America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
THE International Bank for Reconstruction and Development, popularly known as the World Bank, is about to celebrate the third anniversary of the commencement of its operations. Those three years have been fascinating and exciting ones, crowded with problems as unique and complex as they have been pressing. Solutions have not been and are not yet easy to find; the state of knowledge about the whole business of international investment is still remarkably incomplete. By now, however, some of our experiences and some of the lessons we have learned seem worth recording.
Deceptive and unfortunate ideas of grandeur are quite naturally evoked in many minds by the designation "World Bank." I fear that in many quarters those ideas of grandeur led to expectations of rapid and spectacular achievement and to consequent disillusionment when the spectacular failed to materialize. Solid, gradual growth and development make poor news copy and thus escape public attention, but they are not for that reason to be deprecated. The fact is that, slowly but quite perceptibly, the Bank has gained general acceptance of its credit in the public markets and a reputation for objectivity, fair dealing and competence in the councils of its member states. The loans which it has granted, totalling some $650,000,000 as of the end of April 1949, have been for essential and well-conceived programs or projects which should materially strengthen the economies of the borrowing countries. Its advice and encouragement to various of its members have led to the adoption of economic and financial measures and administrative reforms which may well prove to be at least equally as beneficial as the Bank's financial help. The Bank's bonds have had a very satisfactory market record; as a result of legislative or administrative action in 37 states, the bonds are now eligible investments for almost all institutional investors in the United States and there is at present a substantial unsatisfied demand for the bonds. The Bank's earnings record has been good and has enabled a promising start to be made in building up reserves. These, to me, are satisfying accomplishments. They are not spectacular in any sense, but they represent the fruit of much intensive work.
The Bank cannot and should not be expected to provide the answer to all or even a major part of the world's financial ills. It is beyond both the power and the purpose of the Bank, for example, to try either to cure the "dollar shortage," or to assure the maintenance of full employment throughout the world, or to satisfy short-term budgetary and balance-of-payments requirements. The Bank's sphere of activity is narrower and more precise, although it touches upon those problems. In general terms, its mission may be defined as providing the foreign financing required to carry out long-term projects which will increase the agricultural and industrial output of its member nations. That is a broad enough field for all the resources, vigor and ingenuity which the Bank can possibly bring to bear. Operating within that field, the Bank has already made a promising beginning. If given the sustained coöperation of its members and if permitted to stick to its last and not be diverted by every momentary emergency, real or fancied, the contribution of the International Bank over the years can, I am convinced, be of substantial and continuing importance.
What I have written may serve to dispel some of the prevalent misunderstanding as to the impact upon the Bank's activities of the European Recovery Program. There are those who regard the existence of E.R.P. as relegating the Bank to a rôle of secondary and minor importance and who tend, therefore, to write the Bank off as an ineffective instrument of international investment. This type of superficial thinking misconceives the purposes for which the Bank was established.
The Bretton Woods conference was not concerned with providing a solution to the short-run problems of Europe during what was generally expected to be a brief transitional period after the war, but rather with the creation of permanent agencies which would operate primarily in the post-transitional period. It is true, as events have proved, that both the magnitude of the short-run difficulties and the length of the period of transition were underestimated at Bretton Woods; ever since the war, Europe's overpowering economic problem has been its need of dollars to buy the sheer necessities of life, and not so much a need for external financing of long-term investment projects. But the existence of this extraordinary immediate need and the creation of E.R.P. to satisfy it neither impair the validity of the conception underlying the Bank nor threaten the Bank's ability to achieve its objective. The Bank was designed to meet a long-term need which will remain when the present emergency is over -- the need for a continuing organization to promote international investment on a scale sufficient to ensure a balanced development of the world's resources and living standards. E.R.P. does not obviate that long-term need; to the contrary, it alone makes possible the creation of economic conditions in Europe in which the Bank can play the rôle for which it was originally intended. I confidently expect that, long after E.R.P. has taken its place in the pages of history alongside UNRRA, lend-lease, the British loan, surplus property credits and similar short-range emergency measures, the International Bank will remain as an active and invigorating influence in the long-term growth of Europe's productive plant.
