ANNUAL ADDRESS BY EUGENE R. BLACK, PRESIDENT OF THE BANK T IS A PLEASUREto again welcome you to Washington. have lent over $214 million. Asia, which in earlier I I would like to extend a special word of welcome to years presented few opportunities for Bank lending, the representatives of our four newest members-The has received more loan capital in the past 15 months Republic of Ireland, Saudi Arabia, Sudan and Ghana. than any other continent. We now have 64 member countries, 12 of which have There was also increased emphasis on lending for become independent nations since World War II. industry. In support of India's privately-owned steel This is the ninth of the Bank's Annual Reports that industry, the Bank lent $20 million to double the I have been privileged to present to you. On the steel-finishing capacity of the Indian Iron and Steel Biblical precedent-and even on the economists' Company. This follows up the $75 million loan the conventional reckonings of business fluctuations-the Bank made last year to Tata Iron and Steel Company fat years should by now be well behind us, and the which will help increase capacity at Tata's main works lean ones should be with us. There were certainly by 60%. Another loan is financing a strip mill at the times during the past year when events gave cause for Kawasaki Steel Corporation in Japan. Large loans in some anxiety. Happenings in the Middle East threat- Australia, Iran and Italy will also be partly used to ened to bring major economic dislocation and, at promote the growth of industry. Although basic times, the world outlook has been bleak. services will no doubt continue to claim the lion's In some countries political instability has slowed share of the Bank's activities, it seems that with the down the rate of growth; in others, failure to maintain present world-wide shortage of capital our funds will sound economic and fiscal policies has frustrated be in increasing demand for large-scale industrial hopes of progress. investments. Prices are, on the whole, still rising-slowly and In the field of electric power, the year's largest loan unobtrusively in some countries, but at an alarming was made to Uruguay. This will help to build a pace in others. This movement has continued to eat hydroelectric project harnessing important water away the value of money. In nearly every part of the resources in the interior. With the aid of this and two world, investment demand has been high with the earlier loans, Uruguay will increase its total generating supply of savings insufficient to meet it. In these capacity by over 100 per cent. Other power loans circumstances interest rates have climbed to new peaks. included finance for the construction of three hydro- Yet the picture as a whole shows further progress electric stations in Chile and completion of a major and continued high production. In many countries in hydroelectric undertaking on the Danube in Austria. all parts of the world real income remains at an Since the end of the year under review, the Bank has all-time record. International trade and export earn- lent $66 million for the large Yanhee project in ings have grown at a very rapid pace, thus providing Thailand. one of the most important foundations for further We have also continued to lend for transport. Two borrowing abroad. of the year's loans are helping to open up remote In this setting of continued economic expansion, I areas of Africa. In Ethiopia new roads are being built can once more report a large amount lent by the Bank to penetrate rich agricultural land. A network of and important additions to its capital resources. dependable highways already completed has contrib- During the fiscal year which ended last June we again uted to doubling the volume of Ethiopia's principal made loans totaling nearly $400 million. And already exports. In Ruanda-Urundi, lying in the very heart of in the three months that have elapsed since then, we Africa, a loan will help to improve transport services 7 radiating from the administrative capital. In the Another source of finance upon which we were able current fiscal year the Bank has lent $90 million for to draw was our 18% capital. During the year we improvements on the Indian railways. received more than $100 million from new releases- Two loans for air transport will help Australia and about the same amount as in the previous year. With India to acquire the latest types of aircraft for their our rate of disbursements continuing to rise and in air lines. At the same time these loans helped the the interests of the further expansion of the Bank's borrowing countries to widen their access to sources lending operations, I felt it my duty to draw attention of private capital abroad. Both were linked with the to the large sums that had not yet been released. In raising of funds in the New York capital market by subsequent discussions that we have had with member these two countries. governments, we have on the whole found growing Finally, I ought to make brief mention of our loans understanding of the Bank's position and increasing for agriculture. These provided substantial sums for recognition of the need to make the whole 18% farm improvement in Italy. They furnished foreign capital available to the Bank as soon as possible. If I exchange some of which was used for imports of farm seem to return to this subject unduly often, it is equipment in Australia. Smaller but nevertheless because of my conviction that ready access to the significant sums are providing more plentiful farm 18% capital was one of the basic assumptions on credit in Costa Rica and financing land reclamation which the Bank was founded. It is vital to the full in Japan. development of its strength. This volume and diversity of lending would not Another important source of funds during the year have been possible without large additions to our was, of course, our net earnings. This year's figure borrowed funds. In fact, during the past year we of $36 million was, in fact, a record. borrowed nearly $325 million-more than in any Apart from our lending we have continued to previous fiscal year. We re-entered the New York receive, and to meet to the best of our ability, a market on a substantial scale for the first time in three variety of requests for assistance of other kinds. I years, and sold two bond issues of $100 million each. might perhaps mention one of a new and interesting We also sold a United States dollar bond issue, in a nature. The potentialities of atomic fission for meeting principal amount of $75 million, entirely outside the part of the mounting need for power in countries with United States. Moreover the Bank obtained a loan high-cost conventional fuels have been discussed at from the Swiss Government equivalent to nearly length both at our meeting last year and in many $50 million. This was our first direct borrowing from other places. Recently we completed arrangements a government. In addition, shortly after the end of the with the Italian Government to undertake a joint year we borrowed $100 million from the central bank study of the commercial feasibility of producing of Germany. electric power from atomic energy in southern Italy It speaks