Washington’s Missing China Strategy
To Counter Beijing, the Biden Administration Needs to Decide What It Wants
The meeting of 22 national leaders convened at Cancún, in Mexico, last October, despite "millimetric progress" (in the words of Willy Brandt), launched a call for "global negotiations." What is meant by this is a series of international conferences, sponsored perhaps by the United Nations, to discuss the major economic problems which have affected the balance of payments and prosperity of many developing countries. Among these problems are food, commodity price stabilization, energy, and the international financial system.
If the experience of the North-South dialogue of the last decade is any guide, there is bound to be a lot of skepticism on both sides of the table about the likely results of this latest effort. The new talks would start in the midst of a deep international recession, which has driven most commodity prices other than oil to their lowest levels in real terms since the end of the Second World War. While this catastrophe obviously stimulates a wide array of developing countries to give global negotiations another try, it also makes it much more difficult for the industrialized countries of Europe and North America to be generous, as they themselves face serious domestic economic and social problems. As of the spring of 1982, the number of unemployed in the United States and the European Economic Community topped 20 million workers.
This article presents ideas on some further steps beyond Cancún. It concentrates particularly on the role of the multilateral development banks and their possible part in energy development.
A major stimulus to the Cancún meeting was that the Reagan Administration has been widely perceived as only tangentially interested in the developing world. This is of course not surprising for a government whose main concern is to introduce major domestic reforms. Moreover, the phenomenon is not new. The U.S. constituency interested in the developing world has always been limited to a few relatively small groups. In the last decade the strength of this constituency has eroded. The aftermath of Vietnam, stimulating isolationism, was clearly a major factor. The backlash against OPEC was another. Then the opening up of China, a country with historic links to the United States, introduced the fascinating new subject of a huge country which absorbed the attention of those normally interested in other less spectacular developing countries. These changes were combined with the endless confrontational rhetoric at the United Nations, especially on the part of a small number of Middle East and African countries. All of this has sharply eroded the interest in developing countries; support for development assistance, tenuous at best, has plummeted. The Reagan Administration clearly feels it has to be responsive to these electoral views.
The result has been a questioning by the U.S. government of what should be the role of the multilateral development agencies, with ensuing cuts in the proposed capital increases for the multilateral development banks, especially the World Bank and the International Development Association (IDA), the World Bank affiliate which is funded almost entirely out of government contributions and lends to the poorest countries.
While the degree of criticism of the multilateral development banks by the U.S. Administration has receded somewhat in recent months, as they have begun to reorient their lending and give greater emphasis to the development of private sector projects, the cut in the growth of the volume of lending is taking place at a time when access to commercial bank loans by the so-called middle-level developing countries is becoming more difficult, as a result of the well-publicized debt-service problems of Poland and Romania and the financial difficulties of a few large economies in Latin America. The severity of the impact of the international recession upon export earnings of developing countries thus threatens to be aggravated on the side of the capital account by a curtailment of loan flows at the time when many countries are in particular need.
Let me digress to illustrate this point with reference to Peru, my own country, and to show the very limited room for maneuver which such countries face in economic terms at this juncture. The case of Peru, by no means the worst hit among middle-level developing countries, since it is a modest net oil exporter, illustrates the perils of an international recession combined with high international interest rates and curtailed capital flows.
In mid-1980, Peru embarked on a bold experiment with democratic government, after the first presidential elections since 1963. The return to power of Fernando Belaúnde Terry, after twelve years of military rule, naturally greatly heightened popular expectations. For one thing, per capita income had declined sharply-by about 15 percent-in the wake of the financial crisis of 1975-78, which was brought on by the profligate fiscal policies of the previous government. For another, the restoration of freedom of the press on the day Belaúnde was inaugurated was bound to fuel popular hopes further. A major program was launched to stimulate investment and production, by giving farmers credit and more realistic prices and by making new investment more attractive in petroleum and mining. A start has been made in filling the large infrastructure gaps which had been allowed to develop in the previous decade, especially in roads, electric power, education and basic public health. All of this has required revenue and also painful domestic adjustment measures such as price increases and decontrol for food and fuel, and the introduction of new taxes, particularly a value-added tax, in order to finance the public investment effort.
