STRICTLY CONFIDENTIAL FINANCIAL POLICY COMMITTEE of THE INTERNATIONAL DEVELOPMENT ASSOCIATION Washington, D.C. Tuesday, July 23, 1968 A meeting of the IDA Financial Policy Committee was convened at 10:30 o'clock, a.m. in the Board Room, 1818 H Street, N.W., Mr. Roberts. McNamara, President, presiding. STRICTL CON Fl DENTIAL 2 C O N T E N T S - ------- page 1. Opening Remarks by Chairman 3 2. Mr. Lynch 5 3. Mr. Rice 16 4. Dr. Mejia -Palacio 22 4. Mr. vom Hofe 31 5. Mr. Jagannathan 40 6. Dr. Machado 47 7. Mr. Skjerdal 61 8. Mr. Coleman 74 9. Mr. Jahanshahi 81 10. Mr. Tazi 84 11. Mr. Mentre 88 12. Mr. Reid 95 13. Mr. Suzuki 108 14. Mr. van Campenhout 113 15. Mr. Stone 119 16. Dr. Lieftinck 135 17. Dr. Chen 147 18. Mr. Gutierrez C'a.no 151 19. Mr. Bako 157 20. Mr. Escobar 160 21. Summary by Chairman 170 3( STRICTLY ONFIDENTIAL P R O C E E D I N G S MR. McNAMARA: I know how interested most of you are in the policies we are following in IDA. During my short period here, on a number of occasions you have asked that we raise these for discussion. I have circulated, starting on June 24th, I believe, a series of papers for your information on this set of subjects, having initially identified a series of six questions that I thought were uppermost in your mind, and represented the main points that you would like to address. There may be others, as well, of course; if there are, I would be very happy to have them added to the list. But assuming for the minute that these six represent the major issues that are in your minds, you will recall that two of them I suggested be deferred for later discussion simply because it wasn't possible to prepare the papers that would serve as a basis for an orderly review of them. That leaves four, therefore, that I think we could properly discuss today. I would suggest that we take these essentially in the order in which they were outlined in my June 24th paper, endeavoring to concentrate our comments on each particular issue. It doesn't mean that they aren't related, and it doesn't mean that you should feel any restriction on what you have to say at any particular time, but I think if we could try to concentrate discussion on each one of these, . STRICTLY ONFIDENTIAL 4 - rather than ranging across the floor, we might have a more orderly and more useful series of comments. Furthermore, I know that many of you will want to speak more than once, perhaps first outlining your views and then responding later to the views of others, and I don't think we should feel under any time pressure. We can meet this morning, this afternoon, and later if that becomes necessary. I would assume we could probably finish our discussion today, but if we don't we can quite properly carry it on at a later date. I will also endeavor to exercise the functions of the Chair and restrain my own comments today. I feel rather fully and deeply on some of these points, but I think the discussion is for your benefit, not mine, and I will not interject my views unless pressed to do so by some extreme positions that may otherwise have been presented. I'm deeply grateful for the amount of time that each of you has spent on this subject; I know how extensively you have considered the pape!iSthat I distributed. Many of have commented to me in private on it, and I know you've had discussions amongst yourselves and with members of my staff. So let's begin our discussion, recognizing that there are great differences of view amongst us, recognizing also that where the differences of opinion cannot be resolved, ~e shouldn't attempt to pound out a decision here, but 5 STRICTLY ONFIDENTIAL simply go along as we have been, pushing the policy issue aside for the time being, and addressing the specifics to particular projects as they come up. I don't think we should tear outselves apart here by acrimonious debate on matters that perhaps can be postponed. With that general introduction, may we proceed and I suggest we address first this basic issue, how should the IDA credits chargeable•: against the Second Replenishment be distributed geographically, recognizing that you will want to, in discussing that, discuss the other three issues as well, but hoping that we may concentrate on this first one and having concluded discussion on that, move in an orderly fashion to the remaining three. I understand Mr. Lynch has asked to speak first, and I therefore recognize him. MR. LYNCH: Thank you, Mr. Chairman. I must ask your and the Board's indulgence if my contribution is rather long, and this is, I think, by common consent a subject of overwhelming importance, not merely an academic exercise. If the Replenishment becomes effective, when it becomes effective, what we decide here will have an actual and immediate effect over large areas of the world. I would first like to make clear that I am 6 "' STRICTLY ONFIDENTIAL iscussing everything I say within the context of a replenish- ent of a total of $1200 million, as it was agreed in March. othing that I say will necessarily be applicable, if nhappily whether temporarily or on a longer term basis, some alternative arrangement has to .be arrived at. I would like, Mr. Chairman, in spite of what you said -- I will indeed concentrate on what you described as the main issue but I would first like to deal briefly with those issues in the draft discussion paper, where I can express myself briefly, because we have little or no dis- agreement with what is proposed. MR. McNAivlARA: We're always happy to have that kind of comment. (Laughter) MR. LYNCH: On the proposed terms of lending, on whi h I think you, Mr. Chairman, and the staff have now reached the position that you don't really want any change, our position is really quite flexible. We wouldn't oppose the introduction of a system of intermediate terms if the management considered that the ability to offer them would genuinely, usefully extend the present power of variation, which is available to them, by the technique of blending. We would, though, I think see some difficulty in attempts to vary the maturities or other terms of credits during their 7 STRICTLY ONFIDENTIAL actual currency, and we have grave doubts whether this would prove practicable in the event. There might indeed be some sort of general understanding that countries experiencing a marked improvement in circumstances during the repayment period might consider themselves, as a matter of common practice, under some obligation to the institution to nego- tiate a shorter maturity period, but again, we are inclined to think that this is not really very much in the world of reality, as we can see it now. On the issue of counterpart funds, the control and use thereof, we find ourselves wholly in agreement with both the argument and conclusions of the paper, so I need say no more about that. On rates of commitment, and here we begin, I think, to edge towards the main issue, I must say that my authorities doubt very much whether the proposed rates of commitment, which I remind my colleagues, entail a threefold increase over the rates of commitment of recent years, will prove viable in the event. However, having said this, I must also say that we agree strongly that the organization should plan to commit all the funds available for the three-year replenishment. This question, as I said, is linked to the major issue before the Committee; namely, the geographical distribution of the credits, and within that issue, the 8 STRICTLY ONFIDENTIAL question of IDA lending to India and Pakistan; and here Iim afraid I must at once remark upon a basic contradiction in the discussion paper. We are told that there is no rational basis for even the broadest kind of geographical distribution of credits. Those are strong words: no rational basis. And then the paper proceeds to apply a procedure already admitted to be irrational by definition -- to apply this to India and Pakistan alone. I don't think that my French colleague could possibl describe this as "La rage de la logique." The principles for lending operations which are set out in the paper are in our view completely sound, and they are utterly contra- dicted by the actual proposals for India and Pakistan. The proceeding in their case rests on what is always described in all these papers as "feeling." Perhaps one could, though, identify a basic proposition behind it of some kind. It takes a bit of doing, but you can if you really look, and it is that a multilateral source of funds must make the widest possible geographical distribution on a country basis. But this, in our view, is a very limited kind of outlook. We don't think that multilateralism means solely the apportionment of funds by reference to boundaries of sov ereig states. It means distribution on the basis of need and for the institution, opportunity, by reference to the whole STRICTLY ONFIDENTIAL 9 circumstances of individual developing countries. IDA should in our view use its funds where the flow of resources to maintain development would otherwise be insufficient. This is really why the institution came into being in the first place, and this is supported, I would remind my colleagues, by the provision in Article V of the Articles of Agreement to the effect that where other suitable sources of funds are available, IDA should not participate. I have known my colleagues to be very insistent · on the"Arttc~es of Agreement in the past, and I would commend to their zeal the one that I have just referred to. This i~ why we support the argument in the paper that the institution must pay regard in distributing resources to the availability of alternative sources of finance. This is one of the criteria we are invited to endorse. We can therefore look in very broad terms at the distribution of total official development finance which is available to a number of regions of the world. Latin America has a population of approximately 250 million souls. The flow of development finance to Latin America is now running at about $1,000 million a year. Africa's population now I think approximately 310 million people, has a total flow of $1700 million a year. The population of India and Pakistan is more than the populations 10 STRICTLY ONFIDENTIAL · of these two regions put together, about 615 million people~ The total flow there is very little higher than that to Africa with half the population. It's about $1812 million. These, gentlemen, are facts, not feelings. The United States, a very generous bilateral aid donor and the Inter-American Development Bank concentrate respectively their bilateral and :multilateral aid very largely on Latin America. France, another very generous donor, does the same to Francophone Africa, where also the resources of the European Development Fund are available. I don't think that it is really any valid argument that all less developed countries have individual areas of extreme poverty; of course they do. But the distinction between Bank terms, lending terms, or IDA terms is surely really one of the total ability of the less developed country concerned, having regard to its income per head to service external debt. The phenomena of areas of poverty within a country, although naturally exciting extreme compassion, is common to the less developed countries, and to industrialized countries, as well, including this country. The Board is very well aware, has good reason to be aware of India's very serious foreign exchange difficulties. It's only a matter of weeks since the IBRD Board endorsed the institution's participation in the 11 STRICTLY , ONFIDENTIAL debt relief operations. Certainly those of my colleagues whose countries are members of the India Consortium must be aware, too, that there has been a shortfall of funds from the total flow of finance to India, which the Consortium, under the IBRD chairmanship, considered desirable. Certainly the United States and my own country and the Bank carry a major responsibility for the success of the India and Pakistan Consortia and there are others, too, who are very closely committed to it. I would like here to touch on the question of rais1;· the qualifying limit from $250 to $300. Statistics of income per head are very easy to criticize; they are notoriously imprecise. But the imperfections apply to everybody, and the figures constitute a reasonable guide to relative wealth or poverty. It can be said, of course, that they're really rendered invalid, because they include, in the cases of individual countries where such entities exist, the earnings of large corporations, but such bodies at least to some extent diffuse wealth in those countries fortunate enough to possess the physical assets on which their opera- tions are founded. We don't necessarily oppose the raising of the limit, but if it is in any way related to a desire to secure an increased level of commitments which might STRICTLY ONFIDENTIAL 12 otherwise fall behind consequent upon the proposed reduction in India's and Pakistan's proportionate share, then in our view it weakens the case for that arbitrary reduction still further. In many Directors' minds, I think the questions of the quantity and the type of IDA credits to India are very closely linked. The question is relevant to a number of individual issues of IDA lending policy, including that of control of counterpart funds. My Director and . I have already stated at length in the Board our views of the very strong developmental value of these credits, and in what is in our view the invalidity of the argument that by extend- ing these, the institution is in any way usurping the functions of the IMF. We have stressed their essential character for the present stage of Indian industrial develop- ment. I would only say now that opposition to these industrial import credits appears to be a relatively recent phenomenon and comes sometimes from unexpected sources. In 1947, which is not going back a very long way, really, there was an IBRD loan to the Credit National -de France of $250 million for precisely this same purpose. In the years 1950 to 1962, that's a very recent year, there were IBRD loans totalling over $350 million to Australia for precisely this purpose. There were also credits in 1947 of . 