The Bank Group Meeting

"The question is not whether development will happen. It will. Rather, the choice is between slow, halting growth in an environment of desperation with declining levels of assistance and embittered international relations, or growth as part of a positive, concerted campaign to accelerate and smooth the absorption of the technological revolution in the poorer countries, with a reasonable chance that the spirit of shared concern and effort will reduce the frictions and the dangers, and facilitate and expedite positive results."

Cyril H. Davies

N THESE WORDS Mr. Lester Pearson, former Mr. Pearson's address to the Governors was not deliv- I Prime Minister of Canada, addressing the Boards of ered, and the Commission's report, entitled "Partners Governors of the Bank and its affiliates, the Interna- in Development," was not distributed to them until af- tional Development Association (IDA) and the Inter- ter the midpoint of the meeting, too late for Governors national Finance Corporation (IFC), at their Annual to express any considered reactions. Nevertheless, even Meeting in September, summed up the choice confront- speeches made by Governors before this stage had ing the developed and the developing countries. Mr. been reached showed that the Commission's recom- Pearson was speaking as Chairman of the Commission mendations, which had been formulated after discus- on International Development, which, as the result of sions with governments, international organizations, initiatives on the part of Mr. McNamara, President of business and professional associations, and individuals the Bank, and his predecessor, Mr. George Woods, had all over the world, touched upon matters to which reviewed during the past year the problems and pros- much thought had already been given by people deeply pects of development assistance, and was about to pub- concerned with development. lish its report. Mr. McNamara stated that the Bank's staff would In addition to Mr. Pearson, the Commission con- make a careful analysis of each of the Commission's sisted of Sir Edward Boyle (United Kingdom), Mr. recommendations which in any way bore upon the Roberto Campos (Brazil), Mr. Douglas Dillon (United Bank's work, and that he would submit these analyses States), Dr. Wilfried Guth (Germany), Professor Sir to the Executive Directors with proposals for appropri- W. Arthur Lewis (Jamaica), Dr. Robert Marjolin ate action. When the Executive Directors had reviewed (France), and Dr. Saburo Okita (Japan), each of these analyses and proposals, their conclusions and whom served in a personal rather than representative recommendations would be reported to the Board of capacity. It had worked independently of the Bank. Governors. He urged that governments and other agen-

©International Monetary Fund. Not for Redistribution cies affected by the Commission's recommendations against "expecting too much too soon" and "forgetting should take similar action. there is no such thing as instant development." Speakers pointed out that, if the quality of aid was to be improved, it must be better coordinated. Aid had in the past come from many independent sources, and The mood of the delegates was in general more con- too much of it had been prompted by motives of structive and hopeful than a year earlier, when the short-term political and commercial advantage to the prevalent feeling was disappointment at the loss of mo- donors which had led, for example, to the unsatisfac- mentum of the First Development Decade, exemplified tory practice of tying aid to specific sources of procure- by the delay in completing the second IDA replenishment. This pointed to the desirability of channeling aid ment. While there was no complacency, and speaker as far as possible through multilateral agencies, and of after speaker emphasized that the gap between the rich looking to them for the coordination of aid from all and poor nations was still widening, several new ele- sources, public and private. Mr. Kennedy said that the ments in the situation gave grounds for optimism: the United States was "firmly committed to the multilat- notable expansion of the operations of the Bank eral approach to development financing epitomized by Group, the completion of the second IDA replenish- the World Bank and its affiliates." Mr. McNamara, after ment, the imminent activation of the Fund's special saying, "Our objective is not to search for good invest- drawing rights which, despite cautions from a few, ments in a sick economy," went on to emphasize that many Governors felt was somehow or other bound to the Bank could not be satisfied with "piecemeal solu- lead to an increase of resources for development, and tions"; its aim was to find "a successful over-all strat- the stimulus provided by the eagerly awaited report of egy by which development in each individual sector im- the Pearson Commission. proves and sustains it in all the others." The more constructive attitude appeared to be due to a realization, on the part of both developed and de- Quantity and Quality veloping countries, that they had entered the First De- There was general agreement that, in the year just velopment Decade with exaggerated expectations, and ended, the operations of the Bank Group had met both had been too much inclined to assume that develop- quantitative and qualitative tests in a way which au- ment was simply a matter of injecting a sufficient gured well for the prospects of fulfillment of the five- quantity of external resources. As Mr. Stephan Koren, year plan outlined by Mr. McNamara in 1968. Not Governor for Austria, put it, "I think that one of the only had the Group increased its financing of develop- most important lessons that can be learned from the ment projects by 87 per cent compared with the pre- experience of the last decade is that problems of devel- vious year, but the geographical shifts in favor of Af- opment cannot be solved simply by providing money. rica and Latin America, and the sector shifts in favor of Money can buy factories, dams, reactors, and other agriculture and education which Mr. McNamara had things. But it cannot guarantee development. To proposed a year earlier, had also been realized. The achieve development, appropriate structures, institu- Bank had borrowed $1.25 billion in the world's capital tions and attitudes have to be created." markets, 55 per cent more than in any previous year. Mr. David M. Kennedy, Governor for the United Mr. Konan Bedie, Fund Governor for Ivory Coast, States, said, "I wonder, too, whether simple numerical welcoming these achievements, commented that, "In targets for development assistance by industrial nations sum, this increased dynamism, these qualitative ad- do not divert too much attention from the quality of vances, and these effective evidences of goodwill are the aid provided and the techniques employed." Look- every bit as important, in our view, as the record level ing at the matter from the point of view of the devel- of operations presented to us, and accordingly deserve oping world, Mr. Louis Namwisi, Governor for the equal tribute." Democratic Republic of Congo, said, "The new coun- It was widely recognized that the Bank's advice and tries are fully aware that the success of their efforts de- technical assistance was an essential ingredient of its pends in the first place upon themselves, upon the real- aid. Mr. McNamara's statement that the Bank was istic nature of their development policies, upon the about to expand its program of country economic re- effectiveness of forms of associations with foreign en- ports was therefore welcomed. Many developing coun- terprise, and upon progress in the technical training of tries, he said, would receive a regular annual mission national managerial staff." which would report in detail on economic and social Mr. L.K. Jha, Governor of the Fund for India, said, progress and investigate all sectors of the economy "We labor under no illusions. The destiny of the devel- with a view to determining priorities for both invest- oping world will be determined mainly by the wisdom ment and preinvestment activity. Both Mr. Emilio Co- and sacrifice of its own people." Quoting Gunnar Myr- lombo, Fund Governor for Italy, and Mr. Namwisi rec- dal's phrase, "Development is the movement of the ommended that the bank should extend its advice on whole social system upwards," Mr. Pearson cautioned economic and development problems to the point that,