In a relatively small economy such as Peru's, prosperity and the availability of resources are heavily dependent upon exports. The reconstruction effort thus relies on external prosperity. The combination of the international recession and high interest rates cast a pall over 1981. Peru did well to register a four percent rate of economic growth in 1981. 1982 looks quite uncertain. Minerals as a group, which account for half of Peru's merchandise export earnings, at present face their lowest export prices in real terms in more than 30 years. The case of copper, which represents one quarter of merchandise export earnings, is particularly dramatic. One ton of copper in 1970 could buy 24 tons of wheat (most developing countries are wheat importers, because of climatic conditions) or four large tractors; in 1981 its purchasing power had fallen to 11 or one respectively.
At the same time, soaring international interest rates on the floating rate Eurodollar portion of the external debt, the largest single component of the external debt of the middle-income developing countries, has caused a scissors effect on their balance of payments and their budgets: less income, more outlays.
The case of Peru, not an untypical one, illustrates the vulnerability of relatively undeveloped economies to the international recession and the accompanying credit squeeze. Global negotiations cannot cope with this immediate problem. A more prosperous international setting is the prime requisite. On the other hand, the magnitude of the international recession requires that the negotiations that follow Cancún focus on rather practical and achievable objectives.
The first key point is thus that the post-Cancún negotiations be practical and limited in scope. A major priority should be to focus on subjects on which there is a risk of going backwards if nothing is done. Two subjects come to mind. First, the future role of the multilateral development banks (particularly the World Bank and the Inter-American Development Bank.) Here it is fundamental to avoid retrogressing in areas where international cooperation has worked well. Second, there is the question of energy, where the present conventional wisdom that the glut in world oil will last for a long time may well slow down the drive to correct past mistakes in energy policy and, in the case of the poorest developing countries, to give proper orientation and funding to their energy programs. The fact that these two subjects can be discussed in specialized groups, rather than in large "global" conferences, should not invalidate their importance on the post-Cancún agenda.
In recent years the multilateral development banks, and among them especially the World Bank, have become far more visible as a result of their growing volume of operations. In the fiscal year ended in June 1981, gross loan disbursements to developing countries by the World Bank and its affiliate for highly concessional loans, IDA, were almost seven billion dollars, somewhat more than five times what they had been a decade earlier. The regional development banks (Inter-American, Asian and African) added approximately another three billion dollars in the same period. To put these disbursements of about ten billion dollars in perspective, they should be measured against the identified external capital flows, including both loans and investment, into these countries. These flows were about $60 billion for the latest year, also about five times what they were ten years ago. Thus, while lending by the World Bank and the regional development banks has grown much faster than inflation, contrary to general impressions it does not represent today a significantly larger proportion of the external capital inflows into developing countries than it did ten years ago. In other words, the multilateral development banks are helping to cover a similar proportion of a much larger financing flow.
Nevertheless, as the World Bank and the regional development banks have become more visible, opposition to their continued expansion has increased, especially in the U.S. Congress. Other industrialized countries, with a few exceptions never more than lukewarm about their own contributions to these multilateral agencies, initially went along with the cuts proposed by the United States for IDA, triggering a major reduction of proposed IDA funding commitments in the fiscal year 1982 (July 1981 to June 1982) from $4.1 billion originally negotiated to $2.6 billion actually budgeted. As a result of a major lobbying effort by the new president of the World Bank, A. W. Clausen, this reduction was reversed this spring when a number of contributors, including several OPEC countries, agreed to make up $500 million of the shortfall.
Nevertheless, there has been a sharp reduction and the outlook for next year is quite uncertain. While the impact of a cut in one year or two can be manageable, and in effect will largely be borne by the amount hitherto assigned to India, there are very few possibilities for the poorest countries-IDA's customers-to obtain the funds elsewhere, on any terms. The two major sources of external finance for the middle-income developing countries-medium-term loans raised in the Euromarket and official export credits-are basically off limits for the poorest countries.
