Monica C. Gruder
Governors from the World Bank’s member countries who came to Belgrade spoke on the lessons to be drawn from the 1970s and on the focus of a development strategy for the 1980s. Discussions ranged over a plethora of problems: inflation, declining growth, continuing poverty in many developing countries, rising energy costs, and the need, for all countries, to act in consonance with global, rather than parochial, interests. After reviewing the failure to meet the objectives of the Second Development Decade (the 1970s) regarding growth rates in, and concessionary assistance to, the developing world, World Bank President Robert S. McNamara proposed diversified development strategies, aimed at reducing poverty and tailored to local conditions.
In his opening address as Chairman of the joint Bank and Fund Meetings, Prime Minister R. D. Muldoon of New Zealand stressed the futility of domestic economic policies that were governed by national political considerations to the detriment of wider international interests, particularly on energy, trade protectionism, and inflation. Representatives of both the industrial countries and the developing countries tended to emphasize the constraints affecting their own economies. Yugoslav President Josip Broz Tito stated the wider problem eloquently in his welcoming speech to the Governors: “A system [of international economic relations] that is so relentlessly detrimental to developing countries and keeps enormous human and natural potentials on the margins of economic trends inevitably imposes growing difficulties on the world economy in general, including the economies of the developed countries. The belief that the difficulties confronting the developed countries can be alleviated or transcended by simply shifting them to developing countries is both short sighted and dangerous.”
A shared uncertainty and concern about the future were evident in the frequent references by representatives from the developing countries to the grim prospects of a continuation of today’s economic ills: rampant inflation, high unemployment, a recession in the United States, generally sluggish growth in the countries of the Organization for Economic Cooperation and Development (OECD), high levels of indebtedness, protectionism, deteriorating terms of trade, and growing current account deficits. Many Governors stated that, in this context, the recent increase of oil prices would surely affect the economics of energy supply, especially the international accounts of the oil importing developing countries, whose energy bill is expected to be about $42 billion in 1980, compared with about $26 billion in 1978 and $4 billion in 1972.
The Minister of Finance and National Economy of Saudi Arabia, Sheikh Mohamed Abalkhail, made the point, however, that blaming higher oil prices for the difficulties of the global economy failed to take account of the performance of the industrial economies and of the need for a satisfactory international energy policy. He noted that the international oil market had, in recent years, been characterized by rising demand with little net addition to supply, which led to price increases needed to balance the market. “From 1974 through 1978, the real price of oil declined by more than 20 per cent,” he said. “The price adjustment in 1979 has brought about a real increase averaging about 5 per cent annually since 1974. The current level of oil prices is a necessary minimum to bring new sources of oil and other energy on line.”
Lessons from the 1970s
The failure during the 1970s to attain the goals of the Second Development Decade was a major theme of the meeting. These targets aimed at 6 per cent average annual growth rates in the combined gross domestic product (GDP) of developing countries and achievement of an annual flow of official development assistance (ODA) from the developed countries totalling 0.7 per cent of their gross national product (GNP).
These goals have not been met. In the Bank’s own World Development Report, 1979, GDP growth figures were revised downward to 5.2 per cent a year. Further downward revisions are likely, reflecting the expected worldwide slowdown in growth in the closing years of the 1970s. Moreover, this statistical average obscured the fact that growth had been uneven among countries: in fact, income grew least where growth was most needed—in the poorest countries with the largest populations. As for ODA, it has averaged less than half the target.
Even with a recovery in the rate of economic growth in the 1980s to levels above those of the 1970s, it was disclosed that some 600 million people could remain condemned to live in absolute poverty at the turn of the century—without adequate food and shelter or access to essential public services, including education and health care. Thus it was urgent, as a development objective, “to seek to narrow the relative gap between the rich and poor countries in terms of the quality of life: in nutrition, literacy, life expectancy, and the physical and social environment,” said Bank President McNamara. It would need even greater efforts and dedication than those being made at present. Some progress had been made in the 1970s. But, said Mr. McNamara, if the strategy of the Second Development Decade had given more direct emphasis to reducing absolute poverty, “these and other quality-of-life factors could have improved substantially more than they did.”
On the basis of the experience during the 1970s, Mr. McNamara proposed that strategic development planning in the future should not aim at overall targets but instead give greater attention to the diversity among individual developing countries, and that developmental goals be disaggregated into action proposals that would be specifically tailored to local conditions.
Critical development issues
There was widespread agreement that a priority for the 1980s, both for developed and developing oil consuming countries, was to reduce their dependence on imported oil. This would require not only conservation measures and rational internal pricing policies to curb private and industrial consumption but also the development of alternative energy sources.
Here, too, there were valuable lessons to be drawn from experience gained during the surge in oil prices of five years ago, according to the Deputy Prime Minister and Minister of Finance of Ireland, George Colley. Speaking for the European Community, he said “Externally, countries must realize that any attempt to shift the payments imbalances resulting from the increased costs of oil imports on to other countries can only serve to aggravate and compound the adverse effects. Internally, action will be necessary to win understanding and acceptance of the fact that there has been a real transfer of purchasing power to the oil producing countries.”
Another critical factor in the development equation for the 1980s is population growth. According to Mr. McNamara, excessive population growth is “the greatest single obstacle to the economic and social advancement of most of the societies in the developing world.” No other obstacle to development is more pervasive, more intractable, and more punitive in the penalties it exacts for procrastination, he added. Unrestrained population growth vastly exacerbates the attendant problems of unemployment, urban congestion, insufficiency and maldistribution of food, and widespread poverty.