13 STRICTLY ONFIDENTIAL $191 million -- loans I should have said -- to the Netherlands for precisely this purpose. I don't think there's anything in the argument that these were for reconstruction and not for development. I don't think that this would be the case in Australia's case, anyway, but what possible merit can there be in putting the operations of the group into rigid compartments and saying it's perfectly proper if it is for reconstruction, utterly improper if it's for develop- ment in a less developed country. Are we now to say that the institution was wrong as recently as 1962 in extending loans of this type? Or that the governments whose representatives are now around this. table were wrong to accept them? Shouia India now, overwhelmi~gly in need of precisely this kind, be treated differently from France, the Netherlands, and Australia? I'm afraid, Mr. Chairman, that financial memories like political ones, tend to be very short. We accept that with the major increase, an increase of two-thirds in the funds that will be available to the IDA, if they become available, there will be a wider distribution with the inclusion of Indonesia and with what we welcome as the increased emphasis of the Bank in project preparation elsewhere. There are ample funds available to enable countries which have not enjoyed IDA credits in the pa t to have them in the future, provided suitable objectives 14 STRICTLY ONFIDENTIAL for the funds come forward, and I can say that we would supper aid of the industrial import kind to any country which was at such a stage of development and whose industry was in such a condition that that was the best kind of aid for that country. It follows from what I have said that we think that if the criteria in the paper were followed and no arbitrary determination of percentages was made, there would be an automatic fall in the percentage share of total planned commitment to India and Pakistan. Our case is that the reduction proposed is not related to any criteria and is much too steep. The proceeding is totally irrational. We ~ould prefer to work on the basis of the criteria with no pre-set limits for anyone. I am sure that most Directors have come to the table this morning with very open minds .on this subject, but I recognize that '.it:' s entirely possible that in the end, we shall conclude that there have got to be fixed limits for India and Pakistan. In this event, I would appeal to them very strongly to make them more generous. At the very least, I would have thought that India should, in all her circumstances, enjoy 45 percent of the funds and Pakistan, 15. And there is a further point which I'd like to raise on the paper, and that is that I think we must have it clear what this percentage is a percentage of. The STRICTLY ONFIDENTIAL 15 paper refers to a "lending program." This is a little uneasily ambiguous. What I prefer to say and what I hope that you, Mr. Chairman, will be in a position to assure me about, is that if there's a percentage at all, it should be a proportion of the planned total commitment intended in the succeeding year. It would in our view be intolerable for India and Pakistan to be held back simply because commitments elsewhere were slower than had been expected at the beginning. I believe that you, Mr. President, are confident that this won't happen, but it has already happened in 1967-68 In mid-March, the total figure for commitments for that fiscal year was expected to be $400 million. The failure of projects elsewhere to mature in time caused the total commitment figure to decline to $272 million. Thereupon, the combined figure for India and Pakistan was reduced from $210 million to $170 million. I do seek your assurance, Mr. President, of the desired interpretation of the percentage figures which I described is indeed the correct one, and I would also ask that the figures, if we do decide on figures, should be planning guidelines only, subject to review, and without prejudice to what we do in future replenishments. I appreciate, as I have hinted, that many of my colleagues have positions which are already taken, but I STRICTLY ONFIDENTIAL 16 must leave them in no doubt that we, as the second largest donor to IDA, regard the proposed percentages as quite inconsistent with the criteria in the paper, and we must reserve the right, whatever decision might be taken by this Committee or by the Board, to raise the matter again. Thank you, Mr. Chairman. MR. McNAMARA: Thank you very much, Mr. Lynch. I believe Mr. Rice asked to be heard next. Mr. Rice. MR. RICE: Thank you, Mr. Chairman. We welcome this opportunity to express our views on IDA policy. We very much appreciate the discussion papers that have been prepared. They are most useful in isolating the central issues with respect to these policies. Let me say firmly and at the outset that we're in substantial agreement with the suggestions, conclusions and recommendations of these papers with respect to all four of the subjects that we will be discussing today. This being the case, it will be useful, it seems to me, to note here mainly those points of agreement about which we £e~l~especially strong, or those points where we might diverge slightly, or where we might place the emphasis somewhat differently. With respect to the criteria for the distribution 17 STRICTLY ONFIDENTIAL of IDA funds, we agree that the four criteria discussed in the paper are all relevant and should be taken into account in the distribution of the funds. We would view the insuf- ficiency of creditworthiness criterion, as I think the paper does, essentially as a qualifying criterion. We would make thepoverty criterion somewhat more than a qualifying criterion by giving some weight to the degree of poverty. Now this means that other things equal, including population and performance, a country that is very poor should receive more than one which is significantly less poor. In this connection we particularly welcome and support the recommenda- tion that IDA should make special effort to assist the poorest countries, of course, as well as other qualified countries which are administratively deficient in preparing projects acceptable for IDA financing, and also where possible assist them in improving their economic performance. But having stressed the importance of the poverty criterion, we would give great weight to the quality of economic performance, again other relevant factors being equal; and given roughly comparable poverty, a country making perceptible vigorous efforts toward economic development should receive more IDA assistance than one which is only barely meeting the performance test. Rewarding good performance not only provides an incentive towards .. STRICTLY ONFIDENTIAL 18 development effort, in addition there are good, practical political reasons for doing so. Contributing governments to IDA like to feel that IDA funds are producing results a· the form of economic development. Mr. Chairman, we warmly welcome the recognition of the desirability of achieving a wider geographical dis- tribution of IDA operations and activities. However, we believe that with effective and diligent application of the poverty and performance criteria, together with special effort tohelp the poor and administratively deficient countries in project preparation, this will result automatically in achieving this wider distribution. It is partly for this reason that we fail to understand the need for policy of . -slowdown in countries whose per capita receipts from IDA are relatively high. Often these figures do little more than accent the fact that these countries have very small populations. Actually, IDA credits to a number of these countries with small populations have seldom been large in absolute terms. But more important, rigid implementation of such a policy of slowdown might in some instances force IDA to withhold financing for pivotal projects at a critical time in a country's development. Moreover, I would add that such a policy does not fully take into account the necessarily lumpy character of certain kinds of productive projects. 19 STRICTLY CONFIDENTIAL With respect to the influence that other sources of development assistance should have, we would say that except in cases where countries are approaching the limits of absorptive capacity, IDA should not try to take into account the amount of assistance received from other sources. Again, doing so could operate to penalize excellent performanc . In addition, it might encourage other donors to do the same thing. We feel that IDA should take the lead in determining what countries should be assisted, and IDA should make its decisions normally without regard to what others are doing. A very minor point, Mr. Chairman, we were disturbed by the possible suggestion made on page 2, paragraph 7 of the discussion paper that the performance standards for IDA might not be the same as for the Bank. The impression is left, I think quite clearly, that some degree of mis- management will be accepted. It is suggested that anything less than serious mismanagement will be overlooked. This strikes us as not the kind of thing that countries should be encouraged to expect. Aside from these minor observations, Mr. Chairman, we are in fullcgreement with the paper on criteria for the distribution of IDA funds. On the other three papers, we have very little to 20 STRICTLY ONFIDENTIAL say, Mr. Chairman, and perhaps in the interest of brevity and with the hope of not taking time to speak again, although I am not committed to this, with your permission I could just briefly -- MR. McNAMARA: Surely. Go right ahead. MR. RICE: Thank you. With respect to lending terms, we feel very strongly that these terms should remain the same. We agree that the main advantages of two or more sets of lending terms can be achieved by a blending. Without diminishing our support for the maintenance of .the present terms, in any way, we would simply like to mention in passing that we would expect that there will be countries over time which reach the point self-sustaining growth and no longer need concessional assist ance, and in fact tmprove their position so strikingly that they find themselves in a very good position to begin to repay debt. One might think of such countries as having clearly reached the point of take-off. Now we would simply suggest that in the future, IDA might wish to give some thought to the feasibility of working out arrangements for the acceleration of repayments in the case of such countries. Now this is not the same thing as several sets of lending terms. It is STRICTLY CONFIDENTIAL 21 simply recognizing that over the long pull, countries will find themselves on a path of self-sustaining growth and that in such circumstances, it might prove feasible for countries to begin to think about accelerating repayments. This is something in the future, we emphasize, and we strongly recommend, we strongly support the recommendation that present terms remain the same. Again, another minor point, in the paper on lending terms, page 3, paragraph 12, we were concerned to find again the implication that IDA would be prepared to lend in th face of a threat to a country's stability, when in the same circumstances, the Bank would not. Moving on then to the paper relating to counter- part funds, we agree fully with the conclusion that special controls and accounts should not be set up to attempt to control the use of counterpart funds. We agree with the suggestion that the Bank should be satisfied that these funds are being used or would be used for purposes of economic development. If it is felt that there is any need to go further, we would be willing to have it understood that the Bank would in its regular consultations with governments satisfy itself that these counterpart funds are being used effectively for purposes of economic development. ') That, however, is about as far as we would be prepared to go. STRICTL 'CONFIDENTIAL 22 With respect to the rate of commitment of IDA's Second Replenishment funds, again we fully agree with the proposal in the paper. We feel that IDA should try to com- mit the full amount that would be available in fiscal '69 and fiscal '70, and the goal of committing $530 million each o those two years is, to us, a good one; but we would only add in agreeing with Mr. Lynch that there may well be some slippage, but recognizing this possibility, we feel that the management of IDA should plan for the full commitment of the funds that will be available. tn conclusion, then, Mr. Chairman, I would like to repeat that we are in substantial agreement with the main thrust of each of the four papers. Thank you very much. MR. McNAMARA: Thank you indeed, Mr. Rice. Dr. Mejia. DR. MEJIA-PALACIO: Mr. Chairman, I am one of the few Executive Directors that were here at the beginning of IDA, and really I can say that I don't recognize the institution we ccreated ten years ago. At the beginning of the Bank, the objectives of the Bank were reconstruction and development. IDA is a typical development institution. It was established not as a charity organization, but as an institution that could help countries to keep going on in development programs. At that time, we didn't have these 23 STRICTLY ONFIDENTIAL concepts of supplementary finance, complementary finance that we're talking about now. IDA was a kind of supplementary finance, complementary finance for countries:in trouble, both because they didn't have external credit or because they exhausted their credit. In other words, IDA was estab- lished just to help the countries to keep going on with their development programs. Something is wrong in IDA because we have several institutions here -- we have the International Bank -- and we never hear complaints about the distribution of Bank funds; we have IFC and we haven't had a complaint about distribution of IFC funds. But we've had, especially in the last five years, constant complaints about the distribution of IDA funds. Something is wrong. What is wrong in IDA? I think that the management in the last five years didn't follow the principles by which IDA was established. The first one is, which countries are eligible for IDA funds? Now we have a lot of criteria: the poor countries, countries with performance. But in the beginning we didn't have those kinds of criteria in mind. We followed the principle that IDA shall provide financing to further development in the less developed areas of the world, ARticle ) V, and the classification of member countries in Part I and 24 STRICTLY CONFIDENTIAL Part II. The eligible countries launched at the beginning were those listed as Part II. Period. We didn't say how much income per capita. Part II countries are eligible for IDA credits. I think this is the right criterion, the right thing to do, and it must be kept, this criterion. It does not imply that the Part II list cannot be modified from time to time. It is advisable to have it revised every five years, for instance, or at the time of a capital replenishment in order to see which countries have improved their economic situation to the point of becoming able to contribute to IDA in useable funds. The transfer of a country from Part II to Part I must take place after nego- tiations between the Association aiid '.the :Gove:cnmeiltocof ~the country concerned. Such negotiation can involve, as Mr. Rice said, acceleration of repayment of loans, if they have loans, or the payment of the 90 percent of the capital subscription of those countries, in a way similar to what we are doing in the Bank, under the Philippine proposal that we've been using in medium and small countries, by which they can pay in convertible currencies in five years their subscriptions to the Bank. The same can be done. So it is a matter of revising the list of the Part II countries periodically and seeing which can stay there and which can move to Part I countries and become donors of hard 25 STRICTLY ONFIDENTIAL currency to IDA. I think if you keep this criterion, you will eliminate all the complaints about eligibility of countries for IDA credits. In another way we have not two lists, but three lists: Part I, Part II and Part Nothing, the country that doesn't give to IDA, doesn't receive from IDA. I think that's not fair. Iii this way you eliminate this criterion of income per capita. Now you say we are working on a basis of $250 per capita. Now you propose to raise it to $300. What does $250 or $300 or $350 or $400 mean? Still countries that have $500 or $600 are poor countries, very poor countries so it doesn't mean anything. A country is rich by other standards, but it doesn't mean very much between $200 and $500 per capita income, especially in developing countries. If you have this classification of Part II countries as eligible to be IDA countries, then you can apply the criteria you mention in your paper: insufficiency of creditworthiness, economic performance, ability to present acceptable projects, relative stage of economic development. Especially the first three are essential in my judgment for IDA credits because according to the Articles of Agreement, IDA is going to finance more or less or exactly 26 STRICTL CONFIDENTIAL the same kind of projects that the Bank can finance. It has to be a good project, has to be in a country that is able to execute the project, in a country that is able to manage the project; and the project must be of a high priority and the project must contribute to the economic development of the country. I think you have to keep these criteria very, very strongly, and in this I agree completely with Mr. Rice that we cannot, for any motive, be flexible in these principlE!