There is also increasing U.S. pressure to accelerate the "graduation" of the more prosperous middle-income or newly industrializing countries from the multilateral development banks. This issue is particularly acute in the case of the Inter-American Development Bank, where the United States a year ago proposed phasing out loans to Argentina, Brazil and Mexico, and at the same time closing the soft-loan window, the Fund for Special Operations, which lends at terms that are somewhat less concessional than those of IDA. The elimination of new lending to the three largest economies of Latin America (Venezuela has already been "graduated") would tend to give a heavy bias in the Bank's operations to Central America and the Caribbean, depriving the Bank of its Inter-American character.
As a result of opposition to the measure on the part of most Latin American countries, a compromise is being worked out, involving a reduced level of lending. Incidentally, after the very negative reaction in much of Latin America to the perceived volte-face of the United States in the South Atlantic dispute, from mediator between Argentina and Britain to supporter of Britain, the Bank is one of the important official bridges of communications left intact which ought to be used in the process of repairing the damage that has been done. Undoubtedly, international radicalism in Latin America, at a time when anti-U.S. rhetoric had descended to a relatively low level, has received a major political boost.
The future attitude of the United States to the multilateral banks raises a fundamental political and economic problem. That is whether the role of the multilateral development banks ought to expand or at least be maintained in real terms, or whether it ought to be curtailed. While there are many views within the U.S. Administration, there is a powerful feeling underlying a number of Treasury statements, namely that there is no place for the type of subsidies which the multilateral banks receive and grant to their borrowers. Under this view, which has become less pronounced in recent months, once the U.S. economic program is successful and interest rates have fallen, the benefits of a stable international capital market-for the developing countries with access to it-will far outweigh any benefits now received from subsidized credit from the multilateral development banks.
Such a view is obviously oversimplified and glosses over the fact that the cost to the taxpayer of the ordinary capital operations of the multilateral development banks has been small. In the case of the regular loans of the World Bank, of $3.7 billion in paid-in capital since its inception in 1945, the U.S. share has been $850 million and that of the other major industrialized countries $1.4 billion; these paid-in sums, without ever having had to lay claim to the $33 billion of callable but not paid-in guarantee capital, have enabled the Bank to mobilize over 35 years, largely by borrowing in international capital markets with the guarantee of its callable capital, $68 billion in loan commitments to the developing world. Incidentally, most of this has gone back to the industrialized countries in the form of purchases of services and machinery. In round numbers, for example, the U.S. contribution of $850 million in cash has probably brought it about $15 billion or so in orders for equipment and engineering services, a large part of which would otherwise probably not have taken place.
In the case of IDA, of course, which relies on budget allocations, the fiscal impact on the donor governments has been much more important, totaling $22 billion over 20 years of which the U.S. share has been roughly $8 billion (initially 40 percent, now roughly 29 percent). But this has to, be put in the context of the very limited resources of external capital aid available for the really poor countries, to which IDA limits its activities.
The issue of whether the contribution of the multilateral development banks ought to grow in relative terms should be examined, bearing in mind the fact that historically almost all the economies that have taken off have been assisted by major infusions of external capital. The United States itself is one historical example, while Taiwan, Korea and Israel are more recent instances. There is, of course, a question to be asked about the richer developing countries, whose relative need is declining for the type of technical and financial contribution which the multilateral banks can make. Clearly their relative importance in the total portfolio of the multilateral banks should decline. The speed partly depends, of course, on their own progress and that of the next tier of countries.
Another question is the actual project composition of the lending: as basic infrastructure (roads, ports, power and water) has lost relative importance to other activities where the private sector directly competes, such as oil and gas, mining and heavy industry, far more discussion is bound to arise on whether these are suitable areas for multilateral official lending. The effectiveness of some rural credit programs and of projects aimed at meeting "basic needs" has also been questioned, although the experience in these areas has probably been too short-lived to permit general conclusions.
Even if there is disagreement on these substantive but lateral issues, the fact remains that the multilateral development banks have been, over the years, the most tangible and measurable form of cooperation between the richer and the poorer nations. They have come to be taken for granted by the recipient countries, where they are not always popular because of the often stiff performance conditions attached to their loans. At Cancún there was much lip service in their direction. Yet, only a few months later we find that, instead of continuing forward, for the first time in 30 years we could be about to take a major step backward. And this is happening at a time when the outlook for commodity-exporting developing countries is particularly grim. Clearly, there is a need for a thorough public reexamination of the issues involved.
