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Speeches & Transcripts November 14, 1966

Address by Mr. George D. Woods, President, World Bank Group, to the New York Bond Club

It is good to be back in these familiar surroundings and to see so many old friends and familiar faces. It is now nearly four years since I left private banking to join the World Bank -- time goes quickly. During these four years I have come to appreciate more and more the great contribution which the New York banking community makes not only to the business life of this country but to the business of the world. The World Bank has reason to be ever grateful to you for the support you have given it over the years. Without this support, the Bank's role as a development finance institution would have been a much harder one to play. And I take this opportunity, on behalf of our Executive Directors and Governors, of expressing our sincere thanks.

Since the last occasion on which the President of the World Bank addressed the Bond Club, which was when Eugene Black came in 1952, there has been considerable growth and change in our business. From a membership of 54 in 1952 we have now grown until we have 105 shareholder governments. Today the Bank is lending at the rate of about $800 million a year and its loan portfolio is $6.9 billion. It has financed about 1,000 projects in 79 countries. It administers IDA, the International Development Association, a separate but affiliated fund founded in 1960 to supply very poor countries with finance on highly concessionary terms to enable their development to go forward. Another affiliate, IFC, the International Finance Corporation, which opened its doors in 1956, is entering its second decade with excellent prospects which I will touch on in a few minutes.

The core of the Bank's business -- and in this respect what goes for the Bank also goes for IDA -- continues to be lending, under government guarantee, for comparatively large projects in power, transport, communications, industry, and agriculture. And in case you may from time to time read of failures or frustrations in this or that developing country, let me remind you that in all these major sectors with the exception, for certain countries, of agriculture, the record of the developing countries during the past 10 to 15 years is one of continuous progress. Installed power capacity more than doubled in the decade 1953-63. Mining production in developing countries has risen at almost 7 per cent yearly, compared to 2 per cent in the industrialized regions. The industrial production of these countries has doubled in the past decade; production of steel has tripled. We have plenty of evidence that the Bank's role in all this as a financial counsellor, technical adviser and friendly critic is vastly greater than would be suggested by looking only at our financial stake in these developments.

The knowledge that agriculture in many parts of the world has stubbornly resisted innovation and adaptation to the requirements of rapid population growth is no longer confined to those of us close to the development process. Hardly a day passes without some notice in the press about new and alarming evidence that humanity as a whole faces, and indeed is already in, a food crisis, the consequences of which no one can foresee. It has not been easy for an institution like the World Bank, located at the center of the industrial world, and specialized in the techniques of sophisticated finance, to find ways and means of reaching down to the farmer in the field with help that he is able and willing to use. Nevertheless, we began some years ago to place more emphasis on the agricultural side of our activities and on the contribution that our investments in other sectors, such as fertilizer production and distribution, could make toward breaking through the agricultural impasse.

I should also mention briefly another sector which has been attracting an increasing amount of our attention and which is beginning to loom larger in our activities. I refer to the general field of education hut more particularly to those branches of education which can be shown to contribute directly to the improvement of productivity in the developing countries. In our opinion the most important of those branches today are technical education, vocational training, secondary education -- which in many countries is a critical bottleneck -- and teacher training. In this field, as in others, the Bank finances projects, not general budget support. The amount involved is not large compared to what we loan in other sectors. Nevertheless, we have so far made loans and credits amounting to nearly $100 million, virtually all of it being spent on buildings and equipment.

I would like to give special emphasis today to current activities of IFC, the International Finance Corporation, partly because this is our affiliate concerned entirely with private enterprise in the developing countries, and partly also because some of the most interesting current developments affecting the whole World Bank Group center around it. As you may have noticed, the pace of IFC activities is quickening. The foundation for this was laid five years ago when it was authorized to provide equity as well as fixed interest finance without government guarantee, for private enterprise. Incidentally, IFC is the only intergovernmental organization which invests in equities. As we expected, the scope for investments, given this new flexibility, is such that IFC can employ considerably larger funds than were available on the basis of its original capital of approximately $100 million, plus profits and the proceeds from sales of portfolio assets. This is what lies behind our announcement last month that the World Bank has agreed to open a $100 million line of credit in favor of IFC. This is the first Bank accommodation on the basis of recent amendments to the Articles of Agreement of the two institutions permitting such transactions.

This arrangement will enable IFC eventually to employ its entire capital and surplus in equity, supported where appropriate by fixed interest investments financed through the Bank line of credit. At least as important, it will enable IFC to take on larger commitments and to do business with a greater variety of enterprises.

When IFC goes into an enterprise, it never goes in alone. Whenever you read that IFC has invested this or that amount, you may be sure that a significant multiple of the figure is being provided by private investors as part of the same operation. Indeed, IFC's financial contribution is often comparatively small, its most important role being that of a minority partner unusually well placed to put together proposals for financing which are attractive to other investors, including a growing number of investors in the developing countries themselves.