This is not a matter of the distant future but of a fast-approaching present. E.C.A. is to terminate by July 30, 1952, and the amount of aid provided between now and then should, and I am confident will, be progressively reduced. The aim of E.R.P. is to enable Europe to support itself without extraordinary external assistance by the termination date. But there would obviously be serious political, social and economic consequences if aid were to continue to the end at anything like the present rate and were then abruptly discontinued. From the standpoint both of forcing the European nations to face up promptly to the gravity of the problems still confronting them and of assuring a smooth transition in 1952, a policy of definite and progressive cutbacks for the third and fourth years of E.R.P. should now be announced and subsequently adhered to.
As these cutbacks occur, it is reasonable to expect that the E.R.P. countries will again look to private investors and to the Bank as the principal sources of foreign capital for their long-term investment projects. Discussions now in progress concerning Bank financing for overseas development are a first step in this direction, and there are strong indications that the Bank will soon be called upon to consider other long-term plans involving considerable expansion of productive facilities within Europe itself. The fact that such Bank financing is now being seriously contemplated is perhaps one of the most significant measures of the extent of E.C.A.'s success.
Because the most pressing needs of Europe have been met by E.R.P., the Bank has been able to devote most of its time and attention to the problems of its less well developed member countries. We have granted loans for development projects in three countries -- $75,000,000 for power and telephones in Brazil, about $34,000,000 for power in Mexico and $16,000,000 for power and agricultural machinery in Chile -- and we have at present under consideration additional projects in more than 20 member nations, some of which are in an advanced stage of negotiation. They cover a great variety of proposed undertakings, such as the construction of transportation and communication facilities, irrigation, reclamation and other agricultural projects, power development, shipbuilding and industrial and mining development. Each project presented to the Bank is investigated not only on its intrinsic merits but also in relation to the sound economic development of the particular country concerned. This involves immense and time-consuming effort, but effort which I think is not only worthwhile but inescapable.
Development is not something which can be sketched on a drawing-board and then be brought to life through the magic wand of dollar aid. If proof of this be needed, it is supplied by the numerous reports which have been compiled during recent years suggesting comprehensive development schemes for various areas of the world, most of which are now gathering dust on library shelves. If money were all that were required to translate those projects into reality, the Bank's primary task would have been the relatively simple one of allocating its resources among various claimant schemes. In point of fact, however, the principal limitation upon Bank financing in the development field has not been lack of money but lack of well-prepared and well-planned projects ready for immediate execution.
The explanation lies in the all too frequently ignored gap between the concept of development potentialities, on the one hand, and the formulation of practical propositions designed for the realization of those potentialities on the other. To give a concrete illustration, one of our smaller member states desires to divert water from a river in one part of the country to irrigate desert land in another part, and to generate some power in the process. But that concept as such cannot be financed. Before it can be brought to the point where money can usefully be employed, a great deal of detailed engineering work must be undertaken, the market possibilities for the power and the products to be grown on the irrigated land must be explored, the availability and cost of the necessary equipment must be ascertained, and the economic validity of the project in the light of estimated cost and expected revenue must be demonstrated. Comparison must also be made between the expected economic benefits of this particular project and of other proposed projects which might have to be abandoned or delayed if this one be undertaken. Finally, an organization must be created to carry out the project, and competent management must be obtained.
All of these steps take time. But expansion of productive facilities in even the most highly industrialized nations is a painstaking, time-consuming operation, requiring the most careful and detailed planning. In the underdeveloped areas, the difficulties are compounded both because there is less technical and administrative skill available and because there is less economic and statistical data on which to base judgments. Perhaps the most striking lesson we have learned in the course of our operations is how limited is the ability of the underdeveloped countries to absorb foreign capital quickly for really productive purposes.
Although it will never be a rapid process, the rate of development can, I am confident, be accelerated, and the Bank, by providing both technical and financial help, can serve as a powerful accelerating force. But it must never be forgotten that low productivity and living standards are as much the product of poor government, unsound finance, bad health and lack of education as of inadequate resources or the absence of productive facilities. The attack on backwardness, if it is to succeed, must be made on many fronts and requires primarily a sustained internal effort. External financial and technical assistance can be very helpful, particularly in the early stages of development, but it can never be a substitute for domestic action.