Meetings of the governors of the World Bank and of the Inter-American Development Bank cannot resolve these problems. Obviously, a good deal of bilateral informal negotiations with the U.S. government and other governments will be necessary. However, even if agreements are reached at this level, there is no guarantee at all that they would get legislative approval. There is therefore a need to agree first of all upon broad objectives that reconcile positions as much as possible, and which would provide the backing for detailed legislative recommendations later on.
Among these broad objectives, suggested here merely as points for discussion, might be the following:
- Agreement that support for the multilateral development banks is one of the most important and tangible ways in which the industrialized and capital surplus countries can demonstrate their concern for the majority of developing economies which need and can effectively use external capital at less than market terms. It is true that the bulk of external resources for the middle-income countries are likely to come from export credits and market loans and for the poorest countries, especially of Africa, from bilateral aid. But there is an important role to be played by multilateral financing, which is untied and which places much more emphasis on the quality of investments than other forms of capital flows, except for private investment.
- Recognition that both IDA and the Fund for Special Operations of the Inter-American Development Bank should continue to exist as long as the poorer countries have little or no access to market loans, should expand at an annual rate greater than inflation, and should focus increasingly on the poorest countries to the extent that is not already being done. The possibility of intermediate, less concessional, terms for countries which are not quite as poor ought to be contemplated, as is the case for the Fund for Special Operations. A definition is needed on the share of World Bank/IDA lending which will go to China. If China were to absorb a major share of World Bank lending, as it might, a greater expansion would be needed than at present contemplated of the resources of the regional banks.
- Support for the continued expansion of the ordinary capital activities of the multilateral development banks. Increases in capital, which are provided by all countries in line with their ability to pay, might include a lower portion in cash (at present ten percent) but not to the point that it unduly increases the debt burden of the multilateral banks. At the annual meeting of the Inter-American Development Bank held in Colombia in March 1982 some progress was made along these lines. Growth of personnel should be kept to a minimum.
- Recognition that some major contributors, particularly the United States, consider that much greater emphasis should be given than was the case in the recent past to the role of the private sector. This view would mean both that the multilateral banks should not undertake or finance projects which can be arranged on reasonable terms by other sources-a principle already central to their charters-and that they should give special financial and technical help to productive investment by the private sector, especially in agriculture and in projects where their presence tips the balance in favor of an investor coming in instead of abstaining.
Much of this may sound obvious. However, there is a danger that in the past we have lost sight of these objectives, so that consensus has disappeared on the very nature of the multilateral financial institutions. There is a need for a new dialogue to restore some consensus.
What forum is the right setting for this dialogue? None of the existing settings is entirely appropriate, since they are associated with other routine functions. A conference would achieve little. Perhaps a series of special rather informal meetings organized by an outside body might be a place to start. The Brookings Institution held such a one-day meeting early in January on the "Future of the World Bank." The "Development Committee" of the World Bank, a group of 20 finance ministers that meets twice a year, in theory could be a useful forum, but a revamping of its procedures would be required, such as reducing attendance at the meetings, eliminating set speeches and in general other changes to turn it into a working group instead of an assembly. In general, care has to be taken not to confine a new dialogue to the constituency of the "convinced," since that would be a waste of time.
At its spring 1982 meeting in Helsinki, the Development Committee made some progress, in the sense that a number of countries said that they were willing to de-link the level of their IDA contributions from that of the United States. Moreover, there appeared to be a slight easing in the approach of the United States, although the Secretary of the Treasury cautioned that Congress had not changed its basic attitude.
If there is a question with global implications, it is certainly that of energy. As a result of the sharp rises in oil prices in 1973 and again in 1978-79, major readjustments have taken place and are continuing to take place in the world economy. In the industrialized countries, stagflation, the restructuring of a large part of industry (for example, smaller cars, the shift of energy-intensive industries overseas closer to cheaper energy, the resurgence of coal), and a major reduction of oil consumption as a proportion of total energy use, have perhaps been the main features of the era of higher energy costs. The mushrooming growth of the Eurocurrency market, to over $1,800 billion gross (i.e., without deducting interbank deposits) at the end of 1981, was certainly stimulated by the need to park and recycle the oil-induced surpluses. For the oil-importing developing countries, the initial impact of the cost of higher oil imports was extremely heavy. Balance of payments deficits became very large and growth rates plummeted.