It is in this connection that I would like to refer to the fertilizer industry. Over the past year we have given a great deal of thought to fertilizer production, and with good reason. With the world's population growing at a rapid rate and food surpluses running down, an immense job needs to be done -- and quickly -- to raise food production. Fertilizer should be a vital instrument in achieving this.

The challenge of increasing fertilizer production and use illustrates particularly well the importance of private know-how and private capital to those of us who work for long-term growth in the developing countries today. Important raw material resources, presently unutilized, are available. Natural gas associated with petroleum production, is being flared in the Middle East, Africa and Latin America. In addition, large known deposits of potash and phosphate in developing countries are available to be opened up. The technology is there, in this case in the form of remarkable technical advances involved in the synthesis of ammonia for the production of nitrogenous fertilizer. And the technically competent management and capital will be there too, if we can demonstrate that there are markets and reliable systems for distribution to the farmers in the underdeveloped world.

In recent months IFC has taken the lead for the World Bank Group in discussions for establishing new fertilizer plants in developing countries in partnership with major oil and chemical companies in the United States, Europe and Japan. These discussions have already led to an agreement with Western European and Senegalese investors to finance a fertilizer project in Senegal, the first to be built in West Africa. In addition, negotiations have just been completed for financing by U.S. and Brazilian private investors and industrialists and IFC to build a new fertilizer complex in Brazil, and I believe these are just the beginnings.

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Perhaps the principal problem which I face as I speak to you today is that of finding new resources for the Bank and IDA on the scale that will be necessary if the development effort symbolized by our organizations is not to face a serious loss of momentum. So far as the Bank is concerned, the problem resolves itself into that of gaining access on a sufficient scale to the capital markets of North America and Western Europe. This audience does not need me to tell it that money is scarce and expensive today.

Like any other large borrower, we would, of course, like to see lower long-term interest rates. In our case this is not because it makes any great difference to our own financial position but because the rates at which we borrow determine the rates at which we can lend, and higher interest rates mean a higher debt service burden and consequently limits the amount which a country, like any other borrower, can prudently obligate itself for. Nevertheless, the Bank can borrow all the money it needs in competition with the best the market has to offer whenever we are given the chance to do so. The creditworthiness of our bonds is not in doubt. As you well know, all of the lending investment rating services in the U.S. now give them a Triple-A rating. They enjoy high marketability.

We must, however, obtain permission from the governments of the member countries in whose markets we wish to borrow. I am happy to say that so far, despite the real difficulties which many of these governments are facing in the present situation of combined tight money and balance of payments troubles, there has been a ready appreciation of the desirability of allowing the Bank continuing access to capital markets, and I expect within the next few months to be able to announce new issues of Bank bonds in several markets.

When I spoke earlier of the kinds of projects we finance and the standards we apply, I could speak for the Bank and IDA in one breath. But when it comes to raising money to carry on the work, IDA and the Bank are totally different animals. All the Bank asks for is access to capital markets and the cooperation of your profession. IDA, on the other hand, has to get practically all its resources from governments.

The day will come, of course, when repayments on IDA's credits will begin to generate a significant amount of money which then can be reinvested. But because IDA gives credits for 50 years, with a 10-year period of grace, that time is far in the future. Meanwhile, the pressing needs of our poorer member countries -- some in Asia, others in South America and in Africa -- for development finance on concessional terms can only be met if governments -- and this means principally the seven governments that furnish 85 per cent of IDA's capital -- are prepared to continue their support. I am now engaged in discussions with these governments with a view to replenishing IDA's resources for the next few years at a level that would enable us to take on an appreciably larger share of the burden of assisting those developing countries that are poor but have promise. While progress is painfully but understandably slow, I feel that the effort will not be in vain. I believe the long period of discussions with governments and the resulting better understanding of the necessity for well administered finance for sound development will ultimately bear fruit.

Although you gentlemen will never have any IDA bonds to sell, I believe that if you think about it, you will agree that you, too, have a stake in the continuation of this side of our business. Do not think for a moment that IDA's money is being frittered away or poured down that proverbial rat hole. It is going into building exactly the basic infrastructure that sets a country on its feet and paves the way for agricultural, commercial and industrial growth. Many of today's IDA countries may be, and if we can carry on an appropriate scale I am confident they will be, viable and profitable trading and financial partners in the years to come. I don't mean in one development decade -- for in these matters one must think in generations, not decades. But in time some of them or their institutions will be ready to come to the capital market right here in New York. I assure you that in this development business stranger things have happened.

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Gentlemen, I would like you to raise your sights for a few minutes to the bigger issues involved in matters of worldwide economic development. If there were to appear on this planet tomorrow a new country with a population nearly as big as the U.S. or the Soviet Union, larger than Britain, France and Germany combined some 200,000,000 or more -- I think you will agree that this would be an event of far-reaching significance. Foreign offices and defense establishments would have to adjust themselves to this new presence; so would ministries concerned with international trade, finance and the distribution of the world's physical resources. And these adjustments would not be minor. In this country and in others they would be matters of the highest policy, concerning cabinets and heads of governments.