©International Monetary Fund. Not for Redistribution in Mr. Namwisi's words, the Bank "would give to its pleading the cause of those developing countries which, members the same assistance that the Fund already at the current level of IDA resources, were regarded as gives them in the field of monetary and exchange poli- ineligible for IDA credits, pointed to the great differ- cies." Mr. Colombo had in mind that the Bank would ence between IDA's % per cent service charge and the hold regular consultations with its members on their current Bank lending rate of 7 per cent in the financ- medium-term and long-term problems which would ing of slow-yielding educational and agricultural proj- supplement their annual consultations with the Fund. ects. IDA's funds for lending on concessionary terms The timing of these consultations would not be related were, according to Mr. Witteveen, the most valuable to project appraisals or impending loan operations. resource of the Bank Group. These pleas for larger The emphasis on the quality of aid did not, how- IDA resources were powerfully reinforced by Mr. ever, mean that Governors were less preoccupied with Pearson, who said that the Commission for Interna- its quantity. Many speakers deplored the failure of the tional Development was recommending that the con- developed countries to bring their total aid up to the cessionary element of multilateral aid should rise from target of 1 per cent of gross national product suggested the current 11 per cent to 20 per cent by 1975, and by the United Nations Conference on Trade and De- added that, "We particularly suggest a stronger role for velopment (UNCTAD). In his address at the opening the International Development Association. We believe session the Chairman, Mr. Dagnino Pastore, Fund that among existing organizations IDA is in the best Governor for Argentina, reminded the Governors that position to exert leadership in the effort to establish the Bank's capacity to borrow was affected by factors criteria for the allocation of aid which emphasize eco- outside its control, and urged that more countries af- nomic performance, rather than the political relation- ford the Bank liberal and frequent access to their capi- ships and historical accidents which bear little or no tal markets. Dr. Karl Blessing, Fund Governor for relationship to development needs or performance." Germany, in whose capital markets the Bank had Mr. Jha voiced the views of many other Governors raised 46 per cent of its gross borrowing during the fis- anxious that IDA's resources should be increased when cal year, warned that the circumstances which had fa- he expressed regret that the question of a formal link vored this borrowing could not be counted upon to between SDR's and development finance had been continue, while Mr. Koren took the view that the shelved, "even though developing countries which ac- world's central banks, which had subscribed heavily count for over 80 per cent of our membership and at during the year to the Bank two-year bond issues, least some of the developed countries support it." Mr. could not provide the type of funds most appropriate Witteveen objected to such a link on the grounds that for the Bank's long-term lending operations. Mr. Wit- the purpose of SDR's was to finance temporary balance teveen, Governor for the Netherlands, suggested that of payments maladjustments rather than real long-term the possibility of increasing the Bank's resources by an transfers, which should be financed out of genuine sav- increase in its subscribed capital be studied and, in his ings if inflation was to be avoided. He proposed, how- final address, Mr. McNamara said that a study of the ever, that the "Part I" IDA members should consider desirability and feasibility of improvements in its capi- increasing their contributions to IDA. Mr. Colombo re- tal structure had already been initiated. newed his 1968 suggestion that the chief industrial countries should agree to contribute the equivalent of IDA Resources part of their SDR allocations to the Bank or IDA, Again led by the Chairman, nearly every speaker while Mr. Roy Jenkins, Fund Governor for the United took up the question of IDA's resources. The delay in Kingdom, expressed the hope that, although no formal completing the second IDA replenishment, which link had been established, the contribution which SDR's meant that the resources it provided would have to last would make to the world's liquid resources might help until June 30, 1971, instead of until June 30, 1970 as to create "more favorable conditions for the growth of originally planned, was deplored, and the hope was ex- development aid." In his concluding remarks to the pressed that replenishment could in future be placed Governors, Mr. McNamara said that, while he recog- on a less uncertain basis. Mr. Kennedy in particular nized that there was a division of opinion among the expressed the view that the balance of payments diffi- Governors on whether there should be a formal link culties of the richer countries should not interrupt the between SDR's and development aid, he shared the flow of aid. views expressed by Mr. Colombo, Mr. Jenkins, and Many Governors for developing countries felt that others. they were approaching the limit of the debt they could afford to incur on conventional terms, and saw in a Population large increase of IDA credits relative to Bank loans Once again Mr. McNamara made clear that he had their only hope for avoiding a slowdown in develop- no illusion about the magnitude of the structural prob- ment. Mr. Edward Seaga, Governor for Jamaica, lems that had to be overcome if development efforts

