Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

206. Current Economic Developments⁰

Issue No. 608

October 11, 1960.

Annual Meetings of IBRD, IMF, and IFC

The 1960 annual meetings of the Boards of Governors of the International Monetary Fund, the International Bank for Reconstruction and Development, and the International Finance Corporation, which took place in Washinton September 26–30, went smoothly. As expected, attention centered on the state of the US economy, the international balance-of-payments, and on aid to less-developed countries.

The International Development Association came into being at the beginning of the meetings, as a result of a sufficient number of countries completing the process of ratification. The IDA, establishment of which was endorsed at last year’s meeting, will provide aid for development projects in less-developed countries on more flexible repayment terms than have been available from international organizations.

Quite a few of the Governors from the less-developed countries pointed out that now that the IBRD’s reserve against losses has passed the $500 million mark, as against loans outstanding of less than $3 billion, it is time to consider a reduction in the IBRD’s one percent charge for this reserve. The President of the IFC recommended that the Corporation’s charter be amended to permit the IFC to invest in equities. No opposition was expressed by any of the Governors. The Chairman said that the matter should be considered by the Executive Directors who would bring it before the Governors upon completion of their studies and recommendations (without necessarily waiting until the next annual meeting).

As usual, the Governors considered the annual reports of the institutions. Nigeria’s applications for membership in the Bank, Fund and IFC were approved as were Nepal’s applications for membership in the Bank and Fund and Sudan’s for the IFC. Approval was also given to Yugoslavia’s application for an increase in its quota in the Fund and in its subscription to the Bank.

[Here follows discussion of the soundness of the U.S. economy.]

Long-Term Loans to Less-Developed Countries It was emphatically pointed out by many speakers that there should be an increase in long-term loans to less-developed countries, particularly by those countries accumulating large foreign exchange surpluses, not only because of the need for such loans on the part of the less-developed countries, but also as a means of assisting in reaching a state of more equilibrium in the international balance of payments. In this context Germany was specifically mentioned by Mr. Jacobsson, and by the US Governor and alternate Governor.¹

The German response was favorable in tone and recognized Germany’s obligation, but lacked specificity. Minister Erhard said that the means of raising the necessary funds for development aid is being discussed within the Federal Republic. He reiterated a statement which the Federal Government and the Central Bank made a few weeks ago that appreciation of the deutschemark was not one of the intended measures. Erhard maintained, as Germany did last year, that there needs to be better coordination of aid to less-developed countries. He remarked that the Development Assistance Group is now established² which will lead to better reciprocal information on the resources needed and available for development aid. However, he said, two other goals Germany has in mind remain to be achieved: 1) voluntary consultations and individual development projects and 2) if the circumstances of the individual case so indicate, the combination of several suppliers of capital for joint operations. He noted that these tasks are outside the scope of the DAG, but welcomed the fact that the International Bank has made itself available for consultations on development projects to be carried out bilaterally and is already working energetically to bring about joint operations. Erhard expressed hope that there would be an expansion of these encouraging initial results. [Here follows discussion of the International Monetary Fund.] International Bank W.A.B. Iliff, Vice-President of the International Bank, struck several optimistic notes in his address to the Governors. He noted that in the last three years IBRD lending has almost equalled the total of its first ten years. The cumulative total of Bank lending now exceeds $5,000 million in 53 countries. Ten years ago, its available funds came almost entirely from the paid-in capital of the US and Canada and from $250 million in borrowed money, all of which had been raised in the American market. Five years ago, while the Bank’s sources of finance had taken on a more international complexion, the paid-in subscription of the US, amounting to $635 million, exceeded the sum of all usable subscriptions from the other members. Today, the international character of the Bank is thoroughly established. Members’ paid-in capital available for lending—exclusive of the US subscription—amounts to more than $1,000 million. Of the Bank’s outstanding funded debt which now exceeds $2,000 million, more than half is held outside the US—a very remarkable change from five years ago. Ten years—or even five years ago—it was still largely a dollar bank; today the IBRD is in every sense of the word an international bank. Its securities have been established in the money markets of Belgium, Canada, Germany, the Netherlands, Switzerland, and the UK as well as the US. Investors in more than 40 countries are holders of Bank securities. Also, the over-all financial position of the Bank continues to grow stronger. A further $85.6 million was added to its reserves during the past fiscal year and these reserves now stand at more than half a billion dollars.

