To the question “Are the Bretton Wood’s institutions doing enough?” the answer is clearly “No.” At the IBRD and IDA we have tended to focus on debt with a maturity of over 12 months but have discovered that debts with a maturity of less than 12 months are terribly important. We have also discovered considerable variations in the quality of the monitoring and tracking of debt service by the developing countries. We have been attempting, for at least the last 15 months, to expand our policy dialogue with countries and to include in it the question of debt management to a greater extent than before.

F&D: Given the magnitude of the adjustment problem, how effective do you think the Bank can be when its resources for this purpose are relatively limited? As the Bank goes into structural adjustment lending it is going to face more and more the question of conditionality, which hitherto has been faced mostly by the Fund. Does that concern you?

Clausen: Structural adjustment lending—we have had three years of it—is still a fairly new phenomenon. It is very important. Back in the simpler days of the 1950s and 1960s, in a world that was not quite as interdependent as it is today, it took less time to make adjustments. Changes were easier to accomplish. In today’s environment of economic malaise it takes a longer time for structural adjustment to be effected. We must also take into account the thinness of the political ice, which can be a major factor. The fact that we have a great many countries today that were not independent even 15 or 20 years ago makes the time span for adjustment more critical.

The Fund has a limitation on the time span that it can cover. Therefore, the Bank’s structural adjustment lending is very complementary. Seventeen countries have been the recipients of structural adjustment loans by the World Bank, totaling a sum slightly exceeding $2 billion. How effective can we be with limited resources? When you look at the needs you might say that $2 billion in 17 countries is very small, but a long march can begin with a few steps. The emphasis on helping governments put in place appropriate economic and social policies is not a new phenomenon for the Bank. We have had this emphasis for the past three and a half decades. I think that this policy dialogue is the strongest resource that the World Bank can provide. That is why we are attempting to broaden and deepen the policy dialogue in a constructive manner.

Our job is to help development, to help countries develop themselves. We don’t do development, the countries do it. It is the countries’ priorities that matter. But we can be tremendously useful to countries in helping them sort out the alternatives and by doing the analysis and study in depth—recognizing the strengths, weaknesses, and the relative direction of an individual country’s economy. Thus, we can help increase productivity in the right sectors and in the right regions. That is our job. But you know, help offered is not always help wanted or received. In some cases we may have to be more persuasive, because to be constructive we may have to include in our dialogue elements that may not be politically popular within a country.

So the Bank is well attuned to conditionality on structural adjustment loans and conditionality on projects. There is no doubt that the countries that pursue sound economic policies are the ones with the stronger economic development. There is a growing awareness of this. At the Toronto Annual Meetings, the one thing that came across was the need for adjustment across the board, for all countries, developed as well as developing. We want to be, indeed we are mandated to be, a key player in that process.

F&D: Some years ago, many developing country groups voiced the desire to play a greater role in the management of international institutions. Has this been an issue that you have faced in your discussions in Toronto and elsewhere in your travels?

Clausen: No. But in the discussions on global negotiations it has been suggested that there is a need for new international institutions that are in tune with the needs of the Third World and are more flexible. I must say that I would rather make the existing institutions more effective. I think it is a far better world today because of IDA, not in spite of it. If we had not had IDA or something that was doing its kind of work, we would be far worse off today. We have come a long way since the end of World War II and the establishment of the Bretton Woods institutions. These bodies have been helpful to the development process. Now we are facing a far different environment and it’s going to be far different in the Nineties and beyond. That is why the World Bank group should adapt to the times and be sensitive to the needs of its members so that we can continue to be the effective development institution that our owners want us to be.

F&D: You’ve been here 15 months now. How do you view your transition from the head of the world’s largest commercial bank to that of President of the largest development bank and, in particular, what has struck you about the development process in this period?

Clausen: There are a couple of things that come to mind when I respond to that inquiry. Commercial banks have a much shorter horizon than a development bank. The development bank is really interested in keeping the patient alive so we can effect a cure. When I now visit countries that I visited frequently as the Chief Executive of the Bank of America, I see some of the same people, talk with the same ministers of finance, and heads of the Central Bank. But as a development banker, the dialogue is deeper and the horizon is farther. Not that the adrenalin runs any slower here than in a commercial bank: to the contrary, I see no difference, even though a commercial bank approach is tuned to a different kind of shareholder, who is interested in the quality of assets, in profits and returns, and in how the institution is perceived in the marketplace. But these are all concerns of the Bank’s shareholders too.

I must say also that to come from commercial banking and to see the concentration of the high professionalism that we have in the World Bank is very satisfying. This is a different kind of business entirely, and the fears expressed by some that charging a front-end fee on Bank loans would change it from a development bank into a commercial bank are ridiculous. We are first, last, and always a development bank. Commercial banks have played a marvelous role as intermediators of funds from surplus to deficit areas but their capacity is now limited. That is another reason why I believe that the multilateral financial institutions like the Fund and the Bank must play an increasingly important role in the intermediation process.

“… it has been suggested that there is a need for new international institutions … I would rather make the existing institutions more effective.”

F&D: Finally, a question about style. The history of the Bank is sometimes referred to as a series of eras: the McNamara era, the Woods era, the Black era, and it has been said that you are not willing to have this era baptized as the Clausen era. In an operation of this size and given the need for strong central direction, is it possible not to put your imprint on the institution?

Clausen: I don’t like to talk about it in those terms—sure, personalities count but what really counts is the institution. It’s the institution that perhaps increases the reputation of the individual. By combining all the human resources we have a collegial effect. Each individual, maybe even the president, is a piece of the mosaic that makes the beautiful picture, a true picture of the World Bank. Our objective is to make the Bank appreciated for what it really is, to bring the perception closer to the fact, in more of our constituencies. Unfortunately the perception of the Bank is not as great in some constituencies as it ought to be. And we need also to improve the fact and to make the fact of what we are, and what we are trying to be, closer to the needs of the times and of our shareholders, developed and developing. These are the two objectives that I have. Clearly, I have not come on board just to hide my own personality and my own impact. I came on board and was challenged by, and was interested in, trying to make a difference and trying to contribute something from all that I have learned over the past 32 years in the private sector, to bring some of the advantages of my experiences to the needs of the World Bank.