$ One of the criteria, for me the most important one, is creditworthiness. In Article V of the Articles of Agreement it says,"The Association shall not provide financing· if in its opinion such financing is available from private sources on terms which are reasonable for the recipient or could be provided by a loan of the type made by the Bank." The first principle, finance available from private sources, is similar to any other international financial organization. The Bank has the same provision. If there are funds available from other sources, the Bank is not supposed to go i . IFC is the same. So this is a general principle in any international financial organization. The second part is the interesting one, "or by a loan of the type made by the Bank." So it means that the only difference between the Bank and IDA is that in the Bank, you have to evaluate the creditworthiness of the 27 STRICTL CONFIDENTIAL country and in IDA you don't have to, and this is why I said at the beginning that it was established as an institutio to help countries go on with their development programs, in case of trouble, or lack of external credit or because they ve exhausted or are going to exhaust this credit. It doesn't imply that the terms are absolute. A country can have externa credit, but not enough for its development needs; or a country can have external credit, but it will be exhausted if it takes another credit on conventional terms or its external credit will be exhausted in the foreseeable future. In other words, IDA credit must help to maintain a certain amount of creditworthiness in order that the country can· fulfill its development program. As I said before, it's the same concept as we are applying now to supplementary and complementary finance. I agree that there must be geographical distribu- tion of IDA funds for a simple reason. IDA needs the support of the member countries, not only the economic, the financial support of the big countries, but the moral and the legal support of the poor countries. Any institution in the world needs support, political support you can say, not only economic support but political support. What has happened to IDA is that in the last five years, IDA has had no support, not too much from the big countries because it is ver 28 expensive for them. They have to put up the money. And not from the poor countries, because they haven't received the benefits they expected from IDA. So IDA lacks support, political support, and every time we go to an Annual Meeting, we have the same complaints from the Governors. The Governors say, "We're not receiving anything from IDA; we don't support IDA." So this is why IDA is in trouble, IDA is almost dying. I don't know if you with your ability can revive this institution, but one of the ways to revive this institution is to ask for support from poor and rich countries, and the only way to get support from the poor countries, I can assure you, is providing for wider distribu- tion of the funds. I have several communications from my countries. Today I received one, especially from Brazil, in which tney welcome the first step, they call it the first step in the right direction, in trying to widen the distribu- tion of IDA funds. I am in agreement with Mr. Lynch for different reasons, that you cannot put 40 percent for India, 12-1/2 for Pakistan. It doesn't mean anything. If you are going to follow good banking practice, you have to limit it as the banks do, to 15, 20 or 25 percent to one client. This is a practice. But 40 percent doesn't mean anything. Maybe India will need more, maybe they'll need less or you must 29 STRICTLY ONFIDENTIAL give them less in order to keep IDA strong politically and economically. I don't ehink you can establish those limits; i t is not advisable. I sympathize very much with the problem of India and Pakistan, especially of India, which is bigger, and I think it's an obligation of the world to go and help that country. It is very important for the whole world, and one time I proposed that this problem of India be taken out of the Bank under a special committee, '.At that time I said there were many things that the Bank could do or IDA could do, like at the beginning we established a Bank for Reconstruction, but in one year we came to the conclusion that we couldn't reconstruct Europe at that time, so the Marsha 1 Plan came. Then there was the Indus Basin problem, and we decided that we couldn't finance that work, so we established a special committee, and then there was the Suez Canal blockade during the war between the company of the Suez and gypt, and we established a committee, and they put money in, the big countries, and the Bank administered the money and they cleared the canal, so it's not the first time we've had a problem that we cannot finance, cannot afford, so why not ask for a special fund for India in which the big countries can put all the money that India needs and it could be administered by the Bank; and the rest of the funds they are STRICTL CONFIDENTIAL 30 willing to put into IDA, make it available to all the countrie that are eligible for that purpose. If you allow me, Mr. Chairman, I will very briefly say that in regard to the terms, I don't have a very strong point on this. I think it will be advisable to charge some interest and to reduce the terms as the countries, other countries do, because the practice in bilateral loans like loans from the United States, from Russia, from Germany, France, et cetera, they charge interest, 2 percent. The United States gives loans of 40 years' maturity, so I don't see why IDA has to give 50 years, free of interest, 10 years of grace. There's no reason at all. I think you have to have a flexible policy and give terms from 20 years to 40 years, and put some interest on some loans, and have others free of interest. You have to adopt a free hand in those loans, but I don't have any strong feeling and I'll go along with the majority. With respect to the administration of the counter- part funds, I agree with the paper, you cannot go into this problem; this is very difficult, very complicated, and • Rice's proposal that you keep in touch with the governments supervising what they're doing, that's all right. You don't control that kind of counterpart fund. Finally, Mr. Chairman, I want to say that if you put interest on IDA funds, maybe IDA can build up some 31 STRICTLY ONFIDENTIAL capital, and not depend on other institutions like the Bank, and with all my respect I want to say I am very disturbed with two proposals I found on my desk for considerat on, first that you're increasing the interest rate and second that you'r~ giving to IDA $73 million. I don't know how I can go to my Governors at the next meeting and say to them that we are too rich to give $33 million away, and too poor to go on with interest rates at 6-.:~;/4 and not at 6-3/4. Your calculations are that this half-point cost to the users of Bank loans of about $3 million every year, under the assumption they will take $600 million in loans. More or less the average life of a credit in the Bank is 20 years; it would mean in 20 years it will be $60 million. The day you increase the interest rate, you give $73 million. It is the kind of thing that is very, very difficult to explain, and really I have to say to you, you are putting us in a very, very difficult position. Thank you very much. MR. McNAMARA: Thank you, sir. Mr. vom Hofe. MR. VOM HOFE: Mr. Chairman, speaking the first time in this Board on IDA policy, I should like to make, with your approval, some general remarks from which my positio on the different questions derives. STRICTLY · ONFIDENTIAL 32 If we want to come to a conclusion on the practical policy which :f1"A should in the future follow, we'll have to start thinking about the objectives that IDA should fulfill, as well as the underlY,ing COl\cept which I would like to call the IDA philosophy. As I see it, and as I think the IDA Articles of Agreement see it, and as Dr. Mejia just told us, the creation of IDA was envisaged as being an institution of primarily economic function, and not a charitable organi- zation. This is the way I still see IDA's objectives, a fact from which I draw the first conclusion, that poverty cannot be the decisive criterion for distribution of IDA funds. In my opinion . taking into consideration the limited amount of IDA funds versus capital requireme~ts, we~should rather primarily be concerned with achieving the highest possible economic efficiency with what i~ availaole. This means that conditions should be created to the largest possible extent which all,ows the increase of economic productivity and of the standard of living of as many as possible. If we agree to that, we cannot start out with the geographic distribution of IDA funds. Geographic locations yielding the highest efficiency will vary from time to time. We will also have to forego aiming at equal distribution to countries with a low per capita income. But 33 STRICTLY CONFIDENTIAL n the contrary, we should develop focal points with which e could, for instance, aid one or another of our :member ountries in achieving a new economic concept. Therefore, do not find the concentration of forces as we have had it in India and Pakistan as extraordinary as some of my colleagues At the present time, for example, and possibly unnoticed by some, we're experiencing a concentration of Bank loans to Colombia, and in the not too distant future, we may, if I am not all wrong, see a concentration of IDA credits in Indonesia, and I agree with that. Mr. Chairman, I am well aware that a priori the thesi of "Let's help the poorest of the poor first," appeals very strongly to all of us, and I would therefore like to give a few more thoughts on this. What is it that IDA has to offer? For one, there is investment capital, and secondly, technical aid in various shapes. Are investment capital and some technical assistance alone sufficient to help any country to achieve within a short time an increase in its standard of living, such as we calculate it, and is this valid, particularly for a country which for centuries has been living in an economic system which does not produce any riches which could be reflected in its GNP? If IDA has made it a condition that a country which asks for IDA credit must be in a position to offer STRICTLY CONFIDENTIAL 34 suitable projects, this has always meant to me something like a proof of a certain economic standard of that country which is necessary to find an effective starting point for IDA's investment capital. Therefore, we cannot, in my opinion, fulfill this requirement by sending our own people into such a country to develop and present some kind of a project. It is only a false conclusion if we sometimes hear the opinion t,hat if the so-called rich countries were not so stingy, the developing countries could long have a higher standard of living. This reminds me of a story with an incubator, in which we can, by setting it to the right temperature, help an egg to hatch; but it doesn't help a bit if we turn the heat ~~al on the incubator to the highest position, instead of a .~ ~er medium temperature, because, even though warmth is essential, it is only one of several prerequisites. The natural development of the egg itself is necessary for real success. Very similarly, investment capital is only one, an important prerequisite of the growth of an economy. so indispensable are other growth factors in the country itself, in order to achieve development of a modern, differ- entiated, and efficient economy, like, for example, political economical sound conditions; a healthy finance policy, with fficient and reliable credit institutions; a trustworthy and STRICTL CONFIDENTIAL 35 able administration with Civ.il Servants, not only in the higher echelon but even more so in the intermediate and low levels; and last but not least, as a basis for all this, a satisfactory liberal education on a broader level. If we take all this into consideration, it becomes evident why it cannot really make sense to distribute the funds which we have to the poorest of the poor, because there are no genuine starting points for the utilization of these funds, thereby limiting their yield considerably in these countries. If we recognize this, the question will of course come whether IDA should not go further with its aid, such as as done in the field of building of secondary schools. This s a question which is definitely of basic importance, if we alk about IDA policy. Up to now, I have unfortunately not had the time et for a close study of the objectives and achievements four Education Division. We all know that also UNESCO orks on education projects, and I suppose they are cooperating ell with our Education Division. I could also imagine our professionals in setting . p scholastic curricula, concentrate more heavily on education hich will.enable young people to stand on their own in the ields of business and industry. 36 The question is, however, do we really need a separate group for this, and if we answer this question in the affirmative, why then don't we also establish schools for administrative personnel, for bank clerks, et cetera, et ceter. ·I must admit I feel somewhat uneasy about such a nursery where everything has to be picked up and developed, in which the so-called poorest of the poor are missing, in order to make a successful use of our IDA funds. A priori I would think that such a nursery is not part of our objectives, but I . would like to hear the opinion of my colleagues on that. If I'm well informed, the approval of the construc- tion of schools took place at a time when good projects for the proper use of IDA funds were still scarce. I share your opinion, Mr. Chairman, that the number of projects will steadily increase in the future. I am therefore of the same opinion as the staff, that apart from certain minimum conditions regarding a certain level of economic development, the so-called economic performance of the country should also play a determining role. If in the future we were to see ourselves forced to adopt a more demanding standard in the selection of our borrowers, then in my opinion this should be applied to their economic performance. We waste our money and take it away from other projects which could be of greater economic benefit, if we STRICTLY ONFIDENTIAL 37 ive it to countries where, for instance, a running inflation f more than 10 percent a year renders real economic progress mpossible, or where the government does not take any steps n the face of a birth rate which exceeds the country's rowth potential and thus already in advance impedes any mprovement of their standard of living. I am still inclined to include into good economic erformance, the creditworthiness of a country and I remember ery well the years when the World Bank refused to grant a redit to a developing country unless it had settled the uestion of pre-war debt with its creditors. I know very ell that today such an opinion is considered quite old- ashioned, at least as far as it concerns the debt of developin ountries. Repeated efforts on the part of some Directors ere necessary this year so that the Annual Report of the ank would even mention the possibility that external debt an also be reduced through efforts on the part of the deb tors uch as an increase in exports. Before that, one could only , ead of the incapacity of developing countries to satisfy their bligati6ns, and