It's good to be at sea again with the New York state Savings Banks Association.
You will remember, you signed me on as a speaker aboard this same ship almost exactly ten years ago this day. At that time the World Bank had hardly gotten its sea-legs. I accepted your gracious invitation then to express my thanks for the confidence this group had already shown in the Bank's promise. It was your group 'Which more than any other helped us to establish the legality of World Bank bonds for investment by savings banks and fiduciary trusts in the United States. When we needed support most, you gave us the support we needed.
That would be reason enough for me to welcome this second invitation to report to you on what the Bank is doing. But the fact is your support bas never wavered in the ensuing ten years. Today, in so far as we are able to estimate these things, savings banks appear to hold nearly a quarter of the $1 billion of our bonds and notes outstanding in the United States. And somewhat more than half of that quarter is held by members of your organization. If the World Bank has now proved itself seaworthy in the heavy seas of international finance, your continuing support has helped account for this in a more tangible way.
What a difference ten years can make! When I was here in 1949, a round of devaluations had just swept Western Europe and the Marshall Plan -was just being launched to try to restore to our wartime allies the economic and financial independence which we all felt was indispensable if they were to remain politically independent. All sorts of new and untried schemes were being hatched and here at home business and finance were being exhorted as never before to go out into the world and carry to others the benefits of the growth and prosperity which they had so successfully brought to fruit in the United States. It was a time of troubles, but of boundless confidence.
Today we can say that as far as the Atlantic Community of nations is concerned -- and Japan, too -- there were few more successful and constructive decades in history. The economies and the currencies of Western Europe and Japan have been restored and an atmosphere has been created in which the flow of capital across national boundaries has reached a volume few of us would have dared to predict in 1949.
In fact, the degree of success achieved in the past decade seems to have taken many people by surprise. Some even seem to be worried about it. Thus in the United States there is concern over the fact that today America owns only about half the Free World's gold supply while in 1949 it owned something over 6o%. And in Western Europe governments cling to restrictions against dollar trade long after the pressing need to conserve dollars has been overcome. On the surface there appears to be less confidence now that we have achieved a degree of financial order and stability in the Free World than there was when the nations of the Free world were more or less poor relations of the United States.
I am sure that this is but a passing phase. At our recent Annual Meeting I saw plenty of evidence that the European nations know that continued discrimination against dollar trade reflects a hangover from past fears rather than the realities of today's trading world. And at the same time I think that we in the United States will come to learn that part of being banker for the world involves maintaining a healthy balance of payments without regarding every period of gold outflow as a crisis of confidence. The United States has, in effect, swapped a considerable amount of liquidity in the form of gold for new, productive investments abroad -- just the kind of swap we were most anxious to achieve in 1949. If we now have to look to our balance of payments -- to look more carefully to our own costs and guard more carefully against inflationary pressures at home this is a most natural position for the banker of the Free World.
As I see it we have achieved, in the Atlantic Community anyway, something like normal financial relationships -- if anything can be called normal in these changing times. As such today's problems are primarily the result of tremendous achievements in the past decade.
Rapid growth over these ten years has become a common place. You know that; the assets of your members have increased by some $12 billion or more than 100'% in those yea.rs. And we know it, too. The World Bank has grown out of all recognition to what it was in 1949. But rather than recite for you a long and dreary list of statistics, let me talk about the Bank in its three distinctive roles -- as lender, as borrower and as an agency inevitably caught up in the currents of international diplomacy. Let me give a few brief impressions of our work in each of these roles with only enough statistics to set the background.
When I was here in 1949, the Bank had committed only some $&>o million in loans in eight different countries. Now we have committed more than $4,500 million in fifty different countries. Then we were only dealing in two currencies -- dollars and Swiss francs -- now we deal. 1n 30 different currencies.
As a lender the Bank has proved a remarkably flexible instrument. While you are all familiar with the kinds of loans the Bank makes, these loans, in fact, tend to serve separate and distinct purposes in each of our borrowing countries. Where there exists already a considerable understanding of the importance of monetary stability and of the various techniques necessary for the wise investment of capital, our loans serve to support fairly broad economic objectives. This is the case with our big borrowers -- India, Italy, Japan and Australia among others. Then there is another category of loans -- to me the most interesting -- in 'Which we have helped to finance pioneering projects in an underdeveloped country 'Which promise to change the countryside in most dramatic ways. Let me describe two of these latter loans by way of illustration -- a small one and a big one.
Let me take the big one first: You all know that the Bank made a large loan to help finance the Kariba Gorge power project in Central Africa; it remains in fact the biggest single project loan we have made -- $80 million equivalent. The building of this project was an adventure, ranking with the most exciting which engineers and financiers have ever undertaken.