However, over time a significant number of the more prosperous or strongly managed countries have been able to snap back. A number of them have sharply expanded their domestic oil production horizons, either from scratch or from a modest base, including countries as diverse as Argentina, Guatemala, Peru, Ivory Coast, Cameroon, Sudan and the Philippines. Several of these are already oil exporters or well on their way to becoming exporters. Other countries, such as Brazil, have launched large-scale programs to replace oil with renewable fuels such as alcohol. The poorest countries, however, continue to be hard hit, despite substantial special credit help from the International Monetary Fund. Everywhere a shift is taking place from oil-burning power plants to coal, and additions to electric generation capacity are relying as much as possible on hydropower.
The oil price rises have not created the tension that might have been expected between the major oil exporters and the oil-importing developing countries. The North-South dialogue, which was in its heyday in the early and mid-1970s and was partly encouraged by OPEC, deflected some of the latent discontent toward longer-standing issues with the industrialized countries. Also, a number of the large OPEC producers started programs to finance the cost of higher oil imports by neighboring developing countries. Venezuela has been particularly forthcoming in the case of Central America and the Caribbean. For the majority of sub-Saharan African countries, however, the blow was hard. Without refineries of their own, they could not in any case have used Middle East OPEC crude and had to rely on imports of refined products from the oil companies at normal commercial terms.
Still, it is instructive to reflect upon the relative lack of confrontation between developing countries and OPEC on a subject as charged as that of oil prices. Perhaps the main reason is the deep emotional admiration among commodity-producing developing countries for OPEC. OPEC is viewed by them, as it were, as the kid who broke away from the slum and made good.
The present oil glut threatens to create a new energy complacency both in the industrialized and developing worlds. This could lead to a future serious setback. One should consider that the present glut may be the result of a rather unusual coincidence in time of three events: the normal cyclical decline in consumption as a result of the international and particularly the U.S. recession, the coincidence of this decline with the first really serious U.S. attempt at conservation (particularly smaller cars) since the Second World War, as a result of the oil price increase of 1979, and the combination of these two factors with relative peace in the Middle East. The last statement is arguable, in view of the revolution in Iran and the subsequent war with Iraq, but the initial impact of the conservation effort is a one-shot affair and the recession will be over one day. With declining prices, oil consumption is bound to recover somewhat, even without much of an economic recovery. The possibility of another oil crisis should therefore not be forgotten.
The bulk of developing countries face particularly serious energy problems. It is not simply a question of finance, but also of organization and the proper market signals. For the oil-importing countries, especially the poorest, there is the need to work out a "safety net" warding off the perils of sudden price increases and supply disruptions. This is not a global problem but rather suggests a bilateral discussion between major Middle East OPEC producers and African and Asian consumers: now when supplies appear plentiful is a good time to work on future arrangements. Within Latin America, a start has been made through the Latin American Energy Organization (OLADE).
A major challenge is how to meet increasing energy demand for countries which are at incipient stages of industrialization and in which, therefore, further income growth is highly energy-intensive. The World Bank rather conservatively estimates that commercial energy demand by the oil-importing developing countries (a rather broad category) is likely to increase from the equivalent of 14 million barrels a day in 1980 to 24 million barrels in 1990, or an annual growth of less than six percent. The share of oil in total supply would go down from 53 to 46 percent, as a result of a major investment effort in coal and hydropower, but the oil import requirement would still rise from 5.8 to 8.4 million barrels a day.1
The projection assumes rapid increases, which are in fact already taking place in some countries, in domestic oil production. The cost of the total energy investment effort is estimated at $40-50 billion (in 1980 dollars) annually, a number which is probably on the low side. It should be compared with a total gross national product (GNP) for the oil-importing developing countries in 1980 of about $1.5 trillion (i.e., $1,500 billion); this means that something on the order often to 15 percent of all investment in these countries will have to be devoted to energy in this decade, a large-scale effort which is proportionately significantly higher than in the last decade.