While it is not easy to look into the future, Iliff said there does not appear to be any shortage in sight of development capital prepared to move on conventional terms. The volume of private international lending and investment in foreign securities has been growing; foreign bonds publicly issued in the major capital markets during 1959 and 1958 amounted to three times the total floated in 1952 and 1953—and this exclusive of refunding operations. This expansion has been marked by an increase in the number of countries able to invest abroad, notably those countries of Western Europe which have experienced sustained improvement on domestic and foreign account. Even the recent pattern of interest rates suggests the possibility of a continuing growth in the supply of conventional development capital, according to Iliff. While attention today is directed to the recent rise in long-term interest rates in Europe, it should not be overlooked that European interest rates are significantly lower than they were in the peak of the earlier European boom in 1957. Moreover, since 1957, controls over capital movements have been eased. These are indications that the supply of capital in Europe has expanded substantially in the past three years, giving still further support to the view that capital flows to the low income countries can continue to increase.

However, the past decade has also brought some new problems which are taxing both resources and ingenuity, Iliff pointed out. The first of these is that of the new countries—those to whom national independence comes, in many instances, with little or no preparation or warning. In some of these countries we know now that the first roadblocks on the path to development are the lack of the most basic services of government, particularly adequate education. Somewhere men and women must be found, or trained, to build the very foundations without which economic and social progress cannot be built. All development agencies—national, regional and international—will have to stretch the limit of their resources and ingenuity to meet the demand. The IBRD hopes and expects to do its share, but Iliff stressed that something more than the existing forms of technical assistance is required.

The second problem arises from the fact that once a country embarks on a development program in earnest and sets out to find capital to finance it, that country can, with great rapidity, reach the point where its ability to borrow foreign capital on conventional terms is very limited in comparison with the amount it could effectively employ. Iliff pointed out that this is certainly the case with India and Pakistan today and it may already be the case of some other countries. India’s external debt already creates an onerous burden on her economy and, if hard loan continues to be piled on hard loan, the service and repayment burdens will very quickly reach an intolerable level. Clearly, if the tempo of progress in the underdeveloped world is not dangerously retarded, some other forms of development financing must be made available on a substantial scale. “The free world has come to realize this and is experimenting with a whole orchestra of novel financial instruments—bilateral and multilateral ... .³ The objective is to get some harmony out of these instruments. The risk is that—if we are not careful—we could produce not an orchestra, but nothing more than a haphazard ensemble making quite discordant noises.”

In considering these problems one can discern a trend in the international community in the direction of greater reliance on the multilateral approach, Iliff said. Today’s trend differs importantly from similar trends in the past; the search now is not for once-and-for-all solutions to the broad problems of development; rather it is a search for solutions to specific problems—solutions which can be fitted together like pieces of a jig-saw puzzle to make a more hopeful prospect for a picture of peace and human betterment. He added that the historic transformation which is going on in the underdeveloped world today defies any general “solution”; but it does offer infinite possibilities to the practitioners of economic development. “By marrying the needs of development with international cooperation, more and more statesmen the world over are trying to make something of these infinite possibilities. Instead of searching for the elusive grand design, they are seizing on specific development opportunities and trying to use these as a means of promoting harmony and tranquility within and among nations.” In this context, he mentioned the recent Indus Waters settlement, the Indian and Pakistan consortiums, the coming into being of the new International Development Association, the formation of the Inter-American Development Bank, and the movement to amend the function and membership of the Organization for European Economic Cooperation.

International Development Association The International Development Association came into being September 26 as an affiliate of the World Bank. By that date fifteen countries with total subscriptions of the equivalent of $626 million had met the membership requirements. If all of the members of the IBRD join IDA, its initial resources will be the equivalent of $1,000 million, of which the equivalent of $787 million will be available on a fully convertible basis. The first meeting of the Executive Directors of the IDA, representing its member countries, will be held later in the fall. At that time IDA will formally begin operations.

