190. Current Economic Developments0
MOVE TO EXPAND IMF RESOURCES WINS BACKING AT VIENNA MEETINGS
Representatives of the US and major European countries have reached basic agreement on a program to expand the resources of the International Monetary Fund. The proposal was set forth by Per Jacobsson, Managing Director of the IMF, at the September 18-22 meetings in Vienna of the Boards of Governors of the IMF, IBRD, IDA and IFC.
Basically the plan calls for the US, UK, France, Germany, Belgium, Italy, Netherlands, Sweden, Luxembourg, Canada, and Japan to establish stand-by credits in their own currencies to the IMF. While the amount each country will provide is not yet fixed, the total is expected to [Page 416] reach $5-6 billion. The IMF would then have available sufficient amounts of francs, lira, deutsche marks, guilder, etc. as the case may be to meet any foreseeable demands on the Fund’s resources, including hot money flows or balance-of-payments crises of the type the US faced last fall and the UK faced this spring and summer. At the moment, the IMF, after various transactions including a $1.5 billion drawing by the UK in various currencies (see August 15, 1961 issue)1 is short of the European currencies, particularly deutsche marks and liras.
Details of the plan including the amounts to be contributed remain to be negotiated by the Executive Directors of the IMF in Washington. Among the important questions yet to be resolved is the autonomy to be granted the IMF to dispose of the stand-by credits. Some countries, notably France and the Netherlands, have taken the position that the IMF should draw upon such loans only after consultations. The effect of this would be to give the lending country or countries a voice in the conditions that the IMF might establish before the recipient country would be granted assistance.
The major aim of the plan is to ward off speculation by demonstrating that the defenses behind all the main currencies, including the dollar, are adequate.
US Backs Expansion of the IMF Resources
Representatives from Cyprus, Laos, Liberia, Nepal, New Zealand, Nigeria, Portugal, Senegal, Sierra Leone, and Togo were welcomed to the meetings for the first time by Secretary Dillon, who gave the principal address for the US.2 He backed Jacobsson’s proposals for an expansion of the IMF’s resources. While he had no fixed opinions on the details of the multilateral borrowing arrangement, he emphasized four aspects; a) the aggregate amount committed should be large enough to add decisively to the Fund’s resources; b) the additional resources must be promptly available in case of need; c) safeguards will be required to ensure effective consultation between the Fund and the lenders; and d) there must be no weakening of the policies that have guided the Fund in the use of its resources.
US Reviews Its Balance of Payments
Dillon devoted the bulk of his speech to an exposition of US economic policies. He said that the US was already on the road to recovery from the 1960 recession; the GNP is expected to rise from a recession low of $500 billion in the first quarter of this year to a total of $540 billion in the [Page 417] last quarter. Unused capacity and an ample supply of labor should avert any inflationary pressures that might otherwise develop.
Dillon reiterated the Administration’s determination to present a balanced budget in FY ’63. We are resolute, he said, in our determination to maintain both a sound and an expanding economy so that the US may play its full part in the defense and the development of the free world and, at the same time, meet the requirements of an increasing population at home.
Turning to the US balance of payments, Dillon noted that our merchandise trade surplus in 1960 amounted to $4.7 billion, whereas in 1959 it had been less than $1 billion. In the first half of 1961 our trade surplus was running at a seasonally adjusted annual rate of $6 billion. But the improvement in our trade surplus so far this year cannot be expected to continue in the months ahead, since it was accomplished more through a decrease in imports than through an increase in exports. The US is devoting considerable effort to bringing marketing opportunities abroad to the attention of the business community. Dillon also noted that the elimination of current payments imbalances can be greatly facilitated by the cooperation of surplus countries in pursuing liberal trade policies, in increasing long-term development assistance, and in sharing expenditures for the common defense in accordance with their capabilities.
US Emphasizes Social Needs of LDC’s
Under Secretary of State Ball, who made the US presentation to the IBRD meeting, emphasized that economic development will have to be accompanied by other political, social, cultural and economic processes.3 Economic development cannot serve its real purpose if its benefits are enjoyed exclusively by a wealthy elite, while the great masses remain in poverty. Nor can there be any assurance of lasting benefits from economic development in any nation where the government is the master of society and not its servant.
Another major problem stems from the fact that the successful achievement of our humanitarian objectives depends to a considerable extent upon the ability of economic growth to keep pace with demographic developments. The prevailing rate of population growth affects not only the net rate of economic advancement, but also the volume of resources and the nature of the national programs required to achieve rapid development. Even under the best of circumstances, the less-developed nations will fight a losing battle, unless they can obtain, and use with maximum efficiency, a huge volume of capital and technical skills. In this context, the population explosion, if continued, will place an ever-increasing burden on the more advanced countries and international [Page 418] lending institutions. It will place a burden as well on the developing countries to achieve greater effectiveness in mobilizing internal resources for development.
A further problem, too often neglected, is the total economic impact of the development revolution on the world as a whole. Any program for economic development may become an absurdity unless it reasonably takes account of world trading patterns and prospects. We are only at the beginning of a process in which the governments of the industrialized nations must take the lead in providing an orderly opportunity for the expansion of markets for the production of the under-developed nations.
