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Rekindling the spirit of Bretton Woods: A report on the Bank Annual Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1982
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Gerard T. Rice

Despite the grim backdrop to this year’s Meeting, a chord of hope was struck by Canadian Prime Minister Pierre E. Trudeau in his welcoming speech to the Governors of the Bank’s 144 member countries. Referring to the international cooperative effort which had led to the creation of the Bank and the Fund in 1944, he said that “We must marshall the spirit of Bretton Woods to work our way through our deeply troubled times.” Many Governors reiterated this theme. Representing the Bank’s Latin American member countries as well as Spain and the Philippines, Nicaragua’s Minister of Finance, Joaquin Cuadra Chamorro said that reducing and eventually halting recessionary global tendencies would require countries to work together more than ever before.

Ancillary ministerial meetings

These are customarily held in the days preceding the Annual Meetings of the Bank and the Fund to discuss major international economic and financial issues. Although none of the groups described below need hold one of its meetings at the time of the Annual Meetings, the outcome of their deliberations often provides a focal point or sets the tone for the discussions in the Plenary Sessions.

The Interim Committee was established by the Board of Governors of the Fund in 1974. Its 22-member composition of Finance Ministers and Central Bank Governors reflects the constituency representation in the Fund’s Executive Board. The Committee, which normally meets twice a year, advises the Board of Governors of the Fund in supervising the management and adaptation of the international monetary system and in dealing with sudden disturbances which might threaten the system. The agenda for the Committee’s meetings is established by the Executive Board.

The Development Committee, or, more formally, the Joint Fund-Bank Committee on the Transfer of Real Resources to Developing Countries, was also established in 1974, and normally meets at about the same time as the Interim Committee. It reviews the development process and advises and reports to the Boards of Governors of both the Bank and the Fund on all aspects of the transfer of real resources. The Committee has a secretariat of its own, but the agenda—prepared by the secretariat—is reviewed by the Executive Boards of the two institutions. Its membership is based for alternating two year terms on the constituencies in the Executive Boards of the Fund and the Bank.

The Intergovernmental Group of Twenty-Four on International Monetary Affairs seeks to ensure that the special interests and economic circumstances of the developing countries are taken into account in the evolution of the international monetary system. It was established by a decision of the Group of 77 (of the United Nations Conference on Trade and Development) at a February 1972 meeting in Lima. It is composed of representatives from eight countries each in Africa, Asia (including Yugoslavia), and Latin America and the Caribbean—these countries are always the same. Deputies prepare the work of meetings of Ministers which normally precede those of the Interim and Development Committees.

The Group of 10 consists of the ten industrial countries participating in the Fund’s General Arrangements to Borrow, plus Switzerland. It meets informally to review developments in the international economy. The Group of 10, which also has Deputies, frequently uses the meetings of the Interim and Development Committees as a convenient occasion for its own.

The Meeting confirmed that the long-term economic goals shared by both the developed and the developing countries were more important than the short-term differences between them, and it reaffirmed that interdependence was no longer a philosophical luxury which individual countries could afford to accept or reject at will but was a hard economic reality. While it was recognized that sustained growth in individual countries depended ultimately on their own sound economic management, more international cooperation was seen as imperative in the areas of trade, external capital flows, and official development assistance.

There was a consensus that political pressures in favor of protectionism must be resisted. German Minister of Finance Manfred Lahnstein noted that the European Community, the United States, and Japan bore a special responsibility in this regard, while representatives of the developing countries urged the industrial nations to allow freer access to their markets. They stressed that the benefits of free-flowing trade and investment were mutual—that the lower labor costs in the developing countries implied cheaper goods for consumers in the industrial world, while the latter’s goods would find markets among consumers in the developing world—leading to a worldwide recovery without inflation. Jamaica’s Prime Minister and Minister of Finance and Planning, Edward P. Seaga, added that the consumer markets of many developing countries needed only the catalyst of more credit “to fuel an expansion of trade through export-led growth.” While several Governors cautioned that financial transfers to deficit countries should be prudently managed, there was general agreement that their efforts to adjust should be supported by an adequate flow of external funds—nonconcessional as well as concessional.