the urgent necessity to offer credits ith conditions which have nothing to do any longer with the ates generally prevalent in the market. I hope very much that I'm wrong; however, I fear . ' hat if those who are so eager to support the developing ountries were successful in their general endeavor to STRICTLY ONFIDENTIAL 38 communicate to potential creditors the conviction that developing countries cannot pay interest and cannot amortize their credit in a regular way, they will have spoiled the image of developing countries as borrowers in the world for a long time to come, thus doing them more harm than good. I have similar fears for some of our IDA credits, with the stereotyped conditions of a period of SO years and an interest rate of 3/4 percent. A short time ago this Board granted an IDA credit for maintenance of a road. An expert explained to us that the trucks and machinery needed would last for an average of nine years, if taken care of; after nine years, they're used up and have to be replaced. Since the country itself cannot produce the machinery after nine years, we will then presumably go to another IDA credit. This procedure may well repeat itself several times. The result of this is that one day the country has accumulated a credit burden on foreign currency for things which have already been used up long ago in the past. I have serious doubts as to the usefulness of this procedure. If the machine are needed at the present moment and the foreign exchange for their acquisition is lacking, an IDA credit without interest should, if necess~ry, be given, but it should be amortized in the nine years in which the machinery does its ' ' work. 39 STRICTLY ONFIDENTIAL To make a difference here between amortization in domesti6 currency and in foreign exchange is self-delusion. Things which can only be acquired in foreign exchange must also be amortized in foreign exchange, and as I already said, in due time. If a country's credit capacity for foreign currency is depleted, it would in my opinion be better and more helpful to give such a country investment credits only if it can prove at least that the necessary foreign exchange needed for the running of the new investment can be paid out of the proceeds from the new investment itself. It's my personal conviction if we don't travel along the positive road by helping the developing countries on their path to pay their debts, but if instead we continue to try wrigglin ourselves out of the real difficulties by way of softening aid terms, then the time may not be too far away when the Bank through IDA will have to grant those countries ever large amounts o! commodity aid to keep their economies going at all, . a development in the end which would serve the developing . countries themselves least of all. Mr. Chairman, I have offered here a number of thoughts on what I have called the IDA philosophy, together with a few conclusions which I want to draw from these considerations. I still feel too little familiar with the opinions of my colleagues on this Board to submit any proposal; 40 STRICTLY ONFIDENTIAL however, I hope that an approval of this paper before us toda does not mean that the issue of IDA policy would thereby be settled and closed for the next few years. I notice that our coming Board meetings have all been reserved for other topics which makes it particularly impossible to postpone a decision on this paper until a not too distant future date. My proposal would therefore be to return to this subject again sometime during the winter, after we have dis- posed of our program of other policy items; and when we will have sufficient time for discussion. However, if you, Mr. Chairman, intend to take the necessary time today and tomor- row, I sure will go along. To come back now to Question 1, I have already made it clear why I couldn't support any distinct geographica distribution. I agree with your proposal, Mr. Chairman, including your proposal on IDA and Pakistan. However, I should also be ready to go along with what Mr. Lynch proposed, not to put any firm restrictions on any special country. :l\lways keeping in mind that we are an international instdtu:tdon, we have to spread our means . Thank you. MR. McNAMARA: Thank you, sir. Mr. Jagannathan. MR. JAGANNATHAN: Thank you, Mr. Chairman. 41 STRICTL CONFIDENTIAL I shall, in order to be brief, try to speak only on the first of the papers. I would like an opportunity to speak on terms of IDA lending, and on this control of counter- part funds, if at all there is any view different from your own papers, Mr. Chairman. on the criteria for IDA distribution, on the whole I agree with the paper more taken as a whole, rather than the specific headings; that is to say, with the substance of it, rather than the paragraph headings. I will illustrate this by taking creditworthiness. As the paper points out earlier, the Bank will only lend to people who are creditworthy, and IDA will only lend to people who are not creditworthy; and therefore one cannot get both. I mean.the logic and reasonabl - ness of a blend is quite obvious, and it is much more reasonab that a country is not asked to go and exhaust completely its Bankable things before it gets a single dollar from ID~. Similarly in another field, we find population as a criterion mentioned very incidentally in various ways. When one in a defensive, negative sort of way talks about the most populous countries in the IDA group, India and Pakistan, in a different place one speaks of other things being equal, which makes me speculate which countries are equal in population to which. But I do agree with the substance of it, that obviously populat on is a criterion, and on poverty I do find a good many of my 42 STRICTLY ONFIDENTIAL colleagues doubting it, but I think poverty has obviously to taken into account. I would not say the poorest of the poor who lack the ability to help themselves should be forgotten. On the other hand, I greatly welcome your statement that all countries which have difficulty in presenting good projects and difficulty in following sound economic policies, if in fact they have them, would be helped by this group. More fundamentally, hoping that IDA will have larger sums of money, something like 50 percent more than it used to have, I welcome the prospects that a wider, larger numb er of countries can hope to benefit from IDA. I think the greater geographical distribution would be welcome to my country, which has always urged that it is in favor of large~ IDA replenishment, just with this very object. Now, on this, it would be really natural but I do r wish to welcome the statement of the Director from the U.K., in particular, as also all of my colleagues who have spoken l:efore me. I think the Director from the U.K. made many points which needed to be made, and I think it was done much better by him than I could perhaps hope to do. Now I'll touch on some of the other points. On economic policies, I think there again economiq performance, the paragraph elaborates what I would agree with, but not just a simple statement of economic performance 43 STRICTLY ONFIDENTIAL Nhich could be misunderstood. One could take the fortunes of the country which maybe suddenly strikes oil or something and oes l:etter; that is not economic performance. On the other criterion of economic policies, I am sure the Bank does not want to condone mismanagement, minor r otherwise, as Mr. Rice feared, but I think there is a good eal of room for people outside of a country quite easily to ay this particular policy is wrong or that particular policy ·s wrong, which is a minor aspect. Countries are complex uman entities, and there's hardly a country in the world about hich, given the richest country, that another country cannot ay, "You've got to go and put your balance of payments right," r ·'lYou.., re not at all sourid on -your treatment of minorities, 11 r if there's a very large strike, saying, "You don't seem o know how to handle labor." These are things which anyone an, sitting outside and not concerned with the whole complex, oint to minor blemishes, and I am sure that it's in that I spect that you said there would have to be serious mismanageme t before a country is rendered ineligible. Now to go on, there is hardly a speaker who has spoken so far, and I expect the fascination ef India as a subject will continue, I doubt if anyone can keep off that subject. You in your paper, Mr. Chairman, couldn't keep off that. I feel very conspicuous like a person seven feet tall, 44 STRICTLY ONFIDENTIAL who may feel inclined to hide, but I just don't think my country's done anything guilty. The mere fact that my constituents are more numerous than those of anybody else around this table, without a single exception, I think should not mean one cannot point out some facts on which general information, I think, is highly desirable. In a sense I suppose it is very natural to mention India and Pakistan, the most populous countries, a kind of tall poppy that is very conspicuous, as I mentioned, but I think it's a great deal due to the kind of tables one usually sees, which are rather partial. There's been a little more complete presentation on this occasion in two papers. One is in the tables circula · · with the IDA policy papers, and there are various tables which. have now been added to the Annual Report of the Bank. If people always had these tables before them, I wonder whether India or Pakistan or any other country would be as prominen in thoughts and feelings as they usually are. I particularly refer to Table III which has been distributed with the policy papers, on IDA credits. It does have a particular column saying "Per Capita IDA Credits." Now this is taking IDA alone. Now this institution has distributed IDA. Now you may find several countries getting more than $3, but certainly not a country in South Asia, not in Pakistan. You may find countries in Africa, you may find countries in { 45 STRICTLY ONFIDENTIAL Latin America or somewhere else. I mention this although it is quite obvious that Latin America, as a whole, and that Africa, as a whole, have not had a striking percentage out of the total; but if we just look at the per capita distributi n of IDA, you'll not find these two countries conspicuous. Some speakers have said that you must take the overall amount of assistance available to a country. vell, the opposite has also been expressed. But DAC and the Annual Report of the Bank, and the draft now has got a Table 10 and 11 in which a very useful new concept has been given, and that is the grant equivalent and grant per capita at discounte1 rates. I'm referring to new Table 10 that has been proposed and '!'able 11. Now I do think that the grant element has been somewhat overstated, because when it comes to -- I'm in the curious ambivalence of human beings -- when it comes to how food assistance is treated here, it's treated as an outright grant, but when it comes to control on counterpart funds, many countries are inclined to argue that the food is only sold for local currency, and the local currency is counterpar, and the counterpart money is our money, and we should have a say in this. I mean that IDA concessional money would be discounted here and treated as 80 percent or whatever percentage it is, grant, but when it comes to counterpart ', funds, it's just our funds and we should control them all, and therefore I think there's a tendency to overstate the STRICTL CONFIDENTIAL 45-A amount of it, but taken exactly at its face value, you will find various countries getting 20, 25, aid, or whatever it is, but again you'll not find India and Pakistan anywhere near 10 or even 5, so I wanted to say that if these tables are more . generally studied, you'd not find this as the country ·which has .had a large grant element, either from the world as a whole, or from the IDA institution as a whole. Able speakers from very important donor countries have already made the points and reasons for not taking a very rigid view, reasons for not making an abrupt cut; and it is with this that I wholly associate myself, needles to say, but I think they can take very much more, but I would point out there is something arbitrary and illogical in granting all the conspicuousness of a large country and recognizing that even its own friends would always, even when attacking this, be guilty of this, because it is quite obvious that in various proposals that have been made in the last nine months as to what India should get, what Pakistan should get, I am sure there's not been a single proposal that ?as not been more severe on India than on Pakistan, for the very same reason that India has a larger population, and it is much easier to add 2 percent to one country than to add 2 percent to another country. 46 STRICTL CONFIDENTIAL Allowing for all this, I therefore cannot expect to go any further than the various speakers have done. I would say it should not be arbitrary, it should not be a rigid ceiling. I welcome the statement in your paper, Mr. Chairman, that the reduction will be something of this order, and I think I welcome the statement from Germany and from Britain that it should not be very arbitrary; and in considering whether a cut can be steep or gradual, one has to take the circumstances of the country into account, what it is doing, its economic performance, needs, and all the other things I am sure you would be taking into account. I think I have now referred to what way of economic performance I'd go with, and on poverty, and creditworthiness. I think on the other very important point, as to project lending, Mr. Lynch has touched on it. I think this subject is bound to come up later. I welcome the points he has made, and I think that is very much a consideration that one should go to, what is the stage of development of a country, what are the benefits of lending in a particular way. These can be, I think, gone into on another day when we're discuss in IDA policies or what type of loans IDA should give. Today I do not think I would like to say anyth~ng more, except to request people who haven't had time to see the tables I referred to, to study them once again. Thank you, sir. 47 STRICTLY ONFIDENTIAL MR. McNAMARA: Thank you very much. Dr. Machado. DR. MACHADO: Mr. Chairman, I want to thank you for arranging this meeting. As you and my colleagues well know, I have been requesting a discussion of this type for over a year. I think this discussion is long overdue. I have asked, I have begged, I have pleaded and I am glad at last I have someone to answer my prayer. I'm glad that we're having this discussion today. I think it's ;absolutely essential. IDA has now been in operation for eight years, and this is the first time when we actually take a few hours out of our busy schedule to take a look at our accomplishment, our record, and like a man going for his annual physical checkup, to find out what's right and what's wrong, take stock of our successes, our failures, and I think that this self-examination is the healthiest thing we could do. Whether we like it or not, in looking at the results of eight years of operation, we all have come to one conclusion, and I am going to be very frank in my statements, I am making no criticism of anyone in particular, and I may have to say some things that may not be shared by my colleagues, but there's only one way we can face this problem, and that is by being very frank and calling a spade a spade. STRICTLY ONFIDENTIAL 48 The result of eight years of operation, whether e like it or not, and without analyzing why we reach that situation is that there's been a lopsided geographical dis- tribution of IDA resources. Figures are more eloquent than any words I can say. In eight years of operation, when we have