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The Bank Group Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1972
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Martin Shivanan

Bank Croup Governors at their Annual Meeting focused on the need for action in several major areas to shape the course of international development.

Against warnings of a “massive shortfall” in official concessionary aid, they suggested a variety of efforts to devise new methods of mobilizing resources for development. Expressing satisfaction that the International Development Association’s (IDA) third replenishment had finally become effective, they urged an early start on the fourth replenishment, some advocating larger-scale contributions, and a search for better ways of funding IDA. Emphasizing the vital interest of developing countries in the contemplated reform of the international monetary system, many suggested shaping the new monetary order to alleviate the aid shortfall by linking special drawing rights in the Fund with development assistance. Such aid might be channeled through the International bank for Reconstruction and Development or IDA or directly to developing countries. In the broad discussion of reform, they said, the debate should focus also on the need for freer trade and private investment.

At a time when many setbacks were being cited for the Second Development Decade, they congratulated the bank Group on record total commitments in the fiscal year 1972 of $3 billion, and endorsed its plans for a further substantial increase in the volume of lending in the fiscal years 1974/78.

Against a background of increasing concern with the problems of obdurately low employment and living standards among the major, poorer sections of developing countries’ populations, many Governors expressed approval of the need to achieve both higher national incomes and a wider distribution of the benefits of economic growth. In particular, in agreement with goals expressed by the President of the bank, Mr. Robert S. McNamara, in his annual address, they stressed the need to bring these benefits to the least developed countries and into the lives of the poorest population sectors of the developing world.

A Difficult Year

The consensus in these areas evolved out of discussions which underlined the uncertain milieu in which many developing countries were operating. The picture of the past year that emerged from Governors’ statements was often somber: the year had been a daunting experience for many developing countries, and particularly for the poorest and least developed members of the bank. In addition to disadvantages of small size and weak bargaining power, their difficulties had been compounded by international currency adjustments in the wake of the Smithsonian Agreement. Speakers from these nations said that they were experiencing further declines in their terms of trade, a reduction in the purchasing power of their foreign exchange reserves (which were usually turned over three or four times a year), and aggravated debt service problems. The need to divert resources to obtain additional foreign exchange, unmatched by higher aid flows, and often in the face of falling commodity prices, had meant for many of them periods of import restrictions, reduced consumption, and stringent effects on their domestic economies.

Aid Shortfall Predicted

The problems facing the developing world were confirmed by Mr. McNamara, who reiterated at the opening session his earlier prediction that the flow of concessionary aid, or Official Development Assistance (ODA), would not exceed 0.37 per cent of the developed countries’ gross national product (GNP) by 1975—or only half the target figure established by the United Nations for the Second Development Decade. This shortfall was “regrettable in the extreme,” he said, particularly because it would penalize the poorest member countries of the bank, whose per capita incomes were less than $200 and whose populations by the end of the century would total 2.25 billion. These countries had the greatest need for concessionary help and the least chance of finding feasible alternatives to official assistance.

The deficit in ODA would have serious economic and financial consequences also for the other members of the developing world, he said. Debt service payments, running at $7 billion annually, were rising twice as fast as in the 1960s, reflecting a hardening of the terms of debt as the proportion of concessionary aid in the total flow of external assistance declined.

Mr. J. M. Mwanakatwe, Governor for Zambia, said that the increasing debt burden of the developing countries would extinguish most of the expected lower levels of concessionary aid. The vulnerability of the African countries, which included 16 of the 25 poorest nations in the world, was stressed by Mr. C. A. Kamara-Taylor, Governor for Sierra Leone. Mr. D. T. Matenje, Governor for Malawi, pointed out the pressure on countries with a paucity of infrastructure to take funds on hard terms when softer loans or credits were exhausted or unavailable.

The challenge posed to developed and developing countries was stressed by the Chairman of the Board of Governors, Mr. AN Wardhana, when he opened the proceedings with the Chairman’s annual address. The unfavorable trends of most current indicators on aid, trade, and foreign debt were matters for great anxiety, he said. At this critical juncture of economic development, the developing nations needed more, not fewer, options, as well as better strategies and more resources.

