In Praise of Lesser Evils
Can Realism Repair Foreign Policy?
"Hope," said Sir Francis Bacon, "is a good breakfast but it is a poor supper." The 1960s began with hope for the economically underdeveloped countries, but it is becoming uncertain how they will end. Unless the Development Decade, as President Kennedy christened it, receives greater sustenance, it may, in fact, recede into history as a decade of disappointment. The amount of finance moving from the developed to the underdeveloped world is not rising; and the present trend is for the growth of the low-income countries slowly to lose momentum.
Almost two-thirds of the world's population live in underdeveloped countries; but they have only one-sixth of the world's income. The condition of mankind can be outlined quickly with a few brutal statistics. Defining countries with a per capita income of under $100 as very poor, those with a per capita income of from $100 to $250 as poor, those with a per capita income between $250 and $750 as being of middle income, and those with a per capita income of more than $750 as the high-income countries, here is how the world's people are distributed:[i]
Very Poor 990 million Middle-Income 390 million Poor 1,150 million High-Income 810 million
Just how poor the approximately two-thirds of the world in the Very Poor and Poor Countries are is illustrated by comparing their per capita income of less than $250 with the average per capita income of $1,400 in the Common Market countries (population: 175 million), and the United States' (population: 194 million) per capita income of about $3,000.
The underdeveloped countries are seeking to enter the twentieth century, but many of them, in some respects, have not yet reached the nineteenth. Many still need to achieve the preconditions of industrialization, including stable government, an acquisitive outlook and technical capacity. The price of admission to industrial society, moreover, is much higher than it was a century ago. Technology is costlier, capital requirements are greater, established producers are harder to overtake in world commercial competition.
The aim of the Development Decade is for the underdeveloped countries, as a group, to reach a yearly rate of economic growth of 5 percent. In the period 1950-54, the rate of increase in their gross national product did approximate that figure. But in 1955-60 it dropped to 4.5 percent; and in 1960-64 it was 4 percent. When allowance is made for population growth, per capita income in about half the 80 underdeveloped countries which are members of the World Bank is rising by only 1 percent a year or less. Even to keep abreast of recent high rates of population growth is not a negligible achievement, but it is far from sufficient. The average per capita income in this lagging group is no more than $120 a year. At a 1 percent growth rate, income levels will hardly reach $170 annually by the year 2000. In some countries they will be much lower.
This is crude arithmetic. But its implications are plain and sobering. If present trends are allowed to continue, there will be no adequate improvement in living standards in vast areas of the globe for the balance of this century. Yet, over the same period, the richer countries will be substantially increasing their wealth. In the United States, for example, the present per capita income of about $3,000 a year will, if it continues to grow at the current per capita rate, reach about $4,500 by the end of the century. In other words, one group's per capita income will increase over this period by $50, while America's will increase by about $1,500.
As the gap widens intolerably, one is bound to wonder when the fine sentiments so eloquently and so often expressed by leaders in all the industrial nations will give way to positive action to help raise the living standards of the developing countries at a much faster rate. For how much longer can the industrial nations justify the relatively low place that development finance has hitherto been accorded in their list of priorities?
An important difference between economic development in the twentieth century and past times is that today the rich nations have accepted a measure of responsibility for the progress of the poor. Outside the Soviet and Chinese blocs, a score of countries-including Israel and the Sheikhdom of Kuwait-have institutions for granting aid to other countries, and these institutions are constantly evolving in the direction of greater professionalism and efficiency. In the past two years, for example, Canada, the Netherlands, Sweden and the United Kingdom have all reorganized their aid effort to bring a fuller weight of knowledge and experience to bear on development problems.
Since the war, very imposing machinery of multi-national and international organizations also has been built to promote economic growth. The old Marshall Plan organization in Europe has acquired a world-wide outlook in its reincarnation as the Organization for Economic Coöperation and Development (O.E.C.D.), an important center for coördinating the policies and techniques of the aid-giving countries. The development fund associated with the European Economic Community has opened its horn of plenty to the lands of Africa. A development bank has been established to serve the interests of the Latin American countries, and the Inter-American Committee for the Alliance for Progress (C.I.A.P.) is establishing priorities for the financing of Latin American development. A regional African bank, owned entirely by African states, has called up its first capital; and an Asian development bank promises to become a reality in 1966.
