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Finance & Development, December 1980
Article

Currents of change: Reporting on the Bank Annual Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1980
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Monica Gruder

A willingness to seek new approaches to supplement existing policies for solving global economic problems characterized the 1980 Annual Meetings of the World Bank and its Affiliates, as Governors from 139 countries met in Washington to discuss the Bank’s role in reshaping the world’s economic and financial order into a pattern reflecting the realities of the 1980s.

In his thirteenth and last address as President of the World Bank Group, Robert S. McNamara made it clear that developing countries need a greater flow of resources to assist them in making the difficult but necessary adjustments to the changed global economic equation. He also stressed that the long-term efforts to eradicate absolute poverty should not be deferred or diminished because of short-term concerns about current account deficits and budgetary constraints.

In this context, Mr. McNamara envisaged the Bank expanding its activities in four main ways: by increasing its lending programs to cushion the effects of inflation; by financing structural adjustment; by assisting in financing an expanded program for developing energy sources; and by accommodating the needs of the People’s Republic of China. For the Bank to achieve these goals without cutting back on its existing programs and without becoming an undue burden on the budgets of its member countries, Mr. McNamara suggested that the Bank might take one or more of the following actions: (1) make fuller use of its potential for lending through changing the statutory limitation that the Bank’s outstanding loans cannot exceed its equity (one-to-one gearing ratio); (2) establish a separately capitalized energy affiliate; and (3) increase its subscribed stock without additional paid-in capital.

Economic conditions had deteriorated since the Annual Meeting in 1979, and Governors recognized this development as a key factor affecting deliberations at the Meeting. The potentially catastrophic effects of what Japanese Finance Minister Michio Watanabe called “the ‘trilemma’ of inflation, recession, and payments imbalances” were repeatedly stressed, as was the importance for the developing countries to adjust their economies to higher prices and lower export prospects and for the developed world to battle inflation and resist the temptations of trade protectionism.

Governors endorsed Mr. McNamara’s call for more resource transfers to the developing countries and supported his proposal that the Bank explore the means to finance an expanded lending program, including the possible establishment of an energy affiliate.

Spokesmen for more than 90 countries echoed the appeal of the Chairman of the Annual Meetings, Tanzanian Finance Minister Amir H. Jamal, who exhorted the industrialized and capital surplus countries to scrutinize the recent report of the Brandt Commission. In Mr. Jamal’s view, the Report’s subtitle—A Program for Survival— was not “a flight of rhetorical fancy but a candid statement about present reality.” Noting that the Bank’s 1980 World Development Report “unequivocally places man at the center of economic purpose,” Mr. Jamal urged developing societies to channel their efforts into the provision of food, education, health, and shelter for their people.

Many Governors shared the hope expressed by Indian Finance Minister R. Venkataraman that the Brandt Commission’s recommendations would receive the earnest consideration they deserved and the positive political support they needed, since the Commission had provided “a framework for international economic cooperation based on the premise of mutual interdependence between the South and the North and the need for appropriate policies for the interconnecting range of issues of food, energy, international trade, and development assistance.”

Difficult circumstances

Spotlighting the altered patterns of economic relationships brought about by the higher, and rising, price of oil, Governors stressed the pressing need for each nation to come to grips with its domestic energy situation and for the community of nations also to do so internationally. United States Treasury Secretary G. William Miller cautioned that there was “no prospect of avoiding repeated oil shocks unless the oil importing world recognizes and adjusts deliberately to a radically altered global economic and energy balance.”

Strong support for energy conservation measures and appropriate energy pricing policies in industrial countries themselves was voiced by Sheikh Mohammad Abal-khail, Minister of Finance and National Economy of Saudi Arabia. Speaking on behalf of Arab Governors, Sheikh Abal-khail said: ‘The reorientation of industrial countries’ policies in this direction, while beneficial to themselves, would also be globally constructive and helpful to developing countries.” The spokesman for the African Governors, Liberian Minister of Planning and Economic Affairs Togba-Nah Tipoteh, also pleaded for cooperation between the oil exporting and oil importing groups of countries; in his view, it was essential for “developing a basis for more stable conditions in world oil markets and for a more orderly evolution of the price of oil in real terms.”

Appreciation was expressed to certain oil exporting countries, such as Iraq, Mexico, Trinidad and Tobago, and Venezuela, for providing special assistance to their less fortunate neighbors and regional partners to finance their oil imports. In welcoming these special measures, Sri Lanka’s Minister of Finance and Planning Ronnie de Mel urged other oil exporting nations to consider similar rebates or long-term loans to help finance the increased costs of oil for developing countries—a plea that was echoed by a number of other Governors.

Bank’s changing focus

The growing responsibilities of the World Bank Group as the world’s largest and most influential development institution were widely recognized.

In his address, Mr. McNamara said that, although the Bank had grown into one of the most constructive instruments of human aspiration and progress, it had only barely begun to develop its full potential for service and assistance. Furthermore, the assumptions underlying the Bank’s planned lending program for fiscal years 1981 to 1985, had been invalidated by the economic events of the past year.