©International Monetary Fund. Not for Redistribution were not to be frustrated. He reported that, for the The phenomenon of urban decay, said Mr. Mc- purpose of advising governments on ways of dealing Namara, which was directly related to unemployment, with the population explosion—the "mushrooming was "a plague creeping over every continent," but cloud" overhanging all development—to which he had whose "corrosive effects" were critical in the poorer drawn attention in his address at the 1968 Annual nations. It was estimated that, by the year 2000, the Meeting and in subsequent public speeches, the Bank total population of the big cities of the developing had set up a new Population Projects Department. world would have grown by some 500 per cent. The This step was welcomed by many Governors, although pace of migration to these cities was beyond any rea- Mr. Abdon Espinosa Valderrama, Governor for Co- sonable absorptive capacity, and even highly successful lombia, speaking for 19 Latin American countries and population planning could not curb it before the end of the Philippines, expressed the hope that no question the century. No clear answer could yet be given to the would arise of the Bank's making its lending to any key question whether resources should be used to pro- country conditional on the adoption of a specific family vide inducements to villagers to stay in the countryside, planning program, and Mr. Juan Jose Espinosa, Gov- or to provide the infrastructure for urban development. ernor for Spain, pointed out that such programs raised Nevertheless, an answer to this question was an essen- "delicate moral issues." tial element of any over-all strategy of development. The Governor for Singapore, Mr. Goh Keng Swee, Mr. McNamara was critical of some of the policies was in the exceptional position of being able to an- followed by developing countries to promote industrial- nounce that, since 1957, the annual rate of population ization. Local industries were all too often encouraged growth in his country had fallen from 4.4 per cent to at the expense of agriculture, which had to remain the 1.5 per cent, as the result of the widespread acceptance foundation of their economies. While industrialization of family planning methods advocated, first by a pri- required initial inducements, these could be justified vate association, and later by the Singapore Family only if, in the long run, they led to the emergence of Planning and Population Board, whose former Chair- efficient industries. The excessive and indiscriminate man, Dr. Kandiah Kanagaratnam, had not inappro- protection of import-substitution industries perpetuated priately been appointed first Director of the Bank's inefficiency and hampered the effort to increase export Population Projects Department. earnings. The result was industrial sectors that produced too wide a range of items on a far less than op- Three Other Problems timum economic scale. The resultant economic waste To the population explosion Mr. McNamara added was vividly illustrated by a Bank study which showed three more structural problems which presented grave that, in 1965, developing countries spent $2.1 billion threats to development—unemployment, urbanization, to manufacture automotive products which had a world and misdirected and inefficient industrialization. No market value of only $800 million. The rationalization over-all development strategy, he said, could be com- of such unsound economic structures was bound to be plete unless it provided for an attack on these interre- a painful process resisted by vested interests. The Bank lated problems. was establishing an Industrial Projects Department for Twenty per cent of the entire male labor force of the purpose of expanding lending to industry and to the developing world, said Mr. McNamara, was unem- advise developing countries in this critical field of in- ployed and, at current rates of population increase and vestment. economic growth, this unemployment could only grow worse. To ease the problem, not only must the average Duty of Developed Nations growth rate in the developing world rise to 6 per cent, Mr. McNamara pointed out that the developed na- a figure also selected by the Commission on Interna- tions had a duty to assist the sound industrial growth tional Development as a target for the 1970's, but poli- of the developing nations by dismantling discriminatory cies promoting the right balance between capital-inten- barriers against the latter's exports of manufactured sive and labor-intensive activities, and between the goods. The resultant new pattern of international trade, supply of skilled and unskilled workers, would have to far from damaging the interests of the developed coun- be adopted. Mr. McNamara commented on the "bitter tries, would lead them to expand production in those irony" of unemployment while "there was enough un- directions in which their greatest comparative advan- finished business on this planet to keep everyone em- tage lay. It was wholly absurd, said Mr. McNamara, ployed to the maximum of his ability," and Mr. Espi- for the rich countries to invest billions in developing nosa Valderrama, noting that unemployment, effec- the poorer countries, and then to refuse to be repaid in tively eradicated from the developed countries, had those goods which were the first fruits of development. found fertile soil in the developing countries in which Governors for the developing countries supported to root itself anew, warned that "to attempt to ignore Mr. McNamara's advocacy of the removal of barriers it would be to fall into tragic and irreparable error." to their exports. Mr. A.H. Jamal, Fund Governor for