The World Bank has shared in this evolution, to a point where it would scarcely be recognized by the founders who wrote its charter just over 20 years ago. Originally intended to operate chiefly as a guarantor of loans by others, the Bank from the beginning has been a lender on its own account. In the fiscal year which ended last June 30, it lent more than $1 billion. Since its creation, the Bank has given birth to two affiliates: the International Finance Corporation (I.F.C.), established in 1956 to specialize in the financing of productive private projects in the underdeveloped countries; and the International Development Association (IDA), established in 1960 to make development finance available on special terms to countries too poor to borrow at conventional rates of interest and repayment. From being purely a lending institution, the Bank has widened its activities to include, amongst other things, a substantial program of technical assistance, designed to improve the quality of development programing in its member countries and to assist them in drawing up specific development projects for financing.
Other patterns of bilateral and multilateral coöperation are taking form. Among the most promising are the groups, consisting of aid-giving countries and international financial agencies, organized to coördinate the flow of finance and technical assistance to particular underdeveloped countries. Groups of this kind now exist for eleven countries; two (for Greece and Turkey) organized by the O.E.C.D., one (for Ecuador) by the Inter-American Development Bank, and the remainder (for India, Pakistan, Colombia, Malaysia, Nigeria, Sudan, Thailand and Tunisia) by the World Bank (in company with IDA). Others are in prospect.
Each consultative group has one essential objective; to increase productivity by accelerating economic growth. Its members seek to accomplish this purpose in several ways. In the first place, the arrangement is designed to provide the several aid-givers with informed, objective analyses of the country's needs for external finance and technical assistance-not only the amounts it could effectively use, but also the appropriate terms of financing and the purposes that deserve priority. Second, the group aims at enhancing the developing country's ability to invest by helping in the planning of development, in the preparation and screening of projects and by advising on administrative or financial problems and the like. It also undertakes, in coöperation with the recipient country, a continuous assessment of progress, and attempts to work out agreed solutions to development problems as they arise. We expect that these consultations will encourage the coöperation and mutual trust that is so necessary between the providers of finance and those who receive it, and we hope that a more adequate and assured flow of finance will be the result.
On a more general plane, the concerns of the industrial and the underdeveloped countries are brought together in the working committees of the new United Nations Trade and Development Board, created as a result of the U.N. Conference on Trade and Development (UNCTAD) in 1964. Among the accomplishments of this meeting was the focusing of attention on some of the major problems of the underdeveloped world-among them, the "commodity problem" and the necessity for a continuing and adequate flow of capital to the developing countries.
Of the 80 or so underdeveloped countries of the world, more than 30 depend for more than half their foreign-exchange earnings on exports of a single crop or commodity, and many others are heavily dependent on exports of only two. The rate at which the underdeveloped countries can invest in their own growth depends very largely on how these commodities fare in international trade; what their exports earn brings the developing world four times as much foreign exchange as loans, grants and direct investments from abroad.
But as a source of income, primary commodities are notoriously fickle. Fluctuations of production and demand may cause export earnings to swing up or down by as much as 50 percent in a single year. The long-term trend of commodity earnings, however, is that they decline as a proportion of world trade. Over the years 1950-62, the export income of the underdeveloped countries rose by an annual average of only 3.5 percent-not enough, by itself, to sustain adequate imports of the equipment and materials the low- income countries must have for economic progress.
The slow and uncertain growth of export earnings exerts pressures leading to fiscal imbalance, inflation and stagnation of constructive effort; it retards development, upsets continuity of investment and diminishes the impact of external finance. In the medium term, the commodity problem may be mitigated by international commodity agreements. In the short term, some way has to be found of cushioning a developing country against the effect of a sudden drop in export earnings on which it has been relying for the financing of its development plan. In the long run-a span that may stretch for a generation or more-the solution must be for the developing countries to diversify their production to a wider range of goods; and the industrial nations, as a matter of trade policy, must show a more hospitable attitude toward the exports of the developing nations.
In 1966, both the high-income and the underdeveloped countries need to give renewed and purposeful attention to this problem. Two initiatives in which the World Bank is joining should eventually help. The first is a study, organized jointly by the International Coffee Organization, the U.N. Food and Agriculture Organization and the Bank. The study will examine the needs of coffee-producing countries to diversify into other lines of production which would impart greater strength and stability to their economies, and will try to identify the possibilities that they have for doing so. A dozen countries in Latin America and Africa depend on coffee as a major source of export earnings; and coffee exhibits some of the worst features of the commodity problem. By making studies of the possibilities and problems of diversification, the coffee group will develop a better notion of the long- term supply situation on the world coffee market, thereby investigating the basic factors involved in long-term market stabilization.