handled all the sums placed at our disposal by Part I and Part II countries, India has received, according to Table I annexed to this report, 51.4 percent of the total resources of IDA; Pakistan, 19.1 percent, making a total of 70.5 percent. These figures are from your table. In fact, the rest of the world, and this means at the present time practically 98 countries out of almost a hundred in our ..organization have received only 29.5 percent of the total fund flaced at the disposal of IDA and administered by this Board. Now we all pay tribute to the principle of wide geographic distribution, and I would like to find out how wide with this, if anyone around this table, assumes that when 70.5 percent of resources at our disposal go to just two members, I don't consider that wide, I consider that very limited, I'll be honest with you. I believe that all the arguments we have about size of countries, size of population, poverty, riches, et cetera are immaterial when you're faced with the bare fact that the entire world has been receiving less than 30 percent over eight years of the resources of this organization, and 70.5 has gone to only 49 STRICTLY ONFIDENTIAL two countries. This has to be corrected, if we want to save this institution. What has been the result of this unbalanced,lop- sided geographical distribution? Well, it has created a very unfavorable image for IDA all over the world. I can assure you that the ten countries that I represent -- and I have here the letters and telegrams which I've been pas.sing to you as they arrived, Mr. Chairman, because I felt there was no point in reading them or mentioning them at this meetin one by one, the result is that there is absolute disillusion and disenchantment with IDA in the countries I represent, whic are all Part II countries; and this disenchantment, this disillusion is shared by Part I countries, and I think the main difficulty we are facing today in the lack of enthusiasm, the apathy, and the reluctance, I might say, on the part of the Part I countries to make a new replenishment of IDA is precisely the fact that in the result of our baseball game, there's been very unbalanced distribution of resources of IDA. My politicians at home are similar to the politicians every- where. The legislators feel the same way. They no longer call IDA, "IDA," but they call it "The India-Pakistan Club," and it's hard to overnight convince that this is the result of policies, principles, statistics, guidelines and tables, which are the result of the results. Therefore, we must face the fact that this situation has to change, and I welcome 50 STRICTLY ONFIDENTIAL the statement in your memorandum that from now on you intend to limit the resources to be made available to these two countries respectively to 40 percent and 12-1/2 percent, totalling 52-1/2 percent. I think you've been overly generous in making this classification, division, so now what remains for the rest of us, the 98 countries who aren't so fortunate as to have such a big population, et cetera, and we're not so poor, is the question what are we going to do with the 47.5 percent remaining? Your paper suggests some criteria as to how this remainder should be distributed, 47.5 percent of all future resources of IDA to be distributed among those Part II countries, members of our organization. There are several criteria mentioned, and I must say basically I am in agreement with three of them, and I'll mention them one by one. On the subject of creditworthi- ness I believe there's unanimous agreement on that. A country that can come to the Bank to finance its projects should not go to IDA. We do not have await, as I believe the original paper mentioned, lack of creditworthiness. I believe the new criterion which I had the privilege of suggesting is the correct approach. A country may be creditworthy for a project of $5 million or $10 million or $1 million; it may not be creditworthy for a project of $50 million. STRICTLY ONFIDENTIAL 51 When IDA was created, the main purpose was not to organize a charity, as evidently has been the feeling of some of the Directors, but as Dr. Mejia pointed out in his intervention, it was created as a sort of insurance organizati n that would assure that any member of the Bank who at any one time couldn't finance a high-priority project in the Bank due to lack of resources or lack of sufficient creditworthines, there was also IDA to come along, and by blending it would make it possible for a member of the Bank to finance a project essential for its economic development. That is the basic criterion and basic philosophy of IDA. It's not a charity institution; I look upon it more as an insurance institution, an organization that will insure any member of the Bank that any time when they need financing for a priority essential to development, they can be assured that this project would be financed, either by the Bank, if it can be done through the Bank, or by IDA, or by blending both Bank and IDA. Now another criterion, the third is that we should finance projects, and when I say projects, I say Bankable projects, projects that normally would be financed by the Bank if and when the creditworthy criterion is met by the member country. I do not agree with a statement made that only high-return projects are the ones to be financed by IDA. I think that should be changed to projects of a high 52 STRICTLY CONFIDENTIAL priority in the development program. Now if we're going to only finance a high return, perhaps a country will think it .can get IDA help to build a casino, which is a very profitable organization, instead of building schools which is probably what the country needs for further economic development. · There's no need for me to go into further examples. I think just as in the Bank, we don't look only at a high return on a project; sometimes we do .finance projects that do not have a very high economic return, but that are very high on the priority list of the development program and are essential to the development of the country. Then I come again to the criterion of performance. I fully agree with this criterion and I've been one of those who have been insisting that we as Directors of IDA should be tough in seeing that these funds, which are scarce funds, which are rationed funds, which when given to a country are taken away from the rest of the membership, and should be administered with absolute diligence and efficiency, perhaps more even than a Bank loan. In other words, it seems to me that a country should be prepared to make use of these funds in the most efficient manner, precisely because when assigned to a country, they are taken away from the common pot, we might say, and all the rest of the membership is deprived of use of these funds. 53 STRICTLY CONFIDENTIAL When we talk of economic performance, let's see if we are talking about the same thing. I think what we ·have to determine is performance of a country on those projects that we help the country to finance; or do we mean by performance we desire to get into other fields that might perhaps be considered by a country as interference in the internal affairs of a country? Now do we pretend because we make a loan of $1 million or $5 million to a little country that we have to decide on the foreign exchange policy, on the budgetary policy, insist that they cut out inflation which sometimes is completely beyond their control? In other words, we have to be very careful because the amount we are giving to countries, even in the case mentioned in your memorandum of Paraguay where they got assistance of $8 per capita, $8 as against an average income of $200 per year is practically less than 5 percent, it's about 4 percent, I might say, of the national income of one year. Now, how can we use basically -- what leverage can we use when our aid is so relatively small in comparison to the entire economi problems of the country? Is this a door that we are going to open for the Bank in an indirect manner to exert political pressure in the internal affairs of a country, because this matter of performance can cover a lot of fields. Every action and reaction of a country has an economic implication. 54 STRICTLY ONFIDENTIAL So therefore we have to be very careful and I would say that the important thing from our point of view is how a country performs on the loans we make to that country, on the credit we make available to the country, the dilidgence with which it's used -- that's what we have to concern ourselves with, and not use this door to come around and with a grand plan for a small country, say, "Now you follow this plan or else we won't give you any further assistance." I am afraid that might lead IDA into a field into which it was never intended to go, and for which it was not created. There's one criterion I haven't seen specifically mentioned in your list of criteria, and that is the balance of payments problem. I think the balance of payments situatio of a country is extremely important. A country that normally would not have recourse to IDA may, through unlucky crops or weather, or disappearance of its normal export markets, find itself in a very difficult economic situation, creating a serious balance of payments situation; and I believe regardless of how internally the economic situation is, and we have countries like that, right here, members of this institution, the problem of the balance of payments situation is very important, just as important as the other criteria. 55 STRICTLY ONFIDENTIAL I have left for the end a criterion which I'm not at all in accordance with, and I have stated this before so I will repeat it very shortly today, and that is that we have to give undue consideration to the stage of economic developme t. That doesn't mean in distributing rationed funds, that we should not take cognizance of the fact we should not be eager and ready to go after big projects in a country with a high degree of development and ignore the poor little country to which this amount of money might mean life or death. But on the other hand, I believe we are introducing, through this criterion, something never intended in the IDA Ai:'.ticles of Agreement. As Dr. Mejia very clearly stated, IDA classifie its membership into classes, Part I and Part II. I believe we should have a periodic revision not only of the policies · of IDA, but of the classification of the members of IDA. I believe there are countries in the Part II list now that it is time they should jump to Part I and perhaps there are countries in Part I which should be degraded or down- graded or promoted, however you want to put it, to Part II countries. I think the flexibility of this organization should be, from time to time, to take a look at ourselves and decide that a former race champion no longer can win all the trophies in the long race; and on the other hand, that new countries have progressed, with our help~ to a~point 'I where they can afford the luxury of becoming Part I countries 56 STRICTLY ONFIDENTIAL Now take, for instance, the difficulty created by these new devices of classifying countries according to their GNP. We have been operating in the past four years, and this memorandum says so, strictly applying the $250 criterion. There's been a cut-off line. There have been figures which were not compiled by this Bank, figures over which we have no supervision, figures on which I have telegrams, reports from my countries questioning the authenticity of these figures, which set an arbitrary line of $250. Now in a sense of generosity, the staff recommends that this be increased to $300. Well, why $300? Why $250? All you do by leaving it at $300 -- let me show what that does: between $300 and $400, according to these interesting figures, there are only three countries, Portugal, Nicaragua, and Costa Rica. Nicaragua and Costa Rica have been recipients of IDA credits in the past, and I think they should be, and will need IDA assistance in the future. Nicaragua with $318 is completely beyond the $300, and Costa Rica with $380 is completely beyond it. We're facing, in the Bank, difficultie with these countries in even meeting their present obligation to the Bank. They have the problem of'iriflatto~, of an unbalanced budget mostly created by a drop in their normal exports, but here's an absurd situation that is created with this artificial division. These two countries, 57 STRICTLY ONFIDENTIAL along with Honduras, El Salvador, and Guatemala have agreed to create and have succeeded in creating a Conunon Market in Central America. At the present time, these five countries are in a process of integration. Since the integration has become effective, these countries, in planning their public works projects, always take a look at the integrational aspect of these projects. Now let me cite a few instances. In the Inter- American Highway, which is one of the dreams of Latin America, the dream of a man some day taking a car in Alaska and driving all the way down through Mexico and Central America to Cape Horn. Well, there is an impasse there when you get to the border of Costa Rica. There is a p~rt of that road that has not been completely finished. Why? Well, Costa Rica is a sparsely populated country, a mountainous region; the cost of making an all-weather type of road is too high for the country to afford it at this time. Now they are thinking of doing this as an integrational project, as part of the integration network of roads in Central America. If we wanted to help this Central American integration, this is one essential high-priority project. The only way to do it would be to make the finance available to the country where the road has to be built, which happens to be Costa Rica. The only way it could be done is by blending some IDA STRICTLY ONFIDENTIAL 58 assistance, so that this could be done. Let me cite another case. Take Nicaragua. We are interested in Central America, and this has been one of the points you mentioned, of completing integration of the electrical system of Central America, having the electric grid, so that the excess electricity now being generated, let's say in Costa Rica, and eventually in Honduras, can be brought to make one common market, but Nicaragua can't afford to build the additional lines necessary for this · integration; if they have to assume this project by themselves it wouldn't be justifiable if they had to carry this burden alone, but with an IDA assistance project, they could do it. Now we've also been fighting with Central America "for not implementing our dream of a telecommunications system to the common area. There we have the problem of Honduras. Look at the map. This is a country where the northeastern section is practically without any population, a wilderness, mountainous, difficult places. Now you cannot have a tele- communication integration without Honduras, because it's in the map covering coast to coast from the Atlantic to the Pacific. The only way this can be done is not by asking Honduras to assume the entire burden, but by making available an IDA credit to take care of the situation. I could keep on, going on with the other countries. At this moment we are interested in providing Central America 59 STRICTLY ONFIDENTIAL with ports, not only on the Pacific but on the Atlantic, but the cost of decent ports in Costa Rica, Nicaragua, et cetera, is going to be very high for one country alone to assume this burden. Therefore, the necessity of leaving IDA's doors open so that these countries that have problems of their own can be taken into account, regardless of what statisticians with nothing to do say they're earning -- the facts are there -- that door has to remain open, if these countries are going to continue to be members of this organi- zation, and if we're