The new organization will provide development finance to the less-developed areas of the world included within its membership on terms more flexible and bearing less heavily on their balance of payments than conventional terms, thereby furthering development objectives and supplementing the activities of the IBRD. A considerable degree of flexibility is given to IDA by its Articles of Agreement, both in the purposes for which it may provide finance and in the terms on which it may make loans. IDA will finance a wider range of projects than the Bank, but since both agencies will have the same management, it is to be expected that IDA will maintain the same high standard as the Bank with respect to planning, management and financing of the projects which it assists.

A unique feature of IDA is the division of member countries into two groups for purposes of subscription of funds. Subscriptions will be payable over a five-year period, and the countries in both groups will pay 10 percent of their initial subscriptions in gold or freely convertible currencies. One group—the 17 more industrialized member countries of the Bank—will pay the remaining 90 percent in five equal installments in gold or freely convertible currencies; the other group— the 51 less-developed countries—will pay their 90 percent in their national currencies, which IDA will not be free to convert into other currencies or to use to finance exports from the country concerned without its consent.

Members as of September 26 were Australia, Canada, China, Germany, India, Italy, Malaya, Norway, Pakistan, Sudan, Sweden, Thailand, the UK, the US and Viet-Nam. In addition, Ecuador, Ethiopia, Honduras, and the Netherlands have also signed the Articles of Agreement but still have to complete other formalities for membership.

International Finance Corporation In the four years since it has been in operation, the IFC, which provides capital to private enterprises in less-developed areas where private investors put in an equal amount or more, has made investments in 17 countries and has investigated projects in 17 others. As of June 30, 1960 it had made a total of 33 investments, amounting to more than $42 million. This year saw 13 new investments in nine countries totaling $21,747,000, with first investments being made in Argentina, Peru, Venezuela, Tanganyika, Finland and Italy.

The IFC has observed the growing interest of business and financial investors, both local and foreign, in the opportunity for private industry in the developing countries. Though aware of the obstacles and risks involved, the IFC is convinced that there are corresponding attractions and rewards. In the developing areas are growing markets, untapped raw materials and abundant labor able to acquire modern skills. For efficiently managed enterprises, potential profits are greater than in the highly competitive industrialized countries, As evidence of its conviction that the rewards can outweigh the risks, the IFC points out that it is investing in the developing areas, sharing the risks and participating in the potential returns.

The IFC notes that there is an unquestioned trend toward joint ventures under international and local sponsorship, based on growing evidence that the advantages outweigh the difficulties. It stresses that today’s modern operations call not only for complicated technical skills but also for executive management capable of dealing with the more complex problems of planning, financing, taxes, labor and public relations, advancing techniques and the development of new products. Regardless of the special difficulties involved in introducing new techniques into the developing areas, IFC President Garner emphasized that “the sound principles of business and finance are the same everywhere.”

Perhaps the most important problem confronting the Corporation is that of investment in equity securities. This problem has become clear only after considerable experimentation on the part of the Corporation with convertible debentures, stock options, and other techniques. To properly perform its function, the Corporation needs new tools, according to President Garner, and he is advocating that the Charter be amended so as to enable the Corporation to invest in capital stock of private enterprises.

DAG Countries Confer on Aid at Washington Meeting

The Development Assistance Group of capital exporting countries had its third meeting in Washington just after the annual IBRD–IMF meeting and, as prearranged, concentrated on pre-investment technical assistance activities for less-developed countries and the relationship of these activities to development planning and programming. Also, the country representatives informed the Group of developments in their aid policies, programs and institutions. The intention of several countries to increase their contributions to the UN Special Fund and the Expanded Technical Assistance Program was announced, and hope was expressed that the total annual resources of these two programs would soon reach the target figure of $100 million.

The meeting, which took place October 3–5, was attended by representatives of all the members—Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Portugal, the UK, the US and the EEC Commission. Representatives of various UN and other international organizations participated in the discussion of pre-investment technical assistance. Mr. Thorkil Kristensen, Secretary General Designate of Organization for Economic Cooperation and Development (OECD), attended for the first time and stressed his desire to facilitate the transition of the DAG to a committee of the OECD to be called the Development Assistance Committee. He emphasized the importance of consultation among the principal capital exporters to ensure that the flow of funds to the less-developed countries is both adequate and effective.

The US used the occasion to have informal discussions with other capital-exporting countries, outside the DAG meeting, on the importance of increasing Western aid to various countries, particularly the Congo and Afghanistan.