The other initiative stems from a proposal, put forward by the United Kingdom and Swedish delegations to UNCTAD, which the Conference asked the World Bank to study. The proposal aims at defending development programs from the dangers of disruption arising from unexpected shortages in export earnings, by providing supplemental resources under certain conditions to be agreed upon. As I write, our staff study is in its final drafting stages and will soon be forwarded to the United Nations. It examines the many facets of the problem, and outlines a possible approach based on continuous consultation with the developing countries and close collaboration with the International Monetary Fund.
The continuing need of the underdeveloped world for an adequate flow of external capital is given added urgency by what might be called the "debt explosion." In 1956, the outstanding international debt of the low-income countries, stemming from public sources or carrying governmental guarantees, was estimated at just under $10 billion. In 1964, it reached an estimated $33 billion. Because of rising interest rates and the accumulation of short-term debt, the amount of money needed each year to service this debt climbed even faster. From 1956 to 1964, it rose over four times, from $800 million to $3.5 billion.
The external debt of many developing countries, of course, was bound to rise rapidly. These countries were newly independent; they had little debt to begin with, but increased it rapidly as they plunged with energy and enthusiasm into economic development. At the same time, there was much unwise borrowing-brought about in part, it should be added, by the proffering of credit from the industrial nations for an unrealistically short term and in some cases for purposes of little economic value.
In any case, the underdeveloped countries as a whole must now devote more than a tenth of their foreign-exchange earnings to debt service; and the figure is still rising. These levels of debt service are dangerously high. They mean that a good part of the countries' foreign-exchange resources must be devoted to servicing previous obligations rather than to new productive development. Indeed, when all amortization, interest and dividend payments are taken into account, the backflow of some $6 billion from the developing countries offsets about half the gross capital inflow which these countries receive. These payments are continuing to rise at an accelerating rate, and in a little more than 15 years, on present form, would offset the inflow completely. In short, to go on doing what the capital-exporting countries are now doing will, in the not too long run, amount to doing nothing at all.
More finance is needed, and on terms more appropriate to the facts of life in the underdeveloped countries. Although the need for more favorable terms is universally accepted in principle-and the United Kingdom and Canada recently have taken laudable steps toward meeting it-further steps need to be taken if we are to guard against cases of default and serious interruption of capital flow. And the harm done by defaults is much deeper than statistics can indicate; it is truly incalculable.
The solution of the debt problem is within the power and the means of the developed countries. They can ease their own terms, and they can dispense finance through other channels. One of the latter is the Bank's affiliate, IDA, the major international institution for transferring capital to the low-income countries on concessional terms. IDA's clients so far comprise 29 of the poorest nations; its credits are extended free of interest (although there is a small service charge) and for a term of 50 years. Principles similar to those of the Bank are followed by IDA in appraising projects and negotiating credits. The same high standards have to be met; only the terms are different. There is no separate IDA staff; the Bank's experts are IDA's experts, and over the years the Bank has assembled a multi-national professional staff of high quality and with a wealth of experience to handle the growing range of responsibilities in the development field.
Unlike the Bank, however, IDA cannot raise funds by borrowing in the capital markets, and its earnings are miniscule. By far the largest part of its resources has originated from the governments of the high-income countries-from their initial subscriptions and from later contributions-and these resources have been supplemented at the close of each of the last two fiscal years by transfers of $50 and $75 million from the Bank's net income. The total of convertible funds so far at the disposal of IDA has amounted to just under $1.7 billion. The amount that it has committed in credits has now topped the $1 billion mark. If IDA is to continue, further authorizations to make commitments must be obtained in 1966 from the governments of the high-income countries among its members. Actual appropriations of funds, which involve budgets and affect balance-of- payments figures, are not required for two to three years after commitment.
The prime ingredient of economic progress in the underdeveloped countries is their own effort in mobilizing and using their own resources. It is this effort, fundamentally, which determines the rate of growth; it is this effort which provides a basis for external assistance to be received and used effectively.