going to perform our duty as Directors. Now this problem which is very important for reasons I mentioned now becomes absolutely imperative, after the first of August, when the standard interest rate of the Bank is going to jump from 6-1/4 to 6-3/4. Now this jump looks very small here in Washington, particularly for those who don't borrow from the Bank and don't have to pay it, but it's quite an economic burden on the already heavy burden existing on some of these countries. Now if these countries are deprived of the opportunity of blending the lending with IDA facilities, I do believe we are going to take a backward step in the development of these areas, so I beg you to kindly look into this, because this is of vital importance to the countries that I represent, as is demonstrated by the letters, telegrams, et cetera, that I have received and will keep on 60 STRICTLY ONFIDENTIAL forwarding to your office as they arrive. Now, let me go very briefly to the lending terms. I share the views of Dr. Mejia that we could improve our lending terms and improve not from the point of view of the recipient, and this is interesting, that he represents Part II countries and I represent Part II countries, and I do feel there is absolutely no reason why the duration, amortiza- tion terms of the IDA credits should not match those of the Bank. These would include projects that normally would be financed by the Bank, if there were creditworthiness in the country. I see no reason, no complication in the administra- ' tion of the credits if we adopt more or less similar, perhaps a little more liberal terms in the case of IDA. Again on the interest rate, I feel and I am authorized by the countries I represent to say that they would be prepared to pay not just 314 of one percent, but a little higher rate of return, if this in turn will provide funds for what I consider to be a mutual aid association to carry on in the future and benefit other areas. Now I am very grateful, Mr. Chairman, that you gave me the opportunity to speak so long. Please bear in mind I had to wait a year and a half in order to be able to express these views. I feel this is extremely important to countries I represent. I feel we should not hurry in try 61 STRICTLY ONFIDENTIAL today to settle everything. This isn't a train we have to catch, this is something that is going to decide the future economic development of countries that depend on our making a wise decision. I believe we should have periodic reviews of our policies, not every eight years, but oftener if possible, and this is very important because I feel that the position taken by my Governors at the September meeting, where we will hear about these things, on the transfer of Bank funds to IDA will depend largely on whether or not the doors of IDA remain open up until then. This is an important matter, Mr. President, and I hope you give it your best attention, and thank you for the privilege of speaking. MR. McNAMARA: Thank you, sir. Now Mr. Skjerdal. MR. SKJERDAL: Thank you, Mr. Chairman. I was aware that we were facing rather a complicatec question about distribution, and after hearing all the speeches so far, I think it has become still more complicated It seems to me there are two quite different views on IDA, and this goes to the center of the justification of IDA as an institution separate and independent from the Bank. Dr. Machado called IDA an insurance institution for members of the Bank. The other view might be, to which 62 STRICTLY ONFIDENTIAL I belong, that IDA is an institution established to give a hand to the poorest countries in the world, in the form of qualified technical assistance and qualified financial support. I think it is very difficult to bridge the gap between those two points of view, and it seems to me that your covering paper, Mr. Chairman, reflects this dilemma. The only suggested changes of a practical nature is to suggest raising the standard of IDA credit for eligibile countries from $250 to $300, and to set a fixed ceiling on credit to India and Pakistan. I am reserved on both of those points. Before commenting on the distribution criteria, may I say that I'm a bit skeptical about the phrase "fair distribution." Derived from this concept of fairness are the ideas that IDA should allocate its resources in a certain proportion to broad geographical areas such as Asia, Africa, and Latin America; that one should set a ceiling on credits to some countries, and I have read a suggestion to earmark a certain amount to a specific country. I am against a pre-fixed geographical allocation. I am against earmarking. And I would have preferred, if possible, to avoid a ceiling on percentage of credit to specific countries. STRICTLY ONFIDENTIAL 63 What IDA should try to implement is fair distributio in the sense that the same criteria should be applied, regardl ss of geographical location, and of course regardless of color and languages. A certain geographical distribution would follow as the result of other criteria, but it would not be considered a criterion in itself. On this point I agree with what's said in paragraph 15 in Attachment I. I will now comment on what has been called the distribution criteria. I agree with what is said in paragraph 10 of the draft paper, ' that the question of distributing IDA funds a.I'{long qualified countries is somewhat distinct from establishing qualifying crit~ria. When deciding the group of countries which should be eligible for IDA credit, I think there's only one basic criterion, and that is the political criterion. This is expressed in the Articles of Agreement, Article I, through the statement that the purpose of the Association is to raise the standard of living in the less developed areas of the world. I realize that the statistics or estimates on GNP per capita might be somewhat dubious, but I think the figures by and large provide sufficient guidance for the purpose; and on the basis of standard of living criterion or the pover~y criterion, we have to set a standard for IDA assistance to eligible countries which should be adapted to the IDA , funds available and to the absorbing ability of the poorest 64 STRICTLY ONFIDENTIAL countries and changes as these two factors change. If we look at Table III to Attachment I, we will find that 27 countries, including a number of African countr ie• , and also Pakistan and India and Indonesia, have an estimated GNP per capita of $100 or less, down to $40. This is a population of about 950 million people. If we lift the ceiling to $200, we'll include 48 countries and with a ceiling of $250, we'll include 60 countries; but I think with a standard of $300, we get only an additional five countries including three Latin American countries. This leaves us with a remainder of only 15 Part II countries, not considered eligible for IDA credit. I don't think from a practical point of view it will matter much whether we set the limit at $250 or $300, but if this lift is expressing a tendency in policy, I think we should be cautiotis, par- ticularly if at the same time we set a limit on two poor countries with a population of 600 million people. I have heard the argument in order to get broad political support for IDA, we should broaden our lending to Part II countries; and if I understood some of my colleagues correctly, they will just operate two groups: Part I, donor countries; and Part II, countries receiving IDA or eligible for IDA. I think what in the long run is most needed is to get it through to the taxpayer and politicians the knowledge 65 STRICTLY ONFIDENTIAL in Part I countries, the knowledge that through IDA they are making the most important contribution toward helping the poorest nations and people of the world, and to try to help them to get a starting point in their development. As long as IDA funds are in short supply, I think we should be careful not to water down the poverty criteria. More complicated than to fix a standard for IDA eligible countries is the question of allocation between those countries.I have found the analysis in Attachment I quite good, and I can substantially agree. I also agree with what is said in paragraph 11 of that paper, that it is no~ ea~y to define any firm principle or allocation, but since this is a fundamental question, I'd like to make some comment. As I see it, in short, the purpose of IDA is to provide qualified help for self-help, and if this view is accepted, this points directly to performance. In paragraph 7 of the paper there is given a definition of performance, and it is defined essentially as the principle that help should be extended to those who are making every reasonable effort to mobilize their available resources for the purpose of economic development. I agree with this definition and I think it's in line with A~tl~le Vt Section l(b) of the Articles of A~reem~htt where it is said that IDA should finan e specific projects of high developmental priorities in the ligh 66 STRICTLY ONFIDENTIAL of the needs of areas. My only comment in this connection is that projects of high developmental priorities should also include investment in human resources. That is very important to poor countries, including education, health improvement, and family planning, and that performance also should include social momentum of increased standard of living for the broad population. For the least developad countries I am convinced that we have to accept a will to performance in line with actual performance and I agree entirely with what you said in paragraph 19(b) and I welcome your statement on page 1 in the covering paper, which I think maybe will be the most important corning out of this discussion, that I think we have to do some promotion work in this field in the poorest countries. In my opinion, those are the two basic criteria for distribution: poverty and performance or will to perfroma e. These criteria have to be adjusted to individual cases and individual countries, and as adjusting factors we have to take into account the state of creditworthiness; inflow of capital or concessional credits from sources other than IDA, and I agree with what is said in paragraph 14 on that point; and the economic potential of the country. I don't think it's feasible in advance to set up a complete list of all adjustment factors as guidance for 67 STRICTLY ONFIDENTIAL individual cases. I now come to India and Pakistan, which are presente to us as special cases. In paragraph 17 of the draft paper it is said there is a widespread feeling that India and Pakistan have received a disproportionate amount of IDA credits. If we ask the question, disproportionate in relation to what, it might prove difficult to argue on objective criteria that these two countries' share has been dispro- portionate, unless justified projects in other poor countries have been turned down at the same time, which I don't know. I think the question we'll have to ask ourselves is this: Shall we apply the same criteria and guidelines for India and Pakistan as for other member countries eligible for IDA financing, and let these criteria and guidelines decide distribution, or should we make an exception for these two member countries because of their numerous population? This is a significant question, Mr. Chairman, and should not be answered on feelings. It is said in paragraph 17 that there's an increasing absorptive capacity of other qualified members. This fact should on a criteria basis, even out the share between India and Pakistan on the one side, and other qualified members on the other side; but presented by itself no justification for fixing a percentage ceiling for the two member countries. This tendency of evening out might be 6 STRICTLY ONFIDENTIAL still more distinct if you aim at reduction in the special credit to India and Pakistan for industrial imports, which I think we should. I hope that the prognosis is right, so that on the basis of the same criteria guidelines, we'll get wider geographical distribution among member countries and a relatively bigger share to the most of the poorer countries of the world, particularly in Africa; but in principle, I feel reluctant to accept that we a priori should set a ceiling on percentages of two member countries which in fact means that we, as a matter of policy, single out two countries for special consideration. I am afraid of the psychological effect of such a step, and I'm not convinced that it's necessary. On this point I will make one reservation. If a ceiling on credits to India and Pakistan is called for in order to obtain support for IDA from donor countries, this would by itself be an argument which we cannot overlook. If IDA funds in the past have been distributed in a disproportionate way in the sense that the same criteria has not been applied to all qualified member countries·, this might be reason to criticize, but I fail to see, Mr. Chairman, how any donor country can require more than that a geographical distribution based on the same criteria and guidelines for all qualified members is followed. 69 STRICTLY ONFIDENTIAL I have some comment on the terms and counterpart. I don't know whether to take that up now. MR. McNAMARA: Whatever you choose, sir. Others hav ; you may wish to or we can come back to it. MR. SKJERDAL: The terms of IDA credit, I can be short. I agree that the terms should not be related to the individual project and the rate of return on the project, but to the general economic position of the country. I also agree that IDA credits should be made on the same terms to all countries. Logically, the second question is connected with the criterion for deciding IDA-credit-eligible countries. The more liberal one would be in the extension of credit to countries in the middle class, the more that can be said in favor of differentiating the terms for different countries. I think both Dr. Mejia and Dr. Machado are quite logical in their approach to this question, but if one, as I do, will consider poverty as a basic criterion, I see no strong reason for not maintaining the present system, and when credit is linked with a country's economic position and not with individual projects, one always has the opportunity to implement a kind of differentiation on a country basis by blended Bank-IDA financing. 