You may say that this is fanciful, yet in the past five years the population of the developing countries has grown by over 200,000,000 souls -- a number comparable to that of all Africa south of the Sahara or all of South America. While this is certainly not the same as the emergence of a single new country, it is emphatically a circumstance of great weight in world affairs. It speaks urgently for seeking a new balance in the relations between the rich and the poor countries.

Yet the pages of recent history show little recognition by the industrial countries that the equivalent of a new continent has been added to the less developed world, or that, despite population controls which are starting to take effect, a second such equivalent will be added in the next five years. The low-income countries must finance their development effort mostly out of exports to industrial countries and they are increasingly able to produce for export. The trade policy of the industrial countries in 1966 still offers the low-income countries too few opportunities. The flow of finance for development has not noticeably increased. In fact, by some important measures it has declined.

Paradoxically, at the same time that the relative volume of aid has been dwindling, the capabilities of the developing countries have been growing. More than a year ago I stated that it was the judgment of the World Bank staff that for the balance of the 1960s, the developing countries -outside the Sino-Soviet areas -- each year could effectively use, on the average, some $3 to $4 billion more of development finance than they are now receiving. This judgment was based on estimates country-by-country of the capacity of the developing countries;

To save and to export;

To follow acceptable economic policies; and

To plan and carry out high-priority development.

We have kept these estimates under review, and I today confirm and underline our judgment of the summer of 1965.

The capacity of the industrialized countries to support an effective assistance effort also has been rising. Assuming that effective financial assistance would cost an added $3 to $4 billion a year, the industrialized countries can certainly afford it. Their national income has been increasing, in the aggregate, at the rate of $40 to $50 billion a year.

Most of the great powers of this era are now, and for some time have been, engaged in examining at high government levels matters which they consider of pressing and mutual concern:

Fundamental changes in trade and tariff policies;

The shape and functioning of the international monetary system;

Organization for defense within the North Atlantic Alliance.

Yet, looking ahead over the next ten years, where are the threats to international tranquility and order:

Are they confined to balance and maintenance of military strength among the most powerful nations?

Or to financial questions among the richest?

Or is there also a threat arising from the possibility that, without concerted and adequate help from abroad, a large part of humanity will remain on the ragged edge of subsistence?

I deeply believe this possibility is one which presents a real and present danger. It seems to me that we cannot avoid increasingly frequent threats to international tranquility -- to say nothing of our individual peace of mind -- if so many people continue to live so close to starvation, and without hope for improvement in the lifetimes of their children or even their grandchildren.

I have found myself recently on more than one occasion calling to the attention of the members of the Bank’s Board of Executive Directors the tremendous technological developments of our times -- those are that are operational and those looming just over the horizon -- that seem to me to offer possibilities of major breakthroughs on some of our most difficult development problems. Some of these things are still pretty far up in the stratosphere so far as consideration of financing is concerned. But on others we are already doing some hard homework so that our staff can acquire the expertise necessary to evaluate proposals.

Among significant breakthroughs already proven, I have mentioned those affecting the production of ammonia which have brought the vision of enormously increased supplies of low-cost fertilizer in the developing countries closer to realization. Indeed, it is not too much to say that the big obstacles now lie primarily in relations between the international companies capable of building and operating plants applying the new technologies and the governments of the countries where the greatest food shortages exist.

Another important example of a technology that needs only to be applied on a sufficient scale is the recent improvement in methods of birth control. These may not be the ultimate answers but they do seem to offer the first real possibility of reducing the world’s population growth to more manageable proportions.

Looking only a little farther ahead, it is possible to foresee the day when radio and particularly television will be used effectively and widely to raise educational standards and to supplement the efforts of scarce teacher personnel.

Perhaps only slightly further off is the possibility of the combination of nuclear power generation with water desalinization, on a scale that would importantly affect the economics of power production and the supply of water for human and industrial use. As a result of these developments, at a later stage, desalinized water might even become economically available in the large quantities that are needed to irrigate water starved lands with as yet undefinable but certainly far-reaching implications. And it should be observed that fertilizers always must be complemented with a sufficient supply of water.

Even farther out -- literally 23,000 miles out -- is the Comsat satellite and all it portends for the intensification of communications between peoples and governments hitherto remote from each other in almost every sense of the word.

Also somewhere out there is the supersonic transport with equally exciting implications for the whole world, now scheduled for operation in less than ten years.

These are some of the things which lead me to conclude that those who continue to be skeptical about the chances of success of a well thought-out attack on the problems of poverty and backwardness in what we call the developing countries, using both public and private resources well within the capacity of the industrial countries to provide, may not see matters in true perspective.

My message to you today is that we in the World Bank believe that broadly speaking the road we are on is in the right direction and that if followed diligently, but also intelligently and very selectively, it will lead us toward that evasive "better world" which has beckoned people -- farmers, manufacturers, traders and money men -- for generations, as indeed it always will.