well of the Bank's financial standing and of the best site and design for a reactor. I believe around the world, I think, that apart from its bond that a thorough and impartial study of this kind will sales within the United States, it has within the last not only be valuable for Italy but will also provide 15 months been able to place its securities in more data useful in assessing the possibilities of using atomic than 20 other countries in an amount equivalent to energy elsewhere. $222 million. In addition, I can announce to you that The debates of the next few days will cover some we have now made another agreement with the central very timely and important matters. Doubtless you will bank of Germany under which we will borrow $75 be discussing the shortage of capital, particularly in million. Even without taking this transaction into the less developed countries. Stress will be put on the account, more than one-half the Bank's outstanding urgent need for more external capital for the develop- obligations are now held outside the United States. ment of the less developed lands. There will also be, 8 I am sure, considerable discussion of the problems of productive investment must be balanced with con- inflation. I would like in the time left to me today to cessions to the traditions of the people and with a try to put these matters in perspective. legitimate concern for national defense. These subjects occupy our thoughts today because Governments cannot afford to take great risks with they are basic to the difficulties which loom so large the food supply in order to build steel mills with labor in so many of the countries represented here. We all driven from the land; there must be a balance between feel the pressure of investment demands on the industry and agriculture. And free governments cannot limited supply of savings available for investment; the seal themselves off from the world and demand of need to increase foreign exchange earnings and the their people great sacrifices in the name of self- difficulties that stand in the way; the many competing sufficiency; they must earn the trade and investment and conflicting claims which governments everywhere of the outside world to provide goods and services for today have to reconcile with the limited means at their development programs; they must balance invest- their command. ment for export with investment for the home market. In large part, all of these problems are signs of The largest single cause of imbalance is the volume growing pains-the natural consequence of a decade of unproductive investment which governments feel of unprecedented growth in the world and of the they have to undertake. One obvious item is military compelling desire to go on growing. While circum- expenditure. Many countries today are spending one- stances differ from country to country, some govern- quarter or one-third or more of their budgets on arms, ments are clearly running out of breath simply because and often the foreign exchange drain is even more they have been running very fast-sometimes, indeed, burdensome. too fast. From a strictly economic point of view, It is a trite observation to say that this is a sad therefore, today's problems need not be cause for commentary on the progress that humanity has made undue discouragement or alarm. toward a better and a fuller life. The hard facts are, The shortage of development capital and the dangers however, that many countries are today exposed to of inflation are more serious when viewed as political threats to their security; defense priorities are heavy; problems. The past decade was one of record promises the need for sizable military establishments make as well as record achievement. If practice does not difficult and courageous choices unavoidable. Where continue to live up to promise, at least in part, many these circumstances exist, one must refrain from governments may face stormy weather. If the economic criticism. course is fairly easy to chart, holding the ship of state But do they everywhere exist? Are there not too on that course is going to require some difficult and many governments today who, for reasons no more courageous decisions. valid than prestige, or ostentation, are channeling into Those decisions, in my view, relate primarily to expenditure on arms scarce resources which are thus questions of balance-balance between consumption denied to the needs of development? Where this is and investment; balance between productive and non- happening I think that great risks are being taken with productive investment; balance between industry and the hopes and expectations of their people for eco- agriculture, balance between investment to increase nomic growth. export earnings and investment for the home market. There is another, equally large, category of non- People will not voluntarily save for tomorrow if productive investment causing imbalance in the less they cannot today see some improvement from the developed countries today which might be labeled, investment of yesterday; in a free society there must simply, waste. be a balance between rising consumption and rising Some waste is inevitable in any development investment. And free governments cannot give invest- process. Perhaps considerable waste is inevitable in ment an overriding priority over all other concerns; those countries which have recently achieved their 9 national independence and are experimenting with the today is to fix the price of utility services at a figure forms of free, self-government, while being at the same which, in fact, entails a subsidy for the benefit of those time weighed down by a tremendous load of legitimate consumers best able to pay. This approach seriously development demands. distorts development. It remains true, however, that every ill-planned or The economic facts of life may not be the most badly-executed development project not merely con- inspiring facts with which to persuade people. They sumes scarce resources; it also undermines the faith may not always be the most important facts. But of people in the ability of free governments to produce decisions of policy, reached without giving them due concrete results to buttress their promises. Power weight, will almost certainly lead to a maximum of plants so built that they operate far below their waste and distortion and a minimum of higher living capacity; new highways constructed at the expense of standards. failing to maintain old ones; new farm land that is A third, and perhaps most important, cause of cleared and irrigated and then left to lie fallow; social imbalance in the development of the less developed expenditure undertaken without the talent or the countries today is simply the fact that some govern- resources to make the service useful-all these things ments are trying to do too much. The serious threat are monuments to waste. of inflation makes it extremely dangerous for govern- I frankly think a great deal of this kind of waste ments to extend their activities beyond those areas stems, not from a lack of knowledge, but from where only government can provide the necessary inadequate weight being given to the evidence of capital. financial and economic experts