Mr. Y. B. Chavan, Governor for India, described the current phase as a very crucial one in the eyes of the developing countries, which would test their faith in the spirit of international cooperation.

Need to Mobilize Resources

In a wide-ranging discussion of the measures needed to mobilize increased resources for development, Governors agreed that the bank should continue its efforts to expand its lending operations and to seek new markets for its bonds, and that preparations should start immediately for the fourth replenishment of IDA.

Failure on the part of the bank to expand its operations, said Mr. McNamara, would drive developing member countries to even greater dependence on higher cost, shorter maturity sources of external capital, with an inevitable exacerbation of their debt service burdens. With careful planning, however, and with international support, he believed that the necessary funds could be obtained to expand the bank Group’s operations during the fiscal years 1974/78, by an average of 11 per cent annually, and to achieve an increasing proportion of IDA credits. By these means the bank Group expected to help finance, and provide technical assistance for, some $50 billion of capital improvements in developing countries in the fiscal years 1974/78, compared with $30 billion in 1969/73, and $13 billion in 1964/68.

Mr. Helmut Schmidt, Governor for Germany, pointed out that the proposed expansion of the bank Group’s activities would entail a sharply increased need for funds, that the bank had made an encouraging start on opening new markets for its borrowings, and that this should be pursued.

Governors welcomed the recent announcement by the U. S. Government that its contribution to the third replenishment of IDA had become effective, and stated that they looked forward to resumed momentum in IDA lending.

Fourth IDA Replenishment

Supporting an early start on the fourth replenishment, Mr. John Turner, Governor for Canada, said “What is now required is a more profound realization by donor countries that IDA operations are essential to the development effort as a whole, and that they therefore deserve the highest possible priority within the financial resources available for development assistance.”

Mr. Per Kleppe, the Governor for Norway, suggested that contributions should more accurately reflect the recent economic growth of donor countries.

The need for “more rational machinery” to provide a steady flow of resources to IDA was voiced by the Chairman, Mr. Wardhana. His view was echoed by other Governors, including Mr. Babacar Ba, Fund Governor for Senegal, speaking also on behalf of Dahomey, Ivory Coast, Mauritania, Niger, Togo, and Upper Volta, who stressed that IDA would need a “less chaotic” replenishment system if it was to meet the needs of countries, including those in Africa, for concessionary finance.

Mr. Valéry Giscard d’Estaing, Governor for France, said that, to be properly effective, future replenishments should be for five-year periods instead of the present three years.

Mr. McNamara, in his closing remarks, stated that negotiations on the fourth replenishment would begin in earnest before the end of 1972.

Many speakers, discussing the forthcoming international meetings on monetary reform, said the interests of the developing countries should be given full consideration by focusing on development assistance, freer trade, and private investment.

The Link

There was widespread support among developed and developing countries that the discussions should include proposals for linking the allocation of special drawing rights in the Fund with the provision of additional development assistance.

Mr. Mohamed A. Merzeban, Governor for the Arab Republic of Egypt, said the deterioration in the terms and conditions of development assistance confirmed the need for the link. Mr. Rafael Alfonzo Ravard, Governor for Venezuela, speaking on behalf of Latin America and the Philippines, said the question of the link was of great importance to these countries; they felt strongly that the amount of funds provided via the link should be in addition to existing financial flows.

A number of Governors advocated that the additional resources should be directed initially to the multilateral development agencies.

Mr. Giovanni Malagodi, Fund Governor for Italy, reiterated the widely-supported proposal first advanced by his predecessor, Governor Emilio Colombo, at the 1968 Annual Meetings, that the main industrial countries should undertake to use a part of their reserves corresponding to a portion of the SDR allocation for replenishment of IDA or for subscription to bank bonds.

The Governor for India, Mr. Chavan, said that “at a time when the provision of development finance is so grossly inadequate … and uncertain—as is clear from the experience of replenishment of IDA funds—it makes sense for the richer countries to part with at least a portion of their SDR gains to add strength and greater sense of continuity to institutions like IDA.”

The Governor for Sierra Leone, Mr. Kamara-Taylor, believed that linking SDR creation and development finance through the bank Group could, eventually, add hundreds of millions of dollars to the supply of concessionary aid.