In many of the underdeveloped countries, economic performance must be greatly improved. Many can take more effective measures to increase the mobilization of capital through taxation and through incentives to investment, both domestic and international. It is urgent to cut down some of the biggest items of waste-excessive military expenditures, prestige projects, inefficient administration and subsidies to public services that should be self-supporting. Measures are widely needed to keep excessive population growth from devouring the hard-won gains of development. Recent technical advances and birth-control methods have proved dramatically effective in pilot projects and give real hope that, for example in India, the growth in population may at last be slowed down. Nearly all the developing countries can redouble their efforts to overcome the lag in agricultural productivity. Agriculture, now generally recognized as the most vital economic sector, is generally the most feeble. And yet, in those places where land reform and the difficult transition from ancient to modern agricultural methods are being effected, hope for solid improvement in productivity runs high.
Some countries, in spite of many obstacles, are nevertheless making good progress in achieving rising living standards for their people. Among the developing countries in the Bank's membership, a score in the recent past have attained rates of 5 percent in annual growth of real income, the target rate of the Development Decade. Mexico and Venezuela, for example, have been blazing a trail that can be followed by an increasing number of their Latin American neighbors. On the other side of the world, Thailand and Nationalist China, among others, have attained high growth rates; and up to the time when the hostilities in Kashmir began, the economy of Pakistan had been showing a marked response to a determined government's efforts to invigorate agriculture, support industrial expansion and mobilize domestic financial resources. In the Arab world, growth has accelerated in Libya and Tunisia. These stars in the development firmament are not alone in catching the eye; others, too, are visibly gaining in strength.
Despite differences in the achievements of individual developing nations, and despite some discouraging failures among them, the underdeveloped countries as a group are growing in their ability to carry out investment. Their development institutions are becoming more firmly established, education and skills are spreading, administrative and managerial abilities are improving, and program and project planning is becoming more effective.
I am concerned that, with the time now ripe to take advantage of these opportunities, there is no parallel upward trend in the movement of financial resources to the low-income countries. The gross official flow of long-term capital from the countries represented in O.E.C.D.'s Development Assistance Committee (DAC) has remained about the same since 1961. This is despite a rise in the gross national product of the industrial countries over that period of from 4 to 5 percent annually-in other words by perhaps $40 billion a year-with the result that the amount of net official finance represents a dwindling proportion of the aid-givers' national income. If the backflow of amortization payments, profits, dividends and interest is also taken into account, the DAC countries' annual net contribution which would actually represent finance for the developing countries' current import capacity has been about $6 billion, or about 6/10ths of 1 percent of their gross national product.
A preliminary study made by the World Bank staff, utilizing available data and their own experienced judgment, suggests that the developing countries could put to constructive use, over the next five years, some $3 to $4 billion more each year than is currently being made available to them. It may be tempting to suggest that these countries accommodate themselves to what is currently available, on the grounds that it would be a mistake to increase the flow until the recipients had learned more about the effective uses of external resources and considerably diminished their present level of indebtedness. But neither an improvement in the handling of investments nor a constructive easing of the debt burden will be achieved simply by holding down the level of the flow of external resources.
The suggestion that more aid be made available to the developing countries, and on better terms, is in fact a call for a marked change of outlook on the part of the donor countries. It is true that the industrial nations face difficulties in persuading reluctant legislatures to muster resources for the peoples who must have their help. But development finance is not a thing that can be turned on and off like a tap. Any slowdown or lack of orderly and consistent acceleration in its provision means a slowdown in development, though it may take two years or more before the effects of this become apparent. A decision at that stage to counter the ill effects with an increase in financing will also be followed by an interval of years while momentum is regained, and in the meantime some countries may be tempted to retreat into an isolation of despair. The need therefore is for more action now, and there can be no doubt that, in spite of all the problems and difficulties, the basic economic and financial position of the high-income countries is strong enough to support such an increase.
From every point of view, the time is now ripe for the capital-exporting countries to come to a major and irrevocable decision about development assistance. A vast store of knowledge and experience in development-a whole new technology-is at their disposal; there is no lack of able professionals ready to apply it; the need for its application grows daily more insistent; the industrialized world has itself voiced acknowledgment of the urgency of the situation. With so much already done, and so much still left to do, it would be unthinkable for the richer nations, by their inaction, to let the developing world lose hold of its hard-won gains and lose sight of its ultimate goals.
[i] See Escort Reid, "The Future of the World Bank," p. 60-63 (International Bank for Reconstruction and Development, Washington, D.C, 1965). The population of mainland China (700 million) is included in the 1,150 million population estimate for the Poor Countries.