World Banking Blues
By NICHOLAS
DAVENPORT
WHILE the world revolution marches on, upsetting the old order of things in Latin America, Africa, the Middle East, the Far East, while the political leaders of the Western powers try desperately to adjust themselves to this furious wind of change, the dear old financial establishment sits in its ivory tower oblivious of it all, blind to the needs of a new world and clinging to its ancient cere- monies and techniques. Last week I had occasion to express astonishment at the `inquisitor' general of the International Monetary Fund who in- flicted us with a 7 per cent. Bank rate as the price of a rescue loan and now tells the mem- bers of his gold-exchange club in effect that they must put sound money before growth. This week I must deplore the limitations of that worthy institution the World Bank, whose good works, as its new report shows, become increasingly ex- pensive.
In the year to June, 1961, the World Bank lent $610 million, bringing the total of its commit- ments (net of cancellations and refundings) to $5,669 million. The interest it charges is now 5f per cent., exclusive of commission and sink- ing funds. More than two-thirds of the Bank's lending is for basic investment in transport and electric power and for this form of essential public works 51 per cent., coming on top of the other loan expenses, is much too high. The ex- cuse is, of course, that the Bank has to pay more for its own borrowings. Last year, for example, it was borrowing at the rate of 4 per cent. and 41 per cent. in Germany and Switzerland; it has paid as much as 5 per cent. on some previous loans. As one of the Bank's objectives under its constitution is to promote international invest- ment, it is borrowing more and more from pri- vate investors. Naturally these private investors want the market rate and if this is to be left to the `law' of supply (restricted) and demand (insatiable) the rate is bound to rise and the de- velopment finance of the poorer half of the world by the richer (capitalist) half will in time become prohibitive. The President of the Bank himself has admitted that the charges imposed are already tending to put some of the borrowing countries into balance-of-payment difficulties.
Far be it from me to disparage the work of the World Bank. Under the able leadership of Mr. Eugene Black it has done a wonderful job. In 1960 it brought off the Indus basin settlement and so ended the long-standing dispute between India and Pakistan. Fifty million people in the two countries will benefit from the development of these water resources. In its last financial year it helped to solve the problem of India's third- year plan by calling together a consortium of the countries interested in the finance. This far- reaching and well-conceived plan, which officially began in April, 1961, will call for an investment (public and private) of $20,000 million and foreign exchange assistance will be needed to the extent of $6,000 million. The World Bank got the consortium to agree last May to provide over $2,000 million for the first two years (USA $1,045 million, Germany $425 million, the UK $250 million and the World Bank $400 million). The Bank also helped to arrange another con- sortium for the Pakistan second-year plan which called for $4,000 million.
The totals of these two great plans should suffice to show how inadequate are the resources of the World• Bank in relation to the ever- increasing demands for aid from the under- developed and uncommitted nations. And how puny the finance provided for its offshoot—the International Development Association—which was formed in September, 1960, with the same executive directors. At the end of its first fiscal year subscriptions of only $900 million had been promised. The IDA was intended to provide capital on more liberal terms of repayment than is offered by the expensive World Bank. It has so far provided credits of a total of $101 million for four countries (India, Honduras, Chile and the Sudan), which are fixed for fifty years without interest. Amortisation is to begin after a ten-year period of grace. This is pre- cisely the sort of aid which is needed, but it is a mere drop in the bucket. Something must be done quickly to transform the IDA from an appendage to the World Bank into something worthy of a first-aid-providing instrument of the United Nations, which it was intended to be. With the expert technical staff of the World Bank at its disposal to advise on development plans, the IDA, freed from the cramping and expensive financial techniques of the banking establishment, could be the angel of deliverance for the uncommitted nations crying out for aid.
It is time that the Western powers called a monetary conference to reconsider their whole financial system and techniques. The level of international reserves is inadequate for the world's trading needs; the gold-exchange stan- dard as operated, or not operated, by the IMF is out of 'date; the refusal to write-up up the price of gold is putting a strain on the `reserve' currencies they cannot bear; the circulation of hot money from one monetary centre to another; set in perpetual motion by the interest rates differentials, has become a bad joke; finally, the finance of the development programmes of the poorer nations is breaking down. And time is running out. Unless these underdeveloped nations get their aid without expensive financial tie-ups they will turn to the Soviet Union.
It seems to me that the West is being ham- strung by its own financial system. It has allowed itself to be mesmerised by that ancient financial mystery—the cult of the rate of interest. The manipulation of money rates is supposed to secure price stability and economic equilibrium, but this magic has been tried and found wanting in the UK and elsewhere. The more thoughtful of our own economists are already challenging the validity of the old-fashioned monetary policY which the Conservative Government has fol- lowed since 1951. In the Three Banks Reviel!' Professor Thomas Wilson, of Glasgow Univer• sity, has suggested that the attempt to check in* flation by monetary methods is proving mote costly in terms of output than can reasonably be justified. In the Economist Sir Robert Hall, late chief economic adviser to the Government. is calling for a radical change in national habits of thought in regard to the problem of price stability. Both these economists, I fancy, would see, as I do, a solution of this problem onlY through a positive wages policy and a direct approach to labour. Let the British Government take note of these domestic warnings and call an international monetary conference through the agency of the new OEDC. The fact that an expert international committee, set up by its pre' decessor, the OEEC, to report on the problem Of rising prices presented a nearly unanimous re: port proves that it is possible to get economic experts to agree. 1 suggest Sir Robert Hall 44' head of the new inquiry.
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