in the countries con- Particularly, I deplore the decisions of governments cerned. It stems from decisions based more on short- which tend to reduce investment in their own legiti- range political considerations than on economic facts. mate spheres of activity in order to branch out into One area in which this tendency prevails to a fields where private enterprise, domestic or foreign, is regrettable extent is the field of public utility financing. willing to do the job. And it is equally harmful where Where there is no domestic bond market, the choice whole areas of economic activity become paralyzed between subsidies and adequate rate structures can be because governments cannot make up their minds critically important in the context of balanced develop- whether or not to allow private enterprise do a job ment. In one or two countries, for example, a good it is willing to do. case could be made that subsidies to government- What government does not already have its hands owned utilities are being financed at the cost of full without reaching out into new fields? What reductions in the government's education program. government has so much foreign exchange that it can Actually less is being spent on education in these afford to bar a responsible foreign investor? countries today despite an increased national budget. There is no ideological argument here. Just common At the same time money is being used to subsidize sense. No country ever achieved balanced economic public utility services-to provide cheap power to growth without substantial help from the private industries which, without any appreciable effect on entrepreneur-domestic and foreign. By not courting their own costs of production, are fully capable of his help, governments in the less developed countries paying the economic cost of these services. This are simply increasing their already onerous burdens. money might better have been used to build and staff For the industrialized countries, too, in their new schools. relations with the less developed world, the big When the choice is as clear and as compelling as questions today are, in my opinion, questions of this, I cannot understand why it is so difficult for balance. And here again difficult and courageous governments to accept adequate rate structures. Yet decisions are needed to prevent imbalance from aggra- the wide-spread tendency in underdeveloped countries vating development problems further. 10 The industrialized countries, which have contributed developed lands. The application of impartial stand- the bulk of the Bank's subscribed capital, have done ards of economic and financial worth are just as so, I believe, because they have felt they had an necessary in the administration of development aid interest in raising living standards in the less developed as they are in the planning of domestic investment lands-an enduring interest apart from short-range programs. political or commercial interests. Over the long run it In this respect, as well as for many other reasons, is only by helping to raise living standards that they the very large increase in private foreign investment can hope to influence events in the underdeveloped in the less developed countries over the past two years world in directions compatible with their own security is very encouraging. Private investment is almost and beliefs in individual freedom. always less wasteful of talent and resources than is But this is a complex argument. And among the government investment. Private investors know from mass ofthe people in the industrialized countries today experience how much more than capital is needed to the meaning of events in the less developed lands is make the complicated machinery of development only vaguely appreciated. While things like foreign work. The technical and management skills they bring aid and foreign trade are more or less accepted policy with them set an invaluable example in the techniques aims, the challenge of the underdeveloped world is, which can be used to keep waste at a minimum. perhaps understandably, very much on the periphery I do not underestimate the degree of skill and of their lives. This lack of public understanding has resolution necessary to keep all these problems of tended, I think, to obscure and distort the real purpose balance within bounds. My plea is that governments of development aid. recognize the need for balance so that development It is easy to describe the interests of the industri- may result in higher living standards and may flourish alized West in the less developed countries in terms of alongside free institutions. defense or of diplomacy or of new markets and If governments become the prisoners of their own, sources of supply. It is easy to argue that if there isn't more or less arbitrary development targets, in all "foreign aid", then there won't be allies or as much probability something will have to give under the money to buy a given line of exports. pressures of inflation and the impatience generated Now there is some truth in all these assertions. because practice is not living up to promise. And Ultimately, development aid is related to all these perhaps the greatest danger is not that development interests. But in the long run it is only related insofar will give but that government by the consent of the as development aid helps to raise living standards and governed will be abandoned. bring about the stability and confidence on which At the same time, if governments do not have clearly lasting alliances and lasting commercial relationships defined development goals-are willing only to talk are built. about the objective of higher living standards or to It is the achievement of higher living standards, not subordinate that objective to short-range policy con- export promotion, which should guide development siderations-then our task is an impossible one. The policy. The one leads to a natural market; the other attainment of higher material living standards, like often to only a temporary, subsidized market. It is most other worthwhile things in life, has a price; it the achievement of higher living standards, not a can only be achieved if governments, leaders and desire to win allies or to gain an advantage in diplo- people are willing to pay the price. matic maneuver, which should guide development For my part, it will be my aim that the Bank should policy. The one leads to a solid foundation of mutual make, over the years ahead, a continued and significant respect; the other, only to temporary accords. contribution to the capital requirements of that basic And waste, too, should be a primary concern of the development on which higher living standards depend. industrialized countries in their dealings with the less If tight money market conditions persist, funds will 11 inevitably become more expensive, but I remain But at most, ours is a supporting role. The real hopeful that, in the future, as in the past, international problems are yours and the hopes of millions and savings will continue to flow to the Bank on a scale millions of people hang on your ability to resolve that will ensure that no meritorious loan application them wisely. will be turned away. 12