Some Governors, however, expressed a note of caution. Mr. Anthony Barber, Fund Governor for the United Kingdom, while sympathizing with the desires of link proponents, nevertheless urged very careful consideration of the proposals to ensure that they were consistent with the wider reform objectives; if they were not, he said, the prime purpose of providing additional real resources for developing countries would probably be frustrated. The Governor for Germany, Mr. Schmidt, warned against the “temptation to misuse the creation of SDRs as a wonder drug to relieve all possible imbalances.”

Trade Barriers Cited

Many Governors indicated that they were looking to the meetings on monetary reform and related issues to tackle problems of trade barriers which, among other things, made it difficult for them to service their debts in foreign exchange.

Mr. Duck Woo Nam, the Governor for Korea, instanced the experience of developing countries which, after some success in industrialization, found their manufactured exports hampered by tariffs, quotas, and other protective measures of the developed countries. It was ironical, he said, that these countries lent capital to build factories but refused payment in commodities produced by them. Other Governors, including Mr. Gholam Haider Dawar, Governor for Afghanistan, pointed to protectionism in agricultural sectors despite clear comparative advantage on the side of the developing countries. Mr. Tajuddin Ahmad, the Fund Governor for Bangladesh, scored the “cascading structure of industrial protection” in the developed countries which thwarted exports of labor-intensive manufactures. In many cases, said Mr. Hannes Androsch, the Governor for Austria, scarcely bearable debt service was linked with unsatisfactory export trade limited to a few types of goods.

Mr. George P. Shultz, Governor for the United States, said that, in the forthcoming discussions on monetary reform, certain underlying principles already appeared to command widespread support. These included a mutual interest in encouraging freer trade in goods and services. Several Governors welcomed the progress made at the United Nations Conference on Trade and Development (UNCTAD III) to establish general non-reciprocal tariff preferences by the industrialized countries, and stressed the need for early compliance with the UNCTAD resolutions.

Recalling a proposal of the Pearson Commission on International Development, several Governors called upon the bank to study, in cooperation with the regional development banks, the provision of an export credit guarantee facility for developing countries. Mr. Moshe Sanbar, Governor for Israel, said that competitive exports to other developing countries—their “natural markets”—were severely hampered by lack of export credit financing. However, the establishment within each regional bank of an export credit guarantee facility, in cooperation with the bank, would benefit both the developing countries which imported capital goods and services, and the developing countries which could supply them. The facility would guarantee promissory notes issued (or guaranteed) by the central bank of an importing member country where such notes arose from receipt of long-term or medium-term export credits from another developing country. The guaranteed notes would be freely negotiable, permitting the exporting country to tap new sources of finance for its industrial expansion. Mr. Hon Sui Sen, Governor for Singapore, said that, if a scheme of this kind were properly worked out, it would constitute an important part of trade development in the developing countries.

Aid Benefits Not Reaching Poorest

Many speakers agreed with the President of the bank that the target for the Second Development Decade—of a 6 per cent growth rate for developing countries—was already out of reach for many nations, and would prove an exceptionally arduous goal for many others.

They agreed also that the volume of assistance was only one aspect of the problems of developing countries: equally important were its effects and their distribution among the peoples of the developing world.

The keynote for these concerns was set by Mr. McNamara in his opening address. The benefits of development were not reaching the citizens of the poorest nations, he said; their lack of natural and other resources was so great that, even with completely equitable distribution of their national wealth, every citizen would still be poor. The failure of these countries to achieve the 6 per cent growth target would condemn hundreds of millions of their inhabitants to imperceptibly slow economic advance.

Within other developing countries, there was a tendency for growth to be concentrated in the modern sectors of the economy, with little current benefit to the lowest income groups—a strata of people, widely dispersed throughout every developing country—who, for various reasons, were beyond the reach of traditional market forces and existing public services. In some of the least developed countries, where the average income was $145, these poorest people received a per capita income of only $50. In some other countries, they received per capita incomes of $80 against a national average of $275.

The Bank Group, in keeping with the UNCTAD resolutions, was making a special effort to lend to its poorest member countries.

In a call to adopt new approaches for a wider distribution of economic benefits to touch the poorest 40 per cent of populations, Mr. McNamara urged specific commitments to raise their incomes at least as fast as the national average in the next five years, and faster still over ten years.