Back in 1955 when the Bank was approached by the Government of the Federation of Rhodesia and Nyasaland, the Copper Belt in Northern Rhodesia was burning wood to produce power. Either new thermal plants would have to be built, together with new rail lines and new coal mines to supply those plants, or the Rhodesians would have to fulfill an age-old dream of civil engineers and dam the Zambezi, which flows, ferociously in the spring and like a placid stream in the fall, through one of the world's most remote hinterlands. The Federation Government said that their consultants, a team of English and French experts with world-wide experience in building dams, thought Kariba the best bet. They wanted to know if we agreed and would back them.
It was a tall order. They wanted, as a first stage, to build a dam, which -would create a reservoir 130 miles long -- the largest man-made lake in the world -- and attach to it a power station with a capacity of 500 megawatts. As a second stage they wanted to increase the capacity of this station to 6oo megawatts and then build another of the same size on the other side of the river -- making a grand total of 1,200 megawatts. They wanted this great power dam to serve two areas - - one nearly 275 miles away to the north, the Copper Belt, the other nearly 400 miles to the south, the cities of Salisbury and Bulawayo, industrial centers of Southern Rhodesia. Between these two groups of consumers there was absolutely nothing save a handful of tribal Africans and a great many wild animals.
Now this was, despite its spectacular specifications, one of the best documented requests we ever received at the Bank. But we knew that before we took the plunge we had to question every single document.
First we challenged the cost estimates, and sure enough they went up. They started at $148 million but by the time they had been reviewed by the borrowers' consultants and checked by a chartered accountants office in London they had risen to $322 million.
Then we checked the consultants' estimate of the market and the probable rate of growth of that market. After all, 1,200 megawatts is a lot of capacity to build in one of the most sparsely inhabited regions in the world. To check this point we took the unusual step of hiring our own team of consultants; they not only confirmed the market estimate submitted by the borrower, they went it one better. Of course, we settled for the lower of the two estimates!
We paid special attention to the borrower's proposed rate policy. We had read some disturbing statements by officials of the Federation Government who were promising “cheap” power from Kariba. The financial plan proposed was based on rates which would not have permitted Kariba to operate in the black until the second stage installations had been virtually completed. There was no provision for setting aside capital out of the first stage operations to help finance the second stage. We wouldn’t buy any of this so we set about persuading the Federation authorities to set rates that not only would allow a profitable operation right from the start, but which would yield funds by the time they were needed to finance 50% of the second stage. We won our point and when Kariba goes on stream the rates charged will not be cheaper, but just about the same as other power rates prevailing in the country. This means the Federal Government will already have provided for half the money needed to install the second half of Kariba's capacity.
At this point we agreed to the loan, and then started one of the most elaborate international competitions for contracts that has ever been undertaken. An Italian firm ended up with the construction contract and British firms captured most of the equipment contracts. The dam, incidentally, was designed by a Frenchman. These groups, together with the Federation and its consultants, worked together so well that very substantial savings below cost estimates were realized. From these savings it was possible to increase the height of the dam 20 feet, to install an additional generator, originally scheduled for the second stage, and to tie the town of Lusaka in N. Rhodesia into the power system while still ending up some $14 million under the estimates.
The building of the dam was not without its unexpected adventures. Just after the first coffer dam was built in 1957 it was flooded when the Zambezi went on a rampage which exceeded anything on record. A year later, after construction had been put back on schedule, the river again revolted, this time pouring water through the narrow Kariba Gorge at a rate twice the normal flow over Niagara Falls. Once again the coffer dam was flooded and this time bridges were swept away, roads washed out and buildings destroyed. It was shortly after this devastation that I happened to visit Kariba. Yet by the end of 1958, after stepping up the rate of construction, the building program was again on schedule.
This January, right on schedule, Kariba will transmit its first power. The lines will have been built over the vast, almost uninhabited, scrubland of Northern Rhodesia to the Copper Belt. By April power will be flowing south to Salisbury. For some months now water has been building up in the huge lake behind the Kariba dam, causing probably the greatest migration of wild animals since the days of Noah's ark. Such few people as lived in the area have long since been moved, their tribal homes sacrificed in the name of paving the way for a brand new community on one of the world's last frontiers.
Kariba was a big project. The Karnaphuli Paper Mill in East Pakistan was a little project -- at least in terms of the money we lent. Our loan was for only $4.2 million equivalent in dollars, sterling and Italian lire. But Karnaphuli is just as exciting a story. Let me sketch just the barest details.
This paper mill is located in the hills above Chittagong in East Pakistan - - or East Bengal as it was called before partition. The land is about as different from Central Africa as any land could be. Here is one of the most crowded pieces of real estate on earth, yet the people living there have until recently been almost entirely cut off from the outside world.
Here all is jungle -where until the war few outsiders went except to hunt tiger and wild elephants. It is a tangled mass of densely forested hills, ravines and cliffs, interlaced with swamps and water courses which through much of the year are raging torrents. You see it rains on the average of 100 inches a year in East Pakistan; 500 inches a year have been recorded.