Numbers such as these prompted Robert McNamara, before his tenure as president of the World Bank ended in mid-1981, to suggest the creation of a special energy affiliate of the World Bank which would carry out a large lending program for energy. For the five-year period 1982-1986, a lending program of about $30 billion was envisaged, distributed 40 percent to electric power, one-third to oil and gas, and the rest to coal, traditional fuels, and conservation in industrial plants. The affiliate would legally be a separate institution, with its own capital. One unstated justification was that it would be easier to get fresh capital for such an undertaking, especially from the larger OPEC countries, because of the purpose of the new institution and because its capital structure could give these countries more voting power than they have in the World Bank itself. By separating out, at least in financial terms, the fastest growth sector of World Bank lending, it could be easier to get the additional capital needed both for the more traditional activities, diminished in relative terms, and for the new energy program.
The United States has strongly opposed this new initiative.2 In addition to much skepticism about the idea of creating another international organization, the U.S. Treasury questions the need for a large lending program for oil and gas (although it is fair to say that a ten billion dollar oil and gas program over five years, spread over many countries, can almost be considered small change). The program, it believes, would be directed largely for the benefit of state oil companies. The reason for this point is that the Bank cannot lend to the private sector without a government guarantee, and it is certainly unlikely that developing countries would feel justified in giving foreign oil companies such a guarantee. On more questionable ground, the Treasury considers the energy demand projections of the Bank to be exaggerated.
At Cancún, clear support was expressed by a wide variety of participants for the energy affiliate. But the matter rests for now, as the United States is quite unlikely to change its position and the other countries perhaps do not feel strongly enough on the subject to mount a major campaign for that purpose.
There remains, nevertheless, a need to clarify how the very substantial energy investment needs mentioned above are going to be met. A lot depends on proper planning and policies within each country. The role of the official agencies, especially the multilateral development banks, has to be defined.
One thing which is clear is that it is not possible to look at all "energy" from the same administrative standpoint. The contrasting cases of electricity and oil and gas illustrate the point. Investment in electric power, for example, is largely carried out by state-owned utilities in most of the world. Where hydroelectric projects are concerned, the bulk of the substantial capital costs, outside of primitive economies, are local (earthmoving, cement, civil works) and the imported component-which is what the multilateral development banks traditionally finance-is usually relatively low, maybe one-third of total project cost.
In oil and gas, on the other hand, the bulk of successful exploration and development investment has been done by the private sector. The overwhelming majority of investment-from seismic surveys to drill pipe, drilling rigs and engineering crews-is for imported costs. In most creditworthy countries, field development costs can usually be financed commercially, without any recourse to government or parent company guarantees, once a commercial field is proved to exist and a sufficiently strong sponsor exists who can develop it.
Coal stands somewhere between oil and gas on the one hand and hydroelectricity on the other: the role of government and the pattern of investment vary, but so far not much has been done in developing countries because of a lack of basic geological information. Geothermal electric generation has been another relatively neglected area.
The energy lending program, with or without an energy affiliate, gives the World Bank and also other multilateral banks an opportunity to build a bridge between the emphasis which the United States has been placing on the private sector in development and the Bank's own assessment of the need for a larger and more active role by it in energy. In oil and gas, the Bank should be able to maximize the use of its limited resources by emphasizing, for the middle-income countries which already have some access to the international capital market, guarantees rather than loans. The World Bank has not so far used the guarantee powers in its charter, under which a developing country would raise the loan in the capital market with the World Bank guarantee rather than obtaining a direct World Bank loan. It is felt that guarantees create a call on Bank capital in the same way that loans do and that the issue of guaranteed paper would create confusion in the capital markets.
On the other hand, oil and gas development projects, as investment and commercial bankers well know, provide the best opportunity available to enter the fixed-rate private placement market, as long as the sponsor is sufficiently strong or enjoys a guarantee such as that of the Bank or the regional banks behind the project. The Bank might guarantee the government portion of a joint venture, especially in countries which are graduating towards increasing use of the international capital market. While such a format would certainly not be applicable to the poorest countries, which are the ones which most need help, it bears studying. One bonus effect for the lender would be that guarantees do not carry the problem of insuring that borrowing costs are covered by lending interest rates, an issue that has bedeviled the finances of the multilateral development banks in recent years.
In the case of electricity, the financing needs of the middle-level developing countries are tremendous. In a number of rapidly industrializing countries, demand is growing at ten percent or more a year, which means that capacity has to be doubled every seven years or less. And this is occurring despite hefty utility tariff hikes, which reflect the high capital cost of hydropower facilities.