He promised bank assistance for projects to attack unemployment and massive underemployment, and technical and financial assistance in support of institutional reforms to redistribute economic power, for example by land and tax reforms, and to improve the distribution of public services. He also stressed the need for policies to eliminate distortions in the prices of land, labor, and capital.

Many Governors expressed unreserved support for the bank’s initiative. Mr. Ghulam Ishaq Khan, Fund Governor for Pakistan, welcoming the statement, said the developing world was in the throes of serious stresses and strains on account of abject poverty and woefully low living standards.

Mr. Barber said the poorest developing countries were faced with the most acute problems of underemployment, illiteracy, and low living standards. The least the developed world could do was to offer them hope.

The Governor for Mexico, Mr. Hugo B. Margáin, said the experience of his country and that of other developing countries had shown that the cause of economic equity could not be relinquished to market forces. Governments had to act.

Mr. André Vlerick, the Governor for Belgium, expressing unreserved support for the bank’s efforts to distribute benefits more widely, said the expansion of bank activities in agriculture and education were significant in this respect.

Pointing out that it had been the policy of European Common Market countries in 1965-70 to expand social infrastructure spending twice as fast as their natural economic growth rates, Mr. Abdallah Fassi Fihri, Governor for Morocco, said it was inconceivable that a lesser effort was needed for the developing countries. The social infrastructure largely determined living standards and the quality of life, he said, and urged that the bank Group consider large-scale financing in these sectors, if possible on concessionary terms.

Employment A Major Task

Various Governors stressed different aspects. Mr. Turner pointed to “clear and incontrovertible evidence” that employment creation would be one of the highest priority tasks in the developing countries in the next two decades: the bank Group could play a leading role with advice on national development plans and the formulation of projects.

Other Governors stressed the importance of private investment to the developing countries. They commended the International Finance Corporation for record commitments in FY72, and for providing, in the words of Mr. Vlerick, “more incentives for more investment of private capital in enterprises located in the poorest countries than has hitherto been effected.”

Mr. George M. Chambers, Governor for Trinidad and Tobago, said that the provision of financing for housing had to be a high priority objective for the bank Group, not only because of its positive contribution to the quality of life, but also because of the employment created by housing construction, particularly for the large body of semiskilled and unskilled young people.

Support for Cooperatives Sought

Other Governors, including Mr. Albert Marie Ramaroson, Fund Governor for the Malagasy Republic, urged bank assistance for public works and health programs, and the Chairman, Mr. Wardhana, in a statement as the Governor for Indonesia, suggested that the cooperative movement in developing countries constituted an important means of involving the small man in the development process, particularly in the rural areas. These were deserving of bank Group support.

The bank’s increasing involvement in social areas such as population control programs and education sectors was welcomed by various Governors, including Mr. R. J. Nelissen, Governor for the Netherlands. However, he cautioned that countries which asked the bank Group to finance social projects should have a clear appreciation in advance of the future effect on their national budgets of the cost of running these projects.

A questioning note was struck by Mr. Alfonso Inostroza, Governor for Chile. He said that his country had embarked on widespread reforms to redistribute economic wealth and power, including redistribution of income in favor of the large low-income sectors of the population; Chile, however had not received any bank loans during the 22 months of the current Administration which, among other things, had faced problems of drastically reduced foreign exchange earnings, sharply higher import costs, and increased demand for consumer goods.

The overwhelming response of Governors, however, was encouraging to the bank. In his closing remarks at the end of the Meetings, Mr. McNamara singled out their response for comment.

It was encouraging to note the general agreement, he said, that although economic growth was essential, it had to be growth of a kind that would reach into the individual lives of some two billion human beings who lived in the developing countries, and particularly into those lives which previously had been all but passed by.

BANK GROUP ANNUAL MEETING

The report in this issue of Finance and Development of the bank Annual Meeting is greatly condensed, touching only upon a small portion of the speeches and activities.

A more complete record of the Meeting will be published shortly by the bank in a volume entitled Summary Proceedings. It is available free on request from.

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International bank for Reconstruction and Development

1818 H Street, N.W., Washington, D.C. 20433 U.S.A.

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