The people for the roost part practice the age-old system of shifting agriculture which still is common both in Asia and Africa. In the winter they select a patch of relatively light jungle, cut out for themselves a rough clearing and then in the spring burn it off. When the ground is burned to an inch or two deep and has cooled off, sowing begins. The seeds cotton seeds, rice, melons, cucumber and others -- are all mixed up in a single basket and a small portion of the mixture is planted in holes in the clearing. In July corn is harvested; in September, vegetables and grain; in October and November, cotton. The next year a new clearing is made and the process starts again. Unfortunately, it takes the land in one of these clearings about ten years to recover from the beating it takes from one year 1s cultivation in this manner.
Hardly sounds like a place to build a paper mill. 13ut there is one prime asset: an enormous supply of a special kind of bamboo which the natives use in the building of their stilted houses, and which in other countries has been used to make quality paper. Largely on the strength of this the Pakistan Government drew up plans for a paper mill and approached us to help finance it.
I wish I had time to tell the full story of this amazing paper mill. It is a story not without some very harrowing incidents. The majority of the workers employed at the start had never left their villages, much less had any experience with factory work. There was no pool of experienced management to draw on in Pakistan; all had to be trained. Equipment and materials in large part had to be shipped into the site by sampans, often a perilous voyage on the always treacherous rivers.
There were many difficulties on the production line and between management and labor. One mill executive from West Pakistan was killed in a riot, touched off by resentment among the Bengalis at so many intrusions and so many overlords from outside their community. During one brief period through a gigantic miscalculation of the market the mill produced enough blotting paper to serve the needs of Pakistan for several decades. In more than one year the company's accounts didn't make an appearance until many months after they were due.
It is an understatement to say that the World Bank and the Pakistanis learned a lot through the building of the Karnaphuli Paper Mill deep in the heart of the Chittagong Hills. But we lived through it together, ending up with considerable mutual respect and today along the Karnaphuli River there are two miles of well-planned buildings consisting of an integrated pulp and paper mill, modern offices and a colony for the company's 3,000 workers. Production has reached some 25,000 tons of -wrapping and writing paper a year, allowing Pakistan to dispense with some $5 million equivalent in annual imports.
If you were to visit this mill, you would be quick to notice differences from a modern western paper mill. There are still operating difficulties. The labor force is high by western standards. Many workers come from miles away and have to leave their families behind because there is no housing for them near the mill. The starting wage of $15 a month might shock you.
But there has been notable progress. All the foreign management personnel, save only the present general manager, a Swiss, have left and Pakistanis, many of them from Bengal, have taken their jobs. If the living conditions of the workers still leave a great deal to be desired, the wages being paid are twice as much as the local sampan owners get for paddling their cumbersome craft from dawn to dusk along the waterways of East Pakistan. It is enough to support the wage earner and the many dependents who by local custom look to him as the breadwinner. It is an income immune from the hazards of famine and flood that have from time immemorial plagued the surrounding country. It is the beginning of an escape from the cruel predicament of an exploding population pressing u n diminishing reserves of arable land.
The mill, which started as a government-owned project, no has so 28,000 private stockholders who together hold a majority of the stock. Some of these stockholders subscribed as little as $2.10 for a single share. And the plant has begun to show a profit and is declaring annual dividends of 7½%
Is it a good loan, you Will ask? Can a banker take these exotic items into his portfolio and still remain a good banker? To those questions I will only give one brief answer. We have received, so far, more than one billion dollars equivalent in interest and principal repayments from our borrowers. Nowhere has there been a default.
The financial story of the Bank is more familiar to you, but to me it has been no less exciting.
When I was here in 1949, we had made only three issues of our bonds, two in the United States and one in Switzerland. At the same time beyond the United States subscription, we had yet to receive more than token payments from our other member3 from their paid-in capital. And we had hardly begun to make contacts with private financial institutions in the matter of persuading them to participate in our lending in one way or another.
We have now, long since received and loaned out the bulk of the capital initially subscribed and paid in by our 68 member countries. From this source we have had the equivalent of about $1.5 billion, of which the American subscription accounts for only slightly more than a third. More and more of this capital is coming back to us in principal repayments and is being relent. But for some time now by far the most important source of our new resources has been the private capital markets. Two-thirds of the funds we have had available for lending has come from these markets.
Up to date we have floated 49 successful bond issues. Besides Switzerland and the United states, we have entered the public markets of Canada, Britain, the Netherlands, Belgium and the German Federal Republic. Naturally, we have raised dollars for the most part; the American dollar is today an international currency second to none. But we have also raised the equivalent of $300 million in sterling, guilders, Belgian francs, Swiss francs, deutsche marks and Canadian dollars. And about $68o million, or about 40%, of our dollar debt is held abroad. We have grown very international in this department since I saw you last. More than half of our total debt outstanding is held outside the United States in some 42 different countries.