No surrender to aid fatigue

There was concern that official development assistance from the industrial nations to the developing countries declined, in real terms, by 4 per cent in 1981 compared with 1980. Governments were exhorted not to surrender to “aid fatigue” and to try to increase understanding at home of the importance of development assistance to international prosperity and peace. Speaking for the Bank’s Nordic member countries, Norwegian Minister of Finance Rolf Presthus said that the industrial countries must continue striving to reach the aid target established by the United Nations of 0.7 per cent of gross national product (GNP) per annum—which was modest, given the needs of the developing world. Minister of Finance and Industry of the United Arab Emirates, Hamdan bin Rashid Al Maktoum, speaking for the Bank’s Arab countries, noted that Arab development assistance in 1981 had been about ten times greater, in relative terms, than that of the industrial states. For many speakers, the main development issue in the 1980s was whether governments would have the political will and foresight to increase their contributions to development assistance significantly, especially through multilateral channels such as the World Bank and the International Development Association (IDA).

Many governors—including those representing France, China, India, the Nordic countries, the Latin American countries, and the African countries—called for an increase both in the Bank’s resources and in its lending levels. They noted that the Bank’s planned US$60 billion of lending for fiscal years 1982–86 implied scant real growth, at a time when the financial needs of its borrowers were growing, and they urged the Bank to explore all suitable ways of overcoming its lending constraints. Other Governors—including those from the United States, the United Kingdom, and the Federal Republic of Germany—were not optimistic that the growth of Bank commitments in the years ahead could match past rates. Given the present recessionary trends, however, there was a consensus among member countries that their commitment to development assistance should be maintained and reflected in an adequate level of funds being channeled to the World Bank.

Agreement on IDA funds

IDA—the Bank’s affiliate which is the chief source of concessional development assistance to the poorest countries—was especially in need of renewed support from donor countries. Bank President A.W. Clausen pointed out that IDA had suffered an “amputation” in the form of a 35 per cent cut in its funds in the recent past. This had been caused mainly by the United States’ decision to stretch out its agreed contribution to the Sixth Replenishment (IDA-6) from three years to four. Focusing on this IDA “crisis,” almost every Governor emphasized that all donors should meet their obligations and not allow any further shortfall in IDA commitments. “We cannot turn our backs on the more than two billion individuals—half the human race—that live in the poorest societies,” Clausen said. “To do that is in no one’s interest. And most certainly not in the interest of the developed nations, whose prosperity depends now more than ever on a stable and secure global system.”

To clarify any possible misunderstandings regarding IDA’s function and impact as the centerpiece of international concessional assistance, the Bank published this year an extensive evaluation study entitled IDA in Retrospect. (See the article by Shahid Javed Burki and Norman Hicks in this issue of Finance & Development.) Noting that IDA’s 1,300 projects in 80 of the world’s poorest countries had shown an impressive average economic rate of return of 18 per cent, the Chairman of this year’s Meeting, Kuwaiti Minister of Finance and Planning, Abdlatif Y. Al-Hamad, articulated the views of many speakers when he said: “The establishment of IDA is probably one of the most outstanding achievements of the postwar world.”

Two days of intensive discussions by the IDA donor countries in Toronto yielded impressive results. For fiscal year 1983, some 22 of the 32 IDA donor nations other than the United States reaffirmed that they would provide their full third year installments to IDA, irrespective of the lower level of U.S. payments. It was expected that several other donors would also release their full IDA-6 contributions. Consequently, prospects were excellent that IDA’s commitment authority in fiscal year 1983 would meet the budgeted IDA lending program of $3.3 billion (compared to $2.7 billion in fiscal year 1982).

To secure IDA funds for fiscal year 1984—the intermediate year between IDA-6 and IDA-7—all donors except the United States agreed to provide a total of about $2 billion additional to their IDA-6 obligations. As a result of this important “Toronto Agreement,” IDA will have the resources to meet its tentative commitment level of $3.3 billion for fiscal year 1984. The Toronto Agreement was a remarkable achievement in that donor countries set aside their serious domestic difficulties and budgetary constraints in a magnanimous gesture to the world’s poorest peoples.

Wang Bingqian, Minister of Finance and Governor of the Bank of China, expressed the appreciation of many developing countries to those donors who had ensured that IDA’s operations would not be irreparably harmed over the next two years. He also hoped that all donor countries would adopt a positive attitude toward IDA-7 “both in terms of substantial additionality of IDA resources and a reasonable allocation among recipients.” The importance of a successful conclusion to the IDA-7 negotiations—due to begin before the end of 1982—was generally recognized.