In Peru, for example, a country with moderate growth after a decade of slow growth and recession, we will have to spend an average of at least $600 million annually (in 1980 prices) in the 1980s for hydro facilities and long transmission lines in order to meet demand, plus another $100 million or so annually on small electric systems to increase the coverage of the population with access to electricity, especially in the Andes, from the present abysmally low proportion of 40 percent. This investment will represent about five percent of GNP or roughly one quarter of total gross domestic investment, a very large effort. For such programs to go ahead in the developing world, massive financing is needed from a variety of sources.
Long-term export credits for the imported equipment are today plentifully available from traditional suppliers and from new ones such as Argentina, Brazil and Korea; in order to take advantage of this financing, much of it from private sources, and at the same time be able to use loans from the multilateral banks-which bring with them financial discipline and proper planning-countries will have to convince the multilateral banks to be more flexible than in the past and be willing to finance a significant portion of local costs. What matters is whether the total financial structure of a program is properly balanced, rather than whether particular pieces of financing are attached to particular expenditures. There is a major role for the multilateral banks here; otherwise, the temptation will be to rely excessively on medium-term Eurodollar loans which would lead, as is already happening in the case of some power systems, to a debt service crunch.
The financing of investment in energy by developing countries would perhaps not be advanced significantly by "global negotiations," but there are certainly enough questions of general relevance which bear discussion at an international level. The Cancún meeting advanced the idea of a World Energy Plan. While the idea has some obvious pitfalls, there is merit in adding up the numbers and trying to think of imaginative ways in which the energy investment challenge which most developing economies face in the 1980s can be met.
An international working group on energy might be worth considering. There clearly would be skepticism about such an initiative if it were to lead to another international organization. However, there may be room for a dialogue among a small number of representatives from four groups: OPEC, the oil-importing industrial countries-basically the OECD countries grouped in the International Energy Agency-the oil-importing developing countries, and a fourth group which would include the non-OPEC oil-exporters, most of which are minor exporters, with the exception of Mexico.
As I said at the start of this article, my objective has not been to focus systematically on the major points which might be the subject of global negotiations after Cancún. Instead, I have focused on two subjects, the role of the multilateral development banks and the financing of energy, where I feel that there is at present a stalemate between the United States and the majority of other countries interested in multilateral efforts at development. I have tried to suggest some approaches to breaking the stalemate. In recent months there are hopeful signs of a rapprochement. Without it, there is a risk of going backward in these areas, so that Cancún would simply have been a rhetorical exercise instead of a step on the path of progress.
Food and agriculture and commodity price stabilization are two subjects I have not covered. The first bears a comment. Certainly, it is an area where recent U.S. post-Cancún aid initiatives are greatly welcome. Agriculture remains the key to employment and growth in most developing economies, but it is surprising how many countries repeat the same mistakes year after year in their agricultural policies. Farm prices are held artificially low, marketing is controlled by bureaucrats, fertilizer distribution is centralized, artificially overvalued exchange rates are maintained, no storage is provided, feeder roads are not built, and so on.
Some major countries, Brazil and India for example, have made very large strides by taking a different, more market-oriented approach. Brazil is a major agricultural exporter, and in the last five years India has become virtually self-sufficient in foodgrains. But in sub-Saharan Africa and much of Latin America-including Peru-farm output has lagged behind population growth, and nutrition standards have deteriorated in the last 20 years. To what extent an international effort can help is quite uncertain, although the question of agriculture in the poorest countries remains at the top of the international development agenda.
Cancún may end up having been little more than rhetoric and symbolism. At least it should be a reminder that there are a number of issues and areas where substantial progress has been made in recent years and where there could now be a danger of stopping the progress achieved or even of going backward. These issues should be the first priority of any further negotiations, each in a setting suitable for the subject. If that much can be achieved, it will be real progress.
1 World Development Report 1981, Washington: The World Bank, 1981. The calculations do not include China, which is self-sufficient in energy.
2 See An Examination of the World Bank Energy Lending Program, Office of the Assistant Secretary for International Affairs, Department of the Treasury, July 28, 1981.