©International Monetary Fund. Not for Redistribution Tanzania, asked how soon there would be a truly equi- Mr. Kjell-Olof Feldt, Temporary Alternate Governor table international division of labor so that, for exam- for Sweden, pointing out that what mattered to the ple, half the world's sugar production would no longer producing country was not price stabilization per se be high-cost beet sugar produced in the industrial but stabilization of export earnings, reminded the Gov- countries behind barriers which prevented the expan- ernors that this end could be attained by means of sup- sion of efficient tropical cane production. Mr. Jha and plementary financing, of which Sweden had been one Mr. Bedie reminded the Governors that UNCTAD's of the original proponents. A study of supplementary recommendation that the developed countries should financing proposals had been made by the Bank in give preferential treatment to the products of develop- 1965 at the request of UNCTAD, which had recently ing countries had met with no response. Mr. Jae Sul referred it back to the Bank for final preparation and Lee, Fund Alternate Governor for Korea, and Mr. Jha decision. Mr. Janko Smole, Governor for Yugoslavia, asked the Bank to study the possibility of refinancing also commended supplementary financing as an ap- export credits provided by developing countries to en- proach to the problem of fluctuating commodity prices. able their manufactured goods to compete on more equal terms with those of developed countries. Flon: of Private Aid In contrast were the pleas of several Governors for developing countries that the Bank should temper the While Governors were naturally concerned primarily operation of international competitive bidding in the with aid flowing through multilateral channels, a num- procurement of loan-financed goods by according sup- ber of them made clear that they shared the view ex- pliers in borrowing countries substantially more than pressed by Mr. Pearson on behalf of the Commission the 15 per cent preference margin it normally allowed that "this emphasis on official aid in no way means them. that we minimize the importance of private flows." On the side of the developed countries, Mr. Koren wel- Prices of Primary Products comed the upward trend of private investment in de- The aspect of international trade which claimed veloping countries; the technology, management, and most attention was the problem of the stabilization of capital which the private investor provided, he said, the prices of primary products, on which both Bank could not be obtained in any other way. Mr. Kennedy and Fund had submitted reports to the Boards of Gov- spoke of his conviction that "development can be ac- ernors in response to the resolutions adopted at the celerated if we enlist more effectively the vast potential 1967 and 1968 Annual Meetings. Spokesmen for a of private enterprise." Too often, he said, individuals number of countries producing primary commodities in developing countries with ability and ambition lack expressed disappointment that, as Mr. Augustin Bou- resources while, in developed countries, companies mah, Fund Governor for Gabon, speaking also on be- with ample financial strength and technical competence half of Cameroon, the Central African Republic, Congo "shy away from the challenges" of the less developed (Brazzaville), and Chad, put it, the Bank's deci- areas. sions were limited "to measures aimed at the diver- Mr. Seaga described the traditional search of indi- sification of production and the improvement of the vidual entrepreneurs from developed countries for in- competitive capacity of primary products, without pro- vestment opportunities in developing countries as viding for any concrete action aimed specifically at as- "spearfishing"; the search could be much more sisting the developing countries to alleviate the conse- efficiently conducted, he suggested, by "net fishing," quences of the fluctuations in the world prices of these carried out by institutions like the Commonwealth De- products." In keeping with the constructive tone of the velopment Corporation or the Commonwealth Devel- meeting, however, several of these speakers were grate- opment Finance Company of the United Kingdom, ful that the Fund and the Bank had taken primary which were supported by both private and public capi- products, in Mr. Boumah's words, "out of the category tal, in the developed countries, in conjunction with de- of embarrassing and unsolvable problems," and wel- velopment banks or other appropriate agencies in the comed the fact that study of these problems was to developing countries. He welcomed the proposal made continue. Several pointed out that the Bank's Articles in May by President Nixon to establish an Overseas of Agreement limited its scope for action in this field, Private Investment Corporation in the United States. and looked forward to their eventual amendment. On the other hand, Mr. Witteveen fully endorsed the position taken by the Bank; its contribution to the so- IFC lution of the problem, he felt, should take the form of Mr. Colombo commended the progress made by the helping to remedy the structural causes underlying the International Finance Corporation, the private enter- instability of the prices of primary products, rather prise arm of the Bank Group, in the past year. At the than the direct financing of commodity surpluses held same time he, together with a number of Governors for in stock, which was essentially a commercial function. developing countries, urged that IFC should, in Mr.