70 STRICTLY ONFIDENTIAL The last question is what the terms should be. I understood that when IDA was established, the intention was to give credits close to grants, and I think IDA is setting a kind of standard for concessionary terms. Both of these points speak in favor of maintaining the present terms. On the other hand, we're faced with the fact that 50 years today in terms of economic development is a very long period. Nosody can foresee how a country or the world will look in 50 years. There's only one thing we can be sure of, and that is that the speed and direction of economic development in the present IDA countries will differ much in a period of 20 to 50 years. This speaks in favor of some revision clause, and on balance I'd be in favor of the alternative outlined in paragraph 7 of Attachment II. I have heard it said that a revision clause will introduce an uncertainty which the the receiving country could not accept. I do not think that this argument is valid. A revision would only be undertaken, I believe, in cases where the economic situation or where even the country has improved to such an extent that it did not cause hardship to a country' economy if the amortization period were shortened. Furthermore, such a provision would underline the solidarity between all IDA countries, which I think should be a leading principle for all IDA operations. STRICTLY ONFIDENTIAL 71 On the question of counterpart funds, I have no strong feeling. I'm not very enthusiastic about a middle, in-between solution in the form of some kind of general statement that the funds should be employed for the purpose of economic development, because I'd consider such a statement sheer window dressing without any practical reality. On the other hand, I agree with what you said in paragraph 4, Attachment III, that counterpart funds will not play a significant role in general monetary policy, and I also agree that for this reason alone it would not be worthwhile to implement an extensive control system over the disposition of these funds. However I'm not quite convinced about the presentati in this paper and that is for two reasons: first, because I think it is feasible to implement a system of controlling counterpart funds without any administrative burden at all; and secondly, because we are to some extent faced with the problem of financing local expenditure connected with a Bank or IDA project. It has been argued, particularly from developing countries, that the Bank-IDA are too restrictive in the practice of financing local costs. I will not take up this question now, but I think there may be a need in speci 1 cases, particularly in the poorest countries, to secure local cost financing; but instead of doing this in the form of foreign currency, counterpart funds could be used for the 72 STRICTLY ONFIDENTIAL same purpose. I think it's possible to find a very simple solution Counterpart funds could be separate, but could be used freely by the receiving country to finance local cost of future projects approved by the Bank or IDA for financing by these two institutions. In my opinion, this system would have the following advantages: the Bank and IDA could more easily limit their lending to the foreign expenditure portion of the project, as long as there were counterpart funds available in the country, and in this way extend their funds to more projects. It might to some extent meet the borrowing country's budgeting problem in financing local costs or specific projects at a given time. IDA will be assured that counterpart funds will be used for high- priority purposes without having to do any evaluation or control of the project in addition to the work necessary as part of its normal lending operation. We would not be taking anything away from the country, but instead of supporti g the state budget and maybe exposing IDA to criticism, we will follow up the concept that IDA credits shall be for projects of high developmental effect. On the question of rate of commitment I have nothing to say. I agree with the proposal and just hope it will prove to be realistic. 73 STRICTLY ONFIDENTIAL Thank you, Mr. Chairman. MR. McNAMARA: Thank you very much. Gentlemen,I think we might accept one more speaker before lunch and then adjourn to 2:30 if that is acceptable to you, reconvening at that time. The next speaker would therefore be Mr. Coleman. MR. COLEMAN: Mr. Chairman, could we come back? MR. McNAMARA: Yes, surely, if you prefer to wait until after lunch, we can adjourn now, if you wish, and reconvene at 2:30. (Whereupon, at 12:55 p.m. the meeting was adjourned, to be reconvened at 2:30 p.m. the same day.) 74 STRICTLY ONFIDENTIAL AFTERNOON SESSION (2:30 p.m.) MR. McNAMARA: Gentlemen, the meeting will come to order, please. I believe we'll turn the floor over to Mr. Coleman. MR. COLEMAN· Mr. Chairman, I have studied with considerable interest your memorandum of 24th June and of 16 July, with the attachments,on the subject of IDA policy, on which I would like to submit the following comments for your and the Board's consideration. Essentially, the questions posed by you, r1r. Chairman, in your memorandum of 24 June go immediately to the heart of the controversies surrounding the subject of IDA polJ,cies: distribution of IDA funds in the past, and what criteria should go into the future allocations of IDA funds. I have noted with great satisfaction your sympathy with the view that "no single country, however large its population and great its needs, should receive as much as half of the assistance forthcoming from an international institution charged with a broad international mission" of administering aid, and I concur fully with this judgment. This brings me to this fascinating subject to which Mr. Jagannathan referred. Despite other sources of funds, one cannot overlook the fact that IDA is a special arrangement, and that no single country should receive favored treatment 75 STRICTLY ONFIDENTIAL from IDA. The difference is that IDA is an international institution, as distinct from other sources of aid with their implications. While I have great sympathy with the population phenomena of India, particularly, and that of Pakistan, I feel that 45 percent and 16-1/2 percent respectively, of IDA funds under the Second Replenishment, to India and Pakistan, seem indeed high and gnjustified. A 40 and 12.5 percent respectively of IDA funds in subsequent years to these two countries, or a combined allocation of 61 percent in the first ye~ and 52-1/2 percent subsequently are still disproportionat ly large allocations for only two IDA recipients, when viewed against the background of previous allocations to these two countries since 1960, and the fact that most of the committed funds are still undisbursed. Moreover, the proposed rate of disbursement to India and Pakistan under the Second Replenishment hardly seem justified, considering the backlog of unutilized credit committed under the First Replenishment to the two countries. It is difficult to understand, also, accepting the argument that country allocation is impracticable on a geograp ic basis, how these figures were arrived for India and Pakistan in the first place; and if they are to stand as allocations, ten an arbitrary figure might likewise be assigned to each 76 STRICTLY ONFIDENTIAL country without relevance to need or the capacity of the borrower to utilize the funds. The absorptive capacity of both India and Pakistan to utilize these funds in the past has been low, · unequal to the rate of disbursement, while other countries with higher absorptive capacity have been deprived of the use of these idel funds. I incline, therefore, to the view that any excessiv_ amounts of IDA funds which are committed to any borrower but which are not utilized in a reasonable time, should lapse if the delay is due to the inability of the borrower to utilize the funds. In respect of the criteria we should control allocation of IDA funds in the future, I wish to offer the following three broad categories for determining eligibility or qualification for IDA funds under the Second Replenishment which also comprehend those enumerated in the documents under consideration. Category A. Insufficiency of creditworthiness. This is a condition commonly caused by erosion of the credit position of a member due to cumulative debt. (2) Balance of payments difficulties or trade imbalance, as a result of declining export earnings of the memberi falling commodity prices, shortfall in crop production and crop failure. 77 STRICTLY ONFIDENTIAL (3) Budgetary stringencies due to vigorous pursuit of economic development against which local currency expenditures are required, as counterpart support to foreign aid by a member country. Category B. Economic performance is a formidable concept and as a discriminating criterion for establishing country eligibility for IDA credits, the management will be obliged to supply these criteria in the spirit and meaning of paragraph 19(b) and (20),page 6 of Attachment I of the memorandum of 24 June. It will be necessary to judge the degree of intervention which would be tolerable to countries in applying the criterion of economic performance for qualify· 9 a member for IDA credit. Category C. Relative stage of economic development becomes a valid criterion for allocation of IDA funds if, as sugg~sted in paragraph 18 of Attachment I of 16 July, it is viewed~as "a general guideline for operational decisions in view of the large margins of uncertainty which affect estimates of per capita income," ~ather than the use of a per capita figure of $300 mentioned in the same paragraph and/or the suggestion to slow down disbursement in countries whose per capita receipts from IDA reach relatively high figures. The latter two considerations are subject to errors of· judgment because of population differential from country to country. India and Pakistan, for instance, STRICTLY ONFIDENTIAL 78 with their very large population, have received comparatively very large proportions of IDA funds under the First Replenish- ment, even though in terms of actual figures, allocation to th se two countries far exceeds the combined total of allocations to all the rest of the IDA customers. thus, the concept of per capita allocation becomes distorted when used in relation to measures based on population criteria. It is therefore necessary to reconcile the avoidance of extreme tendencies pointed out in paragraph 16, page 5 of Attachment I, with the per capita concept. These two are in conflict. Moreover, the other desirability of effecting wide geographic distributi"on of IDA funds will be defeated by the imposition of the $300 per capita figure. There are those countries which have a higher per capita income than $300, but which may qualify under Category A or B above, for IDA funds to relieve a condition of stringency. Should they be precluded on the basis of the per capita concept of enforcing a flow figure of $300? However, if general guidelines are used as a basis for operational decisions, then the flow figure of $300 can be omitted from the criteria for distribution of IDA funds without prejudice to any member. Lending ~erms. With respect to IDA lending terms discussed in Attachment II to the memorandum of 16 July, 79 STRICTLY ONFIDENTIAL I concur with the view that differentiation of IDA terms on account of project consideration is undesirable. Where operational decisions may require the recog- nition of relative economic development among countries in allocating IDA funds, the blend concept of Bank loans and IDA credits would be sufficiently compensatory and regulatory in each circumstance requiring it. Therefore, I favor retention of IDA's present lending terms. Control of counterpart funds. In the event ' ~here is a re-flow of funds t6 the member country from IDA credits, the suggestion offered on page 2, paragraph 6-of Attachment III, namely, "IDA should be satisfied with a general commitmen from the borrowing government without requiring the segregatio" or control "of the 'counterpart funds'" as adequate to insure proper and efficient use of the funds thus accrued to the bor w- ing government. Rate of commitment of IDA funds under Second Replenishment. I find myself in general agreement with your recommendation, Mr. President, subject to effective use of the Second Replenishment to disburse $530 million in fiscal 1969, and the remainder of $530 million in fiscal year 1970, and additional undeterminetl amount accruing to IDA ', from Bank transfer of profits or from other sources, as they become available. 80 STRICTLY ONFIDENTIAL It might suffice that the rate of commitment and level of assistance from IDA to member countries which fall within each of the broad categories described above may be further dictated by these additional considerations: (a) to the extent that a member country is experien - ing economic dislocation as a result of extreme budgetary pressure under Category A, IDA credit should be enlarged to modify the impact of such economic distress and hasten correction of this condition. (b) Support to a member's development program. Apart from project financing to insure maximum assistance to the member's development program, it is felt that IDA should give loans for program support. The net effect of this dual financial support to members' development effort is to insure complementarity as well as validity and the usefulness and need for development programming, with an aim toward promoting balanced economic growth. Moreover, this form of financial support to the member would preserve the development tempo and assure steady economic growth through the regularity in the flow of funds on concessional terms. Such a policy might conceivably provide another dimension in development financing, and thus offer possi- bilities and new solutions for achieving development growth in the underdeveloped world. 81 STRICTLY ONFIDENTIAL Thank you. MR. McNAMARA: Thank you, sir. Mr. Jahanshahi, please. MR. JAHANSHAHI: Thank you, Mr. Chairman. I think the best guideline in formulating the IDA credit policy is the philosophy and idea that have brought this institution into existence. We know that the developed countries agreed generously to create IDA in order to help the poor countries in their campaign against hunger and disease, and to fill the gap between the rich and poor nations to the extent possible. Fortunately, IDA was not only a club of rich and poor nations; many other nations with average per capita income by joining this institution, welcomed this collaboratio in our international community. In my view, it is obvious that these middle-income nations have not joined this club with any intention of gettin benefits from the limited resources that Part I countries, in spite of all their problems, could contribute. With these considerations I come to the conclusion that the IDA credit po-icy should be based primarily on the criterion of poverty as w~s mentioned by Mr. Skjerdal and some of my other colleagues. Each of the other criteria mentioned in the documen 82 STRICTLY ONFIDENTIAL has its own merit, but in my view economic performance should be considered as an important factor of judgment. This will encourage nations in need of IDA assistance to work harde and to organize in a better way, their economies. In other terms, IDA assistance should be given to the nations which themselves try to make an effort to solve their problems. I have some concern, Mr. Chairman, about the insufficiency of creditworthiness as a criterion for this purpose. Some very poor countries needing IDA help may not be suffering from lack of creditworthiness mainly because they try to avoid policies conducting their economies to such an unfortunate situation. With regard to ability to present acceptable projec s, I wholeheartedly welcome your recommendation to assis.t these countries in identifying and preparing acceptable projects. In looking at Table II of the document, one notices that the total population of the countries having a per capita income below $250 is 1, 330, 000,000, of which 926,000,000 have an income below $100. Also in lifting the ceiling from $250 to $300, we add another 47,000,000 to this figure of 1,330,000,000. I am ready, Mr. Chairman, to support your proposal in this connection, but I hope the ceiling will be kept for the next few years. 83 STRICTLY ONFIDENTIAL I perfectly agree that for practical reasons, it is ot possible to earmark or allocate in advance IDA funds for acb individual country or by broad geographical areas. or the same reason, I do not think it is a correct policy o establish a ceiling for the country. Here I cannot remain silent on the great, unfortunate effects that a limitation of share.s from IDA may have on the economic plans and efforts that a country like Pakistan is making, and the impact of such policy on the economic growth of these countries, particularly as :..