Several Governors supported his view of the urgent need for additional resources to expand Bank lending. Liberia’s Tipoteh called on the Bank to increase its five-year lending program to compensate for the full effect of inflation; he pointed out that the African countries’ current annual real growth rate of about 3 per cent—the lowest among developing countries—was hardly sufficient to meet the basic needs of their peoples, and that vastly increased financial assistance from bilateral and multilateral sources was required to supplement their own resources.

Another concern about the effect of serious constraints on the Bank’s planned lending program was expressed by Jaime García Parra, Minister of Finance and Public Credit of Colombia, who said, on behalf of a group of Latin American and Caribbean nations, the Philippines, and Spain, that “a lower percentage share [for these countries] in total Bank lending commitments and disbursements would have an unfavorable impact on their growth rates, and by extension on their social and economic progress.”

The question of structural adjustment was widely discussed. German Finance Minister Hans Matthoefer stated that it was a matter not of “whether, but how, adjustment will occur: either without delay and in an orderly process, or under disruption and confusion if it is put off too long.” In this connection, Mr. Matthoefer and numerous other Governors welcomed the Bank’s speedy and flexible response to the new financing requirements of the developing countries by the addition of structural adjustment loans to the panoply of lending facilities.

However, A. G. N. Kazi, Governor of the State Bank of Pakistan, cautioned against attaching excessively harsh conditions to the Bank’s structural adjustment loans, noting that “it would be wrong to insist upon doctrinaire approaches, especially those meant for advanced countries operating under stable equilibrium conditions.”

Energy affiliate

Given the long-term challenges of higher oil prices to the oil importing developing countries and the enormous investment needs to meet the opportunities for developing domestic energy sources—needs estimated to total about US$185 million for the period 1981-85—the Bank had begun to consider how it might improve and increase its lending program for energy development. The possibility mentioned in the August 1980 Bank paper, Energy in the Developing Countries, of establishing a new affiliate or facility to finance such assistance received widespread support at the Meeting from officials representing oil exporting, developing, and industrial nations alike.

France’s Minister of Economy René Monory said that, while the modalities of operation of such an affiliate remained to be defined, it was already clear that such “an institution can come into being and grow only if it brings together the efforts of all those in a position to help and if it appears from its characteristics to be sufficiently independent of each of them.” He reiterated the hope expressed during the Development Committee meeting prior to the Annual Meetings that the energy affiliate initiative would rapidly come to fruition.

However, Saifur Rahman, Finance Minister of Bangladesh, pointed out that the low-income countries would not benefit significantly from an energy lending facility unless there was provision for interest subsidies for poor borrowers. He urged members of the Organization for Economic Cooperation and Development (OECD) and the Organization of Petroleum Exporting Countries (OPEC) “to extend their full support in this field, including additional resources to support interest subsidy for lending to low-income countries.”

Saudi Arabia’s Sheikh Abalkhail stated that his group was “fully prepared to participate … in a discussion” of all aspects of a proposal for an energy affiliate, but added that any such facility “should reflect the economic realities of the present world in its capital and voting structure.”

Other proposals

Reactions to the other suggested actions to increase the Bank’s lending capability were more mixed. Many Governors, including those representing the African and Latin American countries, expressed the view that the Bank’s excellent credit standing in the capital markets would not suffer if its gearing ratio were modified. A more conservative stance, however, was adopted by a few Governors, notably the United States’ Miller and the Federal Republic of Germany’s Matthoefer. The latter acknowledged that the proposals were tempting at first glance, in that they would avoid imposing additional payments obligations on member governments, but he reminded his listeners that “the Bank can borrow on the international capital markets only as long as it maintains its sound financial structure and remains a ‘blue chip’ issuer…. The confidence of the international capital markets in the World Bank determines ultimately whether or not higher lending targets can be attained.”

Considerable interest was expressed in the possibility of making fuller use of the Bank’s existing resources by attracting additional funds through cofinancing operations. As Vaovasamanaia R. P. Phillips, Finance Minister of Western Samoa, put it, “Provision for increased cofinancing by the Bank should result in additional resource flows to the developing countries.” Bank of Israel Governor Arnon Gafny suggested the establishment within the World Bank of a “fourth window” aimed at bringing commercial banks and development institutions together in cofinancing operations. Mr. Garcia Parra, of Colombia, and Mr. Tipoteh, of Liberia, particularly supported the Bank’s initiative and its catalytic role in the sphere of cofinancing.

By the close of the Meeting, Mr. McNamara was able to conclude that there was a consensus for an expansion of the Bank’s present approved lending program and an exploration of all possible means of financing such an expanded program. He stated that the Bank would begin formulating specific proposals for financing this expansion and would present them to the Executive Board for action before the end of the fiscal year in June 1981.

Needs of the poorest

The very special and urgent needs of the world’s poorest people and of the poorest developing countries received much attention. The Development Committee had called for a major expansion in concessional flows to low-income countries to help them manage their economic adjustments during the 1980s without unnecessary penalties to their economic growth and social progress.