The resources of the Bank will, in my judgment, be ample for some time to come to finance all the sound development projects which may be presented to it and which can appropriately be financed by foreign loans which are expected to be repaid. This does not mean, of course, that the resources of the Bank are adequate to satisfy all of the world's development needs -- far from it. Just as there is a vast difference between the amount of money which can usefully be employed for development at any given time and the amount which would theoretically be needed to exploit all development possibilities, so too there is a vast difference between the amount of money which can usefully be employed and the amount of additional external debt which the underdeveloped countries can properly assume. At best, therefore, Bank financing, which must necessarily take the form of additional external debt, can provide only a part of the foreign capital necessary for development.
In my judgment, the most advantageous form of foreign development financing is private equity investment. In the long run it is only the free flow of private capital over a sustained period which can provide financial assistance in amounts sufficient to make a significant inroad on the world's development needs. Furthermore, it is desirable that a considerable part of the foreign capital employed for development purposes be in the form of equity investments in order to avoid an undue burden of fixed charges and, more important, because those who make equity investments abroad today normally provide not only money but also essential technical and managerial skills.
The many obstacles which at present impede the free flow of private international investment are well known and no purpose would be served by repeating them here. Some improvement of the situation may be expected as a result of measures designed to implement the "Point Four" program, in particular guarantees, investment treaties and tax revisions. The efforts of the Bank, too, may help to lower some of the hurdles through creating a better climate for private investment in its various member countries and fostering a greater degree of confidence among investors. But however successful these measures may be in increasing the amount of private capital flowing abroad, they are not apt to satisfy existing development requirements. In the first place, it is likely to remain true that such investments will be concentrated in a relatively few countries and industries, particularly the raw material and foodstuff export industries. Very little is apt to be invested in production for the domestic markets of the underdeveloped countries. In the second place, there are many projects basic to development -- primarily in the fields of education, health, road construction, irrigation and reclamation and the like -- which are obviously unsuited to private investment and which are yet beyond the economic capacity of many countries to undertake either out of local resources or with funds borrowed from abroad.
The existence of a need for development financing in excess of the funds available to meet the need is not a new problem: it is one which has always been and probably always will be with us. Nor is it a problem unique to the international scene, as witness the unsatisfied needs of the many underdeveloped areas of this country. Nevertheless, there is a greater sense of urgency now than ever before about raising the income level of the underdeveloped countries because, as a result of modern means of communication, the peoples of those countries are becoming increasingly aware of the great contrast between their status and that of the peoples of the more economically advanced nations. More is involved than merely economic and humanitarian considerations, important as they are; political stability is at stake as well.
Decision whether to increase the funds available to finance development is one which can be made only by the governments of those few countries in a position to provide such funds, and in the light of their own national interests. This is not a subject, therefore, on which it is appropriate for an international official to comment. However, should decision be reached to provide additional funds, the Bank's experience may shed some light on how those funds might most advantageously be utilized.
I would emphasize, in the first place, the desirability of making a sharp distinction between loans and grants. Loans should be made only where there is sound economic justification for the loan and where reasonable prospects of repayment exist. Where that situation does not pertain, any assistance given should be in the form of grants.
It is clearly not wise to saddle a country with loans which it cannot repay. In the end that will lead only to default, impairment of the borrower's credit standing and international ill-will. These were the results of the unsound lending in the 1920's; the credit standing of many countries is still suffering from the unfortunate consequences of their over-borrowing in those years. I believe it is also unwise to try to avoid these consequences by making loans which are for such a long period of time, bear such a low rate of interest and have such generous escape clauses that they are in reality part loans and part grants. There is a tendency in many quarters not to regard such loans as serious obligations, and they are apt to throw a cloud upon international lending from other sources. Unless public agencies, national or international, are to continue indefinitely as the principal source of international capital, steps must be taken to restore the confidence of private investors in foreign investments. This requires not only building up the economic capacities of recipient countries to meet their foreign obligations but also generating a greater regard for those obligations and the will to meet them. These objectives are better served through frankly supplementing sound loans, where necessary, with grants than through disguising the grants by wrapping them together with the loans in a fuzzy type of credit. The difference may be more psychological than economic, but it is not for that reason the less important.