It was widely recognized that, for solutions to be found to the critical development problems of the 1980s, there would have to be an international environment which encouraged foreign trade and capital flows, a resumption of economic growth, and the generation of resources to finance development. To this end, protectionism must be curbed, international capital markets would have to remain open to a larger number of Third World countries, and allocations of ODA would have to be expanded.
While Governors from many industrial countries congratulated themselves on the successful outcome of the Tokyo Round of multilateral trade negotiations in April 1979, developing country spokesmen pleaded for the dismantling of the remaining tariff and nontariff barriers to their products. Korea’s Finance Minister Woun Gie Kim said, “These [developed] countries must recognize that their artificial trade barriers merely delay the industrial adjustments which will enable their economies to grow more rapidly in the future. They should be adopting a more positive approach by devoting their full efforts to structural adjustments without further delay.”
The Finance Minister of the Federal Republic of Germany, Hans Matthoefer, acknowledged the validity of this argument and added: “Developing countries need access to the markets of the industrialized nations. It would be self-defeating if we assisted these countries in the development of their productive capacities but failed to buy their products.”
On the question of resource transfers by private capital markets, it was generally agreed that it would be counterproductive to impose restrictive measures on these markets. However, the point was made, notably by Britain’s Chancellor of the Exchequer Geoffrey Howe, that it would be important to find the right mix of ODA, of resources to be provided through international organizations, and of money from commercial banks.
As the already high levels of debt of developing countries might make private banks reluctant or unable to play as significant a role in the adjustment process as they did during the previous oil price crisis of 1973–74, many Governors spoke of the expanded opportunities for cofinancing activities between the World Bank and private lenders. Bank of Israel Governor Arnon Gafny went so far as to suggest that a cofinancing mechanism be set up within the Bank to increase the flow of private capital into development projects.
Speaking for the African Governors, Liberian Finance Minister Ellen Johnson-Sirleaf said that a large part of the solution to the world economic crisis lay in increasing real resource transfers to developing countries, so they in turn could increase their imports from industrial countries. “A substantial increase in ODA has the advantage of contributing to the utilization of idle productive capacity in the industrialized countries, to the reduction of unemployment in those countries, to the restoration of growth to acceptable levels, and to the expansion of world trade,” she said. Other Governors joined her in calling on the rich members of the international community to take steps to bring their official aid in line with the UN target of 0.7 per cent of GNP as soon as possible.
World Bank resources
… excessive population growth is “the greatest single obstacle to the economic and social advancement of most of the societies in the developing world.”
In recognition of the key role the Bank would continue to play in any development strategy for the 1980s, Governors expressed unanimous support for a steady expansion of the Bank’s capital base and for an early completion of negotiations on an adequate level of replenishment of the resources of the International Development Association (IDA). In his closing statement, Mr. McNamara reported that more than 80 Governors had already voted their approval of the general capital increase. He urged other members to act promptly, so that the Bank’s ability to proceed with its expanded lending program would not be jeopardized.
In this connection, U.S. Treasury Secretary G. William Miller stated “We believe that the capital of the Bank must be increased substantially, and for this reason, supported the resolution of the Executive Directors to that effect. We also support a Sixth Replenishment of IDA, and look to the completion of the negotiations before the end of this year. In accordance with our legislative procedures, our action in both respects will involve the close cooperation of the United States Congress.”
Mr. McNamara and numerous Governors severely criticized the U.S. legislature for threatening to attach conditions to its contribution to the Fifth Replenishment of IDA which, it was said, would destroy the largest single source of economic assistance to the more than one billion people in the poorest countries of the developing world. “I cannot believe that the United States—itself the principal founder of the International Development Association—wants to do that,” said Mr. McNamara.
Future role of the Bank
The Governors endorsed the Bank’s intention to pursue its efforts to bring about the massive structural changes necessary to deal with fundamental development issues. They especially stressed the need for the Bank to concentrate on energy activities, while not neglecting population, family planning, health problems, job creation, food production, rural development, and urbanization.
Eduardo Fernández P., Governor from the Dominican Republic, reiterated a theme mentioned by a number of Governors when he said, on behalf of a group of Latin American and Caribbean countries, the Philippines, and Spain, that the Bank should speed up the disbursement process, extend the grace and maturity periods on loans, and adopt more flexible criteria for local-cost financing and for setting interest rates.
In response to a suggestion from the Development Committee and from many Governors that the Bank initiate a substantial expansion of its program and sector lending in order to speed up the transfer of resources to developing countries and to complement the balance of payments assistance which would be provided by the Fund, Mr. McNamara, in his closing remarks, said, inter alia, that the Bank would provide such assistance to help countries make necessary economic adjustments. “The developing countries,” he said, “face many difficult issues, and capital alone cannot assure their resolution. But it is clear that, without an adequate supply of external capital, progress cannot be made: investment programs will not be carried out; the productivity of low-income groups will not be raised; and economic growth objectives will not be achieved.”
Mr. McNamara outlined the measures that the Bank might take to help alleviate the situation:
“First, we propose to increase program lending to assist countries in severe balance of payments difficulties so as to minimize the disruptive effects on their development programs.
“And second, we propose to initiate program lending to assist countries to undertake the structural adjustments necessary to avoid future balance of payments crises, and thus to pursue an orderly and sustained development effort….
“Such adjustments are not going to be easy and often will conflict with the objectives of particular interest groups. Nevertheless, they are essential. Developing countries, in their own interest, must adjust to new international price relationships, to new competitive pressures, and to higher costs of energy. The Bank can and will assist countries in that adjustment process, but its resources cannot substitute for their action in the long term.”
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