The next meeting of the DAG will be in London in the spring of 1961.

Pre-investment Technical Assistance The main topic for discussion at this meeting was pre-investment technical assistance to the less-developed countries, and various international organizations were invited to send representatives to participate in the discussion. Represented were the UN, including its Special Fund, the Expanded Technical Assistance Program and UN regional economic commissions; the IBRD; the OAS; the IDB; the European Productivity Agency; and the Commission on Technical Assistance in Africa South of the Sahara.

The discussion centered around four topics: technical assistance for economic development policies and planning; linking the results of pre-investment technical assistance to operations of capital lending institutions; the role of national and international organizations; and coordination of pre-investment technical assistance activities. There was general agreement on the importance of having competent governmental and other institutions in the less developed countries in the field of development programming and economic policy formulation. Stress was placed on the need for integrated country development programs based on adequate resource surveys and on the shortage of qualified personnel in the less-developed countries at the planning, managerial and technical levels. The view was expressed that greater priority should be attached to intensive training programs on a local and regional basis, as well the enlargement of opportunities for training in the more advanced countries. The condition under which foreign nationals could best provide effective assistance in national planning was discussed.

Two aspects of the problem of linking the results of pre-investment technical assistance to operations of lending agencies were discussed inconclusively: the possibility of standardizing feasibility and engineering surveys and the difficulty of relating those surveys. The IBRD and DLF have not found it possible in their operations to attempt to standardize the requirements for surveys, according to the representatives of these agencies. Other delegates commented that the IBRD type activity was principally concerned with large loans for basic development purposes and did not cover the problem of smaller loans or of meeting the requirements of private foreign capital. The subject will be studied further.

The discussion of the role of national and international organizations indicated that both types of agencies have important roles to play in technical assistance. International programs frequently are more acceptable to recipient countries and more appropriate for projects which affect several countries, in countries having great political instability, or in situations where conflict is possible between political considerations and technical views. The overriding consideration is the voluntary choice of the recipient government in selection of a national or an international agency to provide assistance. The need for greater coordination between bilateral and multilateral programs was stressed.

There was agreement on the importance of avoiding competition among different agencies and duplication of work. The international agencies and DAG members agreed to cooperate towards avoiding such competition.

Throughout the discussion, the spokesmen for the international organizations emphasized the inadequacy of the present flow of aid for pre-investment activities as compared with that devoted to investment proper, the result being a significant amount of wasteful and abortive investment. They saw an urgent requirement that programs of pre-investment technical assistance should be long-term and continuing.

The consensus was that experts from DAG countries and the international organizations should meet to discuss further the questions of pre-investment technical assistance.

Other Topics The DAG discussed reports of two working parties— one on the improvement of information on financial assistance to the less-developed areas and one prepared by public affairs experts. The first deals with some modifications of the OEEC Secretariat’s basic report on financial assistance provided 1956–59; proposes that further reports be prepared periodically from 1960; and contains proposals for reporting specific financial transactions by DAG members. Suggestions for improving such information were approved in the form of a resolution. The working party is to remain in existence and meet in Paris.

The public affairs experts reported that more needs to be done to increase understanding and acceptance in the DAG countries of the necessity for assisting the economic development of the less-developed nations. The growing awareness of the importance of the public information function in the various economic assistance programs is producing improvements in the quality and magnitude of information efforts directed toward domestic audiences, the people of less-developed countries and citizens of third countries. Attention was given to the need to increase understanding in member countries of the contribution to development by other member counties and to the need for information to be exchanged to this end. The difficulties inherent in presenting the facts on aid to the people of the less-developed nations were recognized as was the need to take full account of the political and psychological problems involved.

[Here follow articles on unrelated matters.]

0. Source: Washington National Records Center, Current Economic Developments: FRC 72 A 6248. Official Use Only.
1. For text of Dillon’s September 27 statement and Anderson’s September 28 statement, see Department of State Bulletin, October 17, 1960, pp. 608–616.
2. The Development Assistance Group, established in Paris on January 14, held its first meeting in Washington March 9–11. For text of the communiqué issued by the Group at the end of this meeting, see American Foreign Policy: Current Documents, 1960, pp. 329–330.
3. Ellipsis in the source text.