The market for our bonds inside the United States has also grown very rapidly. As you a.re no doubt aware, there has been during this time a marked shift in our major buyers. While savings banks and insurance companies dominated our lists up to 1955, about half our debt outstanding in the United States is held by pension funds -- corporate, state and labor union funds -- and philanthropic foundations. This is to some extent a natural result of the prevailing pattern of interest rates. What is important to us is that we have during this period picked up a substantial number of new buyers. In just two issues last year we identified 277 first time buyers.
While the market for our bonds has been expanding apace, we have also established a great number of contacts with private financial institutions here and abroad who have participated in our lending in one way or another. In all some 150 commercial banks, insurance companies and other public and private financial institutions have participated with us at the time of lending or have bought out of our portfolio to the tune of nearly $6oo million.
The financial story of the Bank is one of widening markets and the progressive internationalization of our debt. Recently, as you know, a new chapter in this story was opened when our member governments voted to renew and replenish their guarantees behind our bonds by voting to double our authorized capital. No further paid in subscriptions were involved in this exercise, but the uncalled subscriptions of most members were increased by better than 100%. In the case of the United States, this action increases the effective American guarantee from $2,540 million to $5,715 million. Considering that our outstanding funded debt today is under $2,000 million, the present size of the American guarantee alone would seem quite sufficient to cover our outstanding liabilities in full for many years.
But we do not rest on guarantees, as you know. Since 1949 when I was here before, our annual net earnings have increased each year to a record of $45.6 million in the year that ended last June. Our total reserves, which stood at $22 million in 1949, stand at $433 million today.
This brings me to my final comments -- on the role of the Bank as an instrument in international diplomacy. I said we have been unavoidably involved in international diplomacy. This is because what are commonly called international development problems are more often than not concerned with the domestic policies of the underdeveloped countries. Since we are charged with promoting sound economic policies and the sound management of economic affairs, we are, in every loan operation, inevitably involved in diplomacy.
That we survive in this heady atmosphere is, I think, almost solely due to the fact that we are an international organization. The inevitable conditions we attach to our loans gain acceptance from us where they might not gain acceptance from a national organization very largely because we are not wrapped in the flag of any one nation. And when we have disagreements with a borrower, which we most assuredly do, the disagreements are not cause for recalling ambassadors or mobilizing armies. In fact, we try never to lose contact with a member country no matter how serious our disagreements may be. With us there is always chance and another day in which business may be done.
As you are aware we have been drawn into some international disputes which are not directly connected with our lending operations. We were asked to mediate between the shareholders of the former Suez Canal Company and the United Arab Republic after the Suez incident. We were further asked to mediate the financial claims between the United Kingdom and the U.A.R. That both of these discussions h v b n translated into agreements which are now being carried out is strong testimony to the worth of an international development organization. It is this fact, not any tricks of personal diplomacy, which made agreement possible.
For nine years now we have been trying to bring about a similar agreement between India and Pakistan over the disputed question of the division of the waters of the Indus Basin. Here is the largest irrigation network in the world, equal to all the irrigated land west of the Mississippi. The livelihood of some 40 million people depends directly or indirectly on this river system.
In 1954, after two years of study and discussions with the two parties, the World Bank put forward a proposal for a settlement which involves the construction of a system of works – canals, barrages and reservoirs – which would take ten years to build and which
Since 1954 the Bank has been discussing this proposal with India and Pakistan in all of its many details. We are now working on the text of an International Water Treaty. The costs of the project are far beyond the financial capacity of India and Pakistan, so that the Bank has gone out in search of financial aid. The Bank itself would participate and we have had encouraging assurances of financial help from the governments of Australia, Canada, Germany, New Zealand, the United Kingdom and the United States.
In my opinion there is only one realistic escape from the kind of predicament in which India and Pakistan find themselves over the Indus Waters: that escape is massive economic development through which both nations gain so much that the dispute is forgotten. Since neither party to the dispute, nor both together, have anywhere near the resources needed to effect such an escape by themselves, the international community must ask itself whether it will act or let the opportunity pass. The stakes are very high; on the one hand this is obviously an undertaking that will test the mettle of engineers and financiers as few development projects have ever done; on the other hand, if the dispute were left to fester much longer, it could lead to progressively dangerous tensions between the two countries.
That we can genuinely hope that international cooperation will be available to settle this dispute is to me immensely heartening. For just as India and Pakistan can look for a hopeful escape from their differences through economic development, so can many other nations today who a.re wasting their energies in conflicts with their neighbors. And every concrete achievement there is strengthens the ground on which international peace rests and gives substance to mankind's hope that it can be a lasting peace.