Governors noted that their commitment to the world’s poorest peoples was reflected in the Bank’s dual function of helping developing countries to accelerate their economic growth while enhancing the productivity of the poor—thus making possible a better standard of living for all. A recent Bank study showed that poverty-oriented projects—in the fields of health, nutrition, and education, for example—had rates of return at least as high as other projects. (See “The World Bank and poverty,” Finance & Development, June 1982). Given the bleak scenario for the least developed countries in the World Development Report 1982 if conditions are unfavorable, the Bank was encouraged to continue to stress human development and poverty alleviation, not only through its project and sector work, but also in its macroeconomic policy dialogues. All developing countries acknowledged that in wrestling with their immediate problems—their need for more costly energy and their balance of payments deficits—they must firmly resist the temptation to procrastinate over the longer-term task: the reduction of absolute poverty.

Because of its particularly acute problems, sub-Saharan Africa, which again suffered an overall decline in per capita income in the past year, remained as the Bank’s top regional priority. In fiscal year 1982, Africa’s share in IDA loans rose to 31 per cent, reflecting this increased priority. Although considerable progress in education and human resource development has been made in Africa, the continued rapid growth of population there was perceived as a matter of urgent consideration. Speaking for the African member countries of the Bank, Senegal’s Minister of Economy and Finance, Ousmane Seek, emphasized the efficacy of the Bank’s structural adjustment programs in Africa, especially their provision for technical assistance.

Governors saw the Bank’s chief sectoral priorities as being agriculture, rural development, and energy. Given the close association between rapid progress in agriculture and rapid growth in the overall economy of a developing country, about 25 per cent of the Bank’s total investments was designated for this sector in fiscal year 1983. Another quarter of the Bank’s total lending was for energy, and many Governors urged the Bank to continue to explore ways of further increasing this share. India’s Minister of Finance, Pranab K. Mukherjee, expressed the view of several speakers that the creation of an “energy affiliate,” or some such institutional mechanism that could lead to additional resources being made available, would be an appropriate way of solving the developing countries’ energy problems.

Development prospects

There was widespread support for the International Finance Corporation (IFC)—the Bank’s affiliate which promotes private sector investments in the developing countries. The IFC’s unique ability to attract direct private investment to small and poor countries and to help them develop their capital markets was applauded. The number of IFC projects currently under consideration was at an all-time high, despite the well-known difficult investment climate. In stressing the United States’ unequivocal commitment to the IFC, Secretary of the Treasury Donald T. Regan voiced the opinion of many Governors from both the developed and the developing countries that “an economic environment which enhances the opportunity for private sector enterprise also enhances the prospects for sustained economic growth.”

Governors agreed that the Bank had adapted well to the extraordinarily difficult circumstances of the past 12 months. In order to ensure its financial strength, it had been forced to make difficult decisions—to introduce a front-end fee on new Bank loans, to begin borrowing on the short-term market and lending at variable instead of the traditional fixed interest rates, and to tighten up the criteria for “graduating” countries from Bank lending. There was consensus that these modifications of Bank policies should be given a chance to prove their viability, but that they should be reviewed regularly and implemented with utmost care so as not to compromise the Bank’s character as the world’s premier development institution.

The Bank also proposed to attract more private cofinancing to its projects—to increase the resources available to the developing countries and also to ensure that commercial bank loans would be used for high-priority development purposes. The Bank attracted $3.3 billion in cofinancing in fiscal year 1982, compared with $1.8 billion in the previous year. There was broad agreement that cofinancing was a highly useful instrument for attracting additional funds to developing countries, but several speakers emphasized that it should not become a substitute for augmenting the Bank’s traditional sources of funds. A number of Governors also approved the continued study of another of the Bank’s proposed new initiatives: the establishment of a multilateral investment insurance mechanism. This would provide private lenders with reasonable security against certain kinds of political risks that could not always be covered by individual countries themselves.

Again, the emphasis was on the Meeting’s main theme—that the best way for countries to protect their unilateral interests was to work multilaterally. As Mr. Clausen pointed out, the Toronto Agreement on IDA signified that “the world’s nations do indeed consider themselves as part of a single community,” and he thought it essential not to lose this perspective. Despite present global difficulties, he emphasized that the spirit conceived at Bretton Woods had helped to improve the world and enormous strides had been taken in the field of development since 1944. The message emanating from the Meeting was that the world needed to rekindle that spirit—and apply it to the 1980s.

Correction

In the September issue of Finance & Development (Page 40) an incorrect version of the equation used to derive the private rate of return on the costs of education appeared in the article “Education as an investment” by George Psacharopoulos. The correct version appears below:

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