©International Monetary Fund. Not for Redistribution Seaga's words, "divest itself of its doctrinaire ap- Consultations with "Part I" countries looking toward roach" to public enterprise by being willing to consider the third IDA replenishment, Mr. McNamara told investing in businesses with more than the 25 per them, would be begun immediately with a view to their cent of state ownership which, in view of its charter re- reaching agreement by June 30, 1970, so that the Ex- striction to investment in private enterprises, it normally ecutive Directors could consider a resolution authoriz- applied as a criterion. Mr. M.S. Forna, Governor for ing the replenishment for submission in July 1970 to Sierra Leone, associating himself with this view, em- IDA's member governments. This would leave nearly a phasized that state participation in businesses and year for the Part I countries to enact legislation that development banks in most developing countries was would permit the replenishment to become effective in prompted by pragmatic rather than ideological consid- time to provide IDA with new commitment authority erations. by July 1, 1971. During the year to come the Fund's That IFC's attitude toward state enterprise was not SDR's, on which so many hopes had been pinned, inflexible, however, was evident when Mr. Smole ex- would begin to be activated. The report of the Com- pressed appreciation of IFC's role in the establishment mission on International Development would provide a of an international corporation to be domiciled in an focus for and a stimulus to the more constructive ap- IFC member country outside Yugoslavia. Besides proach to development problems of which the meeting IFC, the charter shareholders would be Yugoslav had already given evidence, and which reflected a banks, together with financial institutions in Europe, growing realization that the problems to be overcome the United States, the United Kingdom, and Japan. were of such magnitude, and the penalties for failure The new corporation would promote, and occasionally to solve them so great, that both developed and devel- participate in, joint ventures between foreign private oping countries had, as Mr. Pearson put it, "no choice companies and Yugoslav enterprises. but to face together with honesty and energy the diffi- The Governors dispersed from Washington reassured cult, frustrating problems that are caused by the to know that strong counterattacks were being mounted grossly uneven pattern of world growth." It was evident from various directions against the stagnation of aid that the year ahead would be significant for world and development which had threatened a year earlier. economic development.

Cyril H. Davies studied economics at Oxford University, and before World War II taught economics at what is now the University of Bradford. After an introduction to the financial problems of reconstruction in Europe while with the Supreme Headquarters, Allied Expeditionary Force and the Control Commission for Germany in 1944-46, he came to the Bank in 1947, and served as a Loan Officer in the Western Hemisphere Department before joining the Secretary's Department in 1961.

BANK GROUP ANNUAL MEETING The report in this issue of Finance and Develop- A more complete record of the Meeting will be ment of the Bank Annual Meeting is greatly con- published shortly by the Bank in a volume entitled densed, touching only upon a small portion of the Summary Proceedings. It is available free on request speeches and activities. from Publications Office International Bank for Reconstruction and Development 1818 H Street, N.W., Washington, D.C. 20433 U.S.A.