Describing the gloomy outlook for official development assistance (ODA), Mr. McNamara castigated the poor ODA performance of most OECD countries and urged them to increase their ratios of aid to gross national product, to direct more of their individual aid allocations to low-income countries, and to consider full cancellation or rescheduling of the past debt of the poor and least developed countries. He also stressed the major responsibility of the capital surplus oil exporting nations to maintain and improve their high levels of ODA and thereby make a big contribution to easing the developing countries’ adjustment problems.

Illustrating the seriousness of the situation, Mr. Tipoteh said that, “for low-income African countries, development assistance is often the only source of external finance.” He added that “the African Governors believe that an expansion of development assistance is an essential aspect of the international adjustment process. Such an expansion would contribute to a growth in economic activity in the industrial countries….”

The responsibility that, among others, the oil exporting countries have toward the poorest countries was emphasized by Pierre Werner, Prime Minister of Luxembourg, speaking on behalf of the European Community. He called on the oil exporters to adopt responsible policies on oil pricing and on investing accumulated financial surpluses, adding that “a larger redeployment of the investments of oil exporting countries in favor of the other developing countries—particularly by an increase in direct aid and by contributions on concessional terms to the international financial institutions—would seem vital.”

References were also made to the particularly acute problems faced by geographically disadvantaged small island economies. Dominica’s Prime Minister Mary Eugenia Charles pointed out that these economies are often regarded as unable to absorb financing on the scale customarily used by the Bank and IDA, and that more and more use is being made of regional financial intermediaries to channel funds to them. She urged that this approach serve to augment regional aid flows but not be considered as an exclusive means of channeling aid to small island states.

In a development welcomed by spontaneous applause, Mr. McNamara announced in his closing remarks that the bridging arrangements for the US$12 billion Sixth Replenishment of the International Development Association (IDA), negotiated last year had become effective during the course of the Meeting, with 14 countries agreeing to provide advance contributions in excess of US$1.2 billion. Nonetheless, the numerous pleas for a more stable channeling of resources to the poorest countries through IDA retained their immediacy and importance.

Institutional change

In a bold challenge to his audience to exercise its political will, Chairman Jamal asked: “Why are the Ministries of the North dealing with finance and economic affairs giving the appearance of being the last bastion of an existing system unwilling to change except most grudgingly, slowly and marginally? … Why not accept that the world is a vastly different place from the time of Bretton Woods, and that the most needed structural change today is in the Bretton Woods institutions themselves?”

Petar Kostić, Federal Secretary for Finance of Yugoslavia, and Mr. Rahman, of Bangladesh, were of the opinion that a greater role for the developing countries in all stages of the institutions’ decision-making processes, including their representation in managerial and staff positions, was warranted. Other Governors favored more decentralization of the Bank’s operations to regional offices.

But the clearest calls for institutional reform came from the Arab Governors, whose spokesman, Sheikh Abalkhail noted that: “Although representing 85 per cent of the membership, the developing countries have no effective say in policies [of the institutions].” He joined Swedish Undersecretary of State for International Development Cooperation, Hans Blix, speaking for the Nordic countries, in urging reform of the voting structure.

In another development, the application of the Palestine Liberation Organization for Observer status, which had been placed on the agenda of the Meetings, was not debated at length in the Plenary sessions. Instead, intensive efforts led by Chairman Jamal behind the doors of the Joint Procedures Committee resulted in a resolution being adopted by the Governors during the closing Plenary session.

Praise for McNamara

Throughout the Meeting, Governor after Governor extolled the dynamism and extraordinary leadership abilities of outgoing World Bank President McNamara. Chairman Jamal said: “Above all, Robert McNamara has been a voice of compassion, of conscience, and of competence. He has persevered with tenacity in the struggle to persuade both rich and poor to make sustained efforts to mobilize resources for development and to utilize them efficiently.”

Perhaps the most ringing endorsement of all came from the Deputy Prime Minister and Minister of Finance of the Bahamas, Arthur D. Hanna, who stated: “While [President McNamara’s] accomplishments are significant, perhaps his greatest contribution lies in the fact that he has brought a sensitivity to the philosophy of this institution which should better serve the welfare of its constituents far beyond his term of office. The vastly expanded role of the World Bank over the years can be attributed-to the leadership of a man who is deeply sensitive to the needs of developing countries and particularly to the most severely affected segments of their populations … Mr. McNamara’s closing remarks were filled with emotion, not so much that he was leaving the Bank, … but also that he, who became so deeply involved in the plight of mankind and knew what ought to be expected of the industrial and developed nations, was saddened that his dreams may not be realized.”

Mr. Jacques de Larosière, Managing Director of the International Monetary Fund, in his concluding remarks, called Mr. McNamara “a man of great understanding and total dedication to our common goals and a man of openness to new ideas …” adding that he had learned from his experience and benefited from his judgment, his intelligence, and his friendliness.

The mood of this year’s gathering was accurately summarized by Italy’s Minister of the Treasury Filippo Maria Pandolfi, when he observed: “The outcome of our deliberations in these Meetings is a first indication that we can indeed blend the urge for change and the desire to preserve into a viable and progressive line of policy.”

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