IDA to Solicit Additional Funds
Eugene Black, President of the IDA and its parent organization, the IBRD, sounded the warning that IDA, the youngest of the international financial institutions, would be seeking more money. Black’s basic theme was that, increasingly, underdeveloped countries with sound development programs and well-prepared projects needing finance had reached or were reaching their capacity to take on any more “hard” loans. Black noted that during the period 1956-1959 more than nine-tenths of the aid extended on other than “hard” terms came from the US and France. Other countries, during this period and since, have become substantial lenders to the underdeveloped world, but they have not yet brought themselves, to the extent that circumstances require, to extend their aid on other than conventional terms. Black expressed the hope that lending countries will step up the flow of official capital at very long term, with only a token interest burden, to avoid the kind of disruption that kills peoples’ hope for orderly economic progress.
The IDA was set up to meet the need for “soft” loans, but its total resources in usable currencies are less than $800 million. Black said that India and Pakistan alone could easily absorb the whole of this sum.
The US, and somewhat more cautiously Britain and Italy, gave support to the idea of enlarging IDA’s resources, although the UK stressed that it could do nothing more until its own finances were in better shape. The matter in all probability will be brought up for action during the course of the coming year.
IDA in its fiscal year ending June 30, 1961 extended credits of just over $100 million for development projects in four member countries. The credits were extended on the following terms—50 years, without interest, and with a ten-year grace period. A service charge of 3/4 of one percent is levied. Loans signed thus far include a $60 million credit to India for highways; $19 million to Chile for highways; $13 million to Sudan for agriculture; and $9 million to Honduras for highways.
[Page 419]Activities of the IBRD
During the past fiscal year the IBRD extended loans totaling almost $610 million. There were 27 loans bringing the total number of the Bank’s loans to 292 in 57 member countries. More than two-thirds of the Bank’s lending is for basic investment in transportation and electric power. In the past few years loans for transportation have been slowly drawing ahead; this was markedly in evidence in the past year with transportation loans accounting for $311 million. Railway improvements made up the bulk of this total, including two large loans—$70 million to India and $80 million to Japan for the improvement and expansion of their rail services.
Electric power loans for the year totaled $125 million and were widely spread throughout the world. In all, eight loans were made for this purpose; one in Africa (Uganda), two in Asia (Ceylon and Japan), three in Latin America (Colombia, Costa Rica, and El Salvador) and two in Europe (Norway and Yugoslavia). These loans will help to add an estimated one million kilowatts of capacity in the countries concerned.
Loans for agriculture amounted to $126 million. This total was mainly accounted for by the loan of $90 million made to Pakistan as the Bank’s contribution to the financing of the large irrigation works required to implement the settlement reached in the Indus Waters Treaty. The other loans for agriculture assisted agricultural credit in British Guiana and irrigation projects in Mexico and the Sudan.
Industrial lending in the past year totaled $48 million, made up of loans for steel in Japan and for industrial development banks in India and Pakistan.
The new loans for the year brought the cumulative total of IBRD loans to $5,669 million of which $4,320 million had been disbursed at June 30, 1961. Of the latter amount, $1,452 million had been repaid to the Bank or sold to other investors.
The past year saw the highest level of activity yet reached by the Bank in providing assistance to its member countries through general economic surveys, which examine the development potential of the country concerned and recommend the main directions which planning and investment should take. The report of the general survey of Libya was published in October, the Tanganyika mission report in March, and the Venezuela mission report in May. A general survey of Uganda, begun last September, will be published in early 1962. A large general economic survey mission was sent to Spain, and recruitment began for a general economic survey mission which the Bank is sending to Kenya.
To expand its technical assistance programs, Black announced in Vienna that the Bank is forming a group of highly qualified development advisers who will be available to member countries on request for extended periods of time. They will perform such duties as chief or [Page 420] senior economist of a general survey mission; resident economic or financial adviser to a government; member of, or adviser to, a planning office; administrator, or adviser to, the administrator of a development program; or simply an adviser on current economic and financial problems.
The task of the development adviser is not to try to impose solutions but rather to illuminate the choices which governments must make if they are to proceed along the road to economic growth. The choices may be among the various economic sectors covered in a national program or among the various projects within a sector. In any case, the development adviser’s job will be to present choices in orderly way, gathering cost data and identifying the benefits of projects so that the government can decide more confidently how fast to proceed and in what direction, given all the competing claims on its financial resources.
IFC to Expand Scope of Activities
The International Finance Corporation (IFC), another affiliate of the IBRD, was originally established to extend loans to private businesses principally in the less-developed countries. The IFC has recently amended its charter so that it is now able to make equity investments in new enterprises. During the fiscal year ending June 30 the IFC made investments of $6.2 million, which brought the cumulative total of its investments to $44.4 million. The IFC has recently made commitments to provide equity-type capital to two private financial institutions in Colombia. This will enable these institutions to expand their investment activities over a broadening range of local enterprises—chiefly smaller and medium-size concerns, which it is impractical for the IFC to finance directly.
[Here follow articles on unrelated matters.]
- Source: Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Unclassified. The source text comprises pp. 1-6 of the issue.↩
- Issue No. 630. (Ibid.)↩
- For text of Dillon’s speech, September 20, see Department of State Bulletin, October 9, 1961, pp. 584-588.↩
- For text of Ball’s statement, September 19, see ibid., pp. 579-584.↩