In the second place, I believe it to be essential that any additional financial assistance made available for development purposes be provided in such form or under such conditions that its expenditure will not generate continually increasing demands for aid. This is an exceedingly difficult matter, for there is no readily apparent limitation, such as is provided by the profit motive in the case of private investment, which would effectively limit claims for help should a new public financing program be undertaken. At the least, there should be a clear definition of the types of need intended to be met and the economic level of the countries eligible for help. It must be made clear, too, that the assistance is extraordinary in character and is not provided in satisfaction of a continuing obligation to assure an ever-accelerating rate of development. Whatever moral arguments may be adduced in favor of the recognition of such an obligation, its assumption would under existing international conditions be politically unjustified and might in the end lead to disastrous disillusionment.
Finally, I feel strongly that any expanded program of financial assistance for development should, to the fullest extent practicable, be under international rather than national auspices. I recognize that the United States Government, which would undoubtedly be the heaviest contributor to any such program, might well wish control over the funds it supplied in order to secure immediate bargaining advantages. But the longer-term disadvantages of such control, in my judgment, far outweigh the immediate advantages. Nothing would be more productive of ill-will toward the United States than to have the other nations of the world over a long period of time regard the United States Government as their principal source of foreign capital. Under such circumstances, those receiving financial aid would not regard it as a favor but as a matter of right, while those who received nothing, or less than they thought they were entitled to, would consider the United States guilty of unfriendly discrimination. There would be no end to the calls made upon the United States and, should the United States itself decide to halt the program, it would be confronted by outcries from every side. To the extent that an international rather than a national agency is the instrument of investment, these consequences can be mitigated if not wholly avoided.
There is one other thought about the Bank which I have expressed on a previous occasion[i] but which I believe is worth repeating. In these days of knife-edged political tension, it is popular to think of international organizations as simply forums for blunt and often ill-tempered debate. The Bank's experience over a considerable period of time indicates that this need not be the case. The Governors and Executive Directors of the Bank have throughout acted with a most commendable and really hopeful display of tolerance and objectivity. And in the day-today work of the staff, nationalities are ignored and decisions on small and on important matters alike are made without partiality to the interests of any particular country.
It is true, of course, that economic matters traditionally arouse less acrimony than things political. It is also true that one of the two great protagonists in today's political struggles is not a member of the Bank. But there is another, equally fundamental reason for such success as the Bank has achieved in creating an effectively functioning international organization. In the case of the Bank, as distinguished from the United Nations and many other international agencies, the initiative in making recommendations and proposing action has been vested in an international staff, whose loyalty is only to the Bank itself, rather than in a group of national representatives expressing the viewpoints of their respective governments. Responsibility for making final decisions rests, of course, with the national representatives -- the Bank's Executive Directors -- but they base their action and center their debates upon staff recommendations. This means, in practice, that problems are approached and decided primarily on the basis of an objective nonpolitical analysis of the issues involved rather than as a result of political compromises.
I believe that there is a lesson here with broad implications in other fields. It is a basic tenet of our democratic faith that the just and peaceful settlement of international disputes depends largely upon bringing to bear upon them an enlightened world opinion. Public debates in the General Assembly and the Security Council are an important means toward bringing an enlightened world opinion to bear on vital issues. But I suggest that the debates might well be more temperate and illuminating, and solutions to the problems made easier, if the initiative for analyzing the issues and recommending appropriate action were vested in a nonpolitical and objective international secretariat.
I do not suggest this as a panacea -- there is no easy road to international coöperation. The will to coöperate cannot be created by any form of organization nor can any form of organization succeed without it. But our experience in the International Bank has at least demonstrated that, given both the will to coöperate and an appropriate organization, effective international action can be made a reality.
[i] Address before the New York Herald Tribune Forum, October 20, 1948.