~- getting soft-term loans from other sources has become mor~ difficult in these days. The argument mentioned in one of our informal . :11\eetings with regard to the share of India from IDA was ~at in a multilateral institution, no member should be given half of the available resources. Regardless of the •· validity of this argument, I do not see any reason and I cannot share the view that the share of Pakistan, a country that has shown the role of IDA credits in economic developmen and the successful results of this assistance, be reduced from 19 to 12-1/2 percent. this reduction of 34 percent of the previous share will prevent this country from reaching the stage of self-sustained growth in the next few years, as it could be expected. ' ' I am glad Mr. Lynch suggested the revision of these 84 STRICTLY . ONFIDENTIAL ceilings• In the matter of IDA lending terms, having again in mind the idea and philosophy behind the creation of this institution, I am glad, Mr. Chairman, to see that you do not propose any change of policy and hardening the softer terms. In connection with the control of counterpart funds, I am prepared to support your recommendation. These funds could be employed for purposes of economic development, including educational expenditures and investment in human resources. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, indeed, sir. Mr. Tazi. MR. TAZI: Mr. Chairman, I had the opportunity to express express my views on this subject during the seminar which was held a few days ago, and I took the liberty of summarizing those views in a document which was circulated to my colleagues and to the management. However, with your permission, I would like to make a few comments on the major recommendations which are contained in the second document you have distributed to us. I greatly welcome your revised memorandum on IDA policies. I'm glad to say. that with many of the sugges tio s contained in it, I find myself in complete accord. 85 STRICTLY ONFIDENTIAL I agree with the suggestion regarding the raising of IDA lending to countries with a per capita income of US$300. It would extend the range of the countries which are eligible for concessionary assistance from this source. Here I would like to state that while deciding which countries fall within the limit of US$300 per head income, we should stick to the per capita income figures for the year 1965 shown in Table III, insofar as allocations from the Second Replenishment are concerned. I also support the recommended approach relating to control of counterpart funds, in terms of which IDA is to be broadly satisfied that these funds will be employed for purposes of economic development, without requiring their segretation in earmarked accounts, subject to IDA review or scrutiny. In regard to IDA lending terms, I am in favor of continuing the present terms and of softening these further by elimination of the service charge altogether. The cost of the present service charge to the borrower, if discounted, at 10 percent, is slightly larger than the present value of principal payments. In other words, to the extent that IDA falls short of being a grant, the service charge accounts for about half the shortfall. I doubt, Mr. Chairman, whether this result was intended. I am glad to note that the practice of having 86 STRICTLY ONFIDENTIAL differential terms for different countries is rightly not being resorted to because of administrative cumbersomeness, and that the eminently practicable and flexible practice of blending Bank and IDA funds is to be employed to meet the requirements of individual situations, both now and in the future, if unforeseen developments should occur. While endorsing these many features of the proposed IDA policies, I am still uncQnvinced about the non-feasibility of establishing some sort of advanced quantitative allocation for broad geographic regions, if not for individual countries. As I stated in my previous submission to the Board on this subject, if quantitative ceilings can be established for India and Pakistan, these can also be set up for other broad geographic regions. Mr. Chairman, we have already the not very pleasant experience of seeing this disproportionate share of IDA funds, nearly 72 percent, absorbed by India and Pakistan, in the absence of quantitative limits. Mr. Chairman, it has to be realized that the present lending criteria are designed to guide specific operational decisions and do not themselves establish priorities among potential borrowers. Adherence to this criterion alone, as our experience to date reveals, cannot secure us against accidental unfairness. I'm afraid without broad quantitative limits for distinct geographic areas, it will be very difficult to avoid accidental unfairn·es 87 STRICTLY ONFIDENTIAL Mr. Chairman, quantitative limits, aside from ensuring that IDA operations are fair, and what is equally important, are seen to be fair, would also act as a spur for both the bank staff, as well as development authorities of the countries concerned, to make every practicable effort to effectively utilize the allocation. I understand, Mr. Chairman, that from the current year onwards, you have also instructed the Bank staff to work in relation to certain targets for Bank loan operations in individual countries. I fail to see why this cannot be set up for IDA. Mr. Chairman, I would like on this occasion to underscore again what I previously stated regarding the criterion of economic performance. Any judgments about economic performance are likely to be vague and subjective. Also it will be very difficult for the Bank staff to have a thorough grasp of the social and political constraints on economic development in a particular country. As such, by and large, the judgment of the government concerned regardi g developmental priority should be respected. Mr. Chairman, here I'd like to support the views expressed this morning by our dean and colleague, Dr. Machado, on the criterion of economic performance. The approach he suggested is certainly a constructive one, and I express the hope that serious consideration be given to hi,s STRICTLY ONFIDENTIAL formula. _1.. _· Finally, Mr. Chairman, with regard to the rate of conunitment, I fully agree with your proposal on this subject, as well as on the desirability to conunit fully the funds generously made available to us by Part I countries. Thank you. MR. McNAMARA: Thank you, sir. Mr. Mentre. MR. MENTRE (through Interpreter): Thank you, Mr. Chairman. I request permission to speak in French, Mr. Chairma . I think that today's discussion is of particular importance, even though we may consider it as do other administrators, that IDA policy may be decided once and for all for a few years to come. As far as the documents which were distributed are concerned, the essential part is the distribution criteria of IDA funds, and more generally, geographical distribution of IDA credits. I think there is not much to add to the memorandum as far as the first criterion is concerned, sufficiency of creditworthiness, and the economic performance criterion. These two points, I believe, the limits are clearly marked in the report. It's clear that these criteria applied give 89 STRICTLY ONFIDENTIAL prize to those countries which have established a better orrowing capacity than others. In fact, I think the dominant hing which dominates the credit distribution criterion of DA resources and the fact which has been noted in the report, he contents of the credit terms, in fact these credits corresp d grants of 80 percent of their total. Giving grants, I think, nder these conditions, the determining criteria should be hose of poverty; that is to say, which is brought out in detai n the report. I should say about this that it is particularly isappointing to see in Table II which is attached, Attachment , to see in Table II that among the 19 countries which have he smallest per capita gross national product, less than 95, the first category, among these 19 countries, ten have ever benefitted from IDA. This is an anomaly which should e remedied. It is certain that one of the elements which ontributed to this anomaly and which is noted in the report ·s the impossibility for certain countries, in particular hose small countries, to present projects which would be ligible for IDA financing, and this point is stressed very ightly in the report, and from this point of view we think aragraph 19(b) in which it is said that the future of IDA-- that in the future, IDA will play a role of promotion of plans in the poorest countries which are eligible, is quite interest- ing. 90 STRICTLY ONFIDENTIAL This criterion of poverty and perhaps the essential part of it places the questin of the limit of availability of IDA resources and geographical distribution of those benefitting. As far as the eligibility limits are concerned, ">'• ', #even though the problem is not of major importance, we are rather reticent about the idea of raising the level from $250 to $300 for the threshold of eligibility; as a general rule we'd rather have individual cases taken into consideration as was brought out by Dr. Machado. As far as distribution between countries is concerne , the first problem is obviously the problem underlined in the report on India and Pakistan. I think here it doesn't deal with the fascination exerted by India, but rather one by the figures, since these twcxcountries have benefitted from 70 percent of the credits which were granted up until 1966. I think then that in order to maintain the character of a general development aiding organization, a certain limitation on the part of these two countries is legitimate, and from this point of view the guidelines that you propose are a first step in the right direction, even though we are somewhat concerned by the appearance of another country which is highly populated; that is, Indonesia, and I should say that references made to the size of Indonesia being the size of 91 STRICTLY CONFIDENTIAL Pakistan and a per capita income being comparable, I think during your trip to Asia you saw the role that the Bank and IDA could play in these countries. It might be somewhat of concern if an extraordinary majority, given to two countrie should be distributed among three countries, instead. I think then the maximum ceiling percentage granted per country, particular attention should be given to the possible developmen credits given to Indonesia. Within these limits for the main countries, the solution which would be most logical is obviously to establish predetermined criteria and to choose, as these criteria, strengthening them if demand is superior to resources, at least at first to favor promotion of projects on a rather wide geographical basis, there might be some merit in the idea that we could have in the annual program a certain geographical env.elope, witliin.:_which the projects would be divided into main geographical zones. I should say that on this point, even though it makes reference to French logic, I am not entirely convinced by Mr. Lynch's arguments, in pointing out that there was no reason to limit the aid granted to a given eographical region. Two of these arguments in particular ave not fully convinced me. The first is to say that a ody of multilateral assistance should logically fill the aps of the assistance programs of a bilateral nature. te pointed out that the United States had a very generous aid 92 STRICTL CONFIDENTIAL program, mainly concentrated on Latin America; France had an aid program largely concentrated on Africa, and France now followed by its partners in the Common Market; and then the international bodies had the opportunity to have their influence in other sections. I wonder if the logic of Mr. Lynch's argument would not be to say that the international bodies have the oppor- . tuni ty to act in the Commonweal th countries • This second argument, to which I was not too sensitive, was that of the balance of credit programs which were granted to India and Pakistan, this exceptional credit has not been generlly granted, and has thus contributed to geographic distribution. Reference was made to credits which were given to certain European countries immediately after the war, and on this point I think that if you can quite simply say that before the Marshall Plan it was necessary to furnish reconstruction credits to Europe, this took varying forms. Great Britain got mainly bilateral credits from the Import-Export Bank, France got one from the World Bank. What I mean is that these credits have now been entirely repaid; that is to say, the shares have been bought up, and if my idea is correct, the Export-Import Bank has been paid. This having been said, it is clear that the 93 STRICTLY ONFIDENTIAL improvement of geographical distribution by active promotion of projects which are financable by IDA, we hope by vigorous action in this sector and by a particularly personal treatment to the countries whose per capita income is less than $125 or $150, a more satisfactory balance may be obtained in the future, a balance which would be more satisfactory and which surely would be one of the elements for strengthening the interest of participating governments, particularly France in further activities of IDA. I will pass more rapidly over the other points which are analyzed in this report. It is possible, first of all, that we may want to return after this first discuss io , so I'll giVE¥OU my preliminary reactions. As far as loan conditions for IDA are concerned, we continue to think that even if the poverty criterion remains dominant, there will be in the benefitting countries of IDA credits, those countries which would be abla to stand higher or more severe reimbursement burdens. It is quite likely, realistic that the use of interest rates is a difficult practice, but we think so far as duration of loans is concerned, and more so a period of grace not rep~y.- able for a ~period of ten years, the most thorough study could be carried out to see if it would not be possible to distinguish on this point, IDA credits. STRICTLY CONFIDENTIAL 94 About counterpart funds, here again we think there is a problem which remains, and we think that the analysis so far has been slightly negative. We understand it is difficult to tend toward precise and detailed control of the use of counterpart funds, but in order to ensure that these counterpart funds are devoted to development, we could think of attributing them to local development banks where financing of what is possible in local currency on this I share the opinion that there is here a field of possible action. I think as far as use of counterpart funds is concerned, the discussion could be usefully taken up again after the meeting which theoretically will be on the 13th of August, and it should be studied how IDA credits could be used to finance local expenditures. The last point is the rate of engagement. The period covered by the Second IDA Replenishment, we think that the proposals which are made here are reasonable ones. We see a certain time lag in the engagements. We hope that as far as the effective payments, effort will be made to obtain a certain distribution in time, avoiding abrupt variations in this sector in one year. Thank you, Mr. Chairman. This is what I wished to say about the important and interesting report which you distributed to us. 95 STRICTLY . ONFIDENTIAL MR. McNAMARA: Mr. Reid. MR. REID: Thank you, Mr. Chairman. I think these are very good papers before us. They make it easy for us and our authorities to focus attentio :on the important issues, and I think also the paper that we discussed in 1964 on IDA criteria, which we looked at again, also stands up very well over the past five years; and this paper we again found helpful in formulating our views I think the six questions which you have listed, Mr. Chairman, are very helpful indeed. It does occur to us, however, that there are some other fundamental issues coneerning the policies of IDA, and for that matter, the Bank, Bank and IDA strategy, general approach and philosophy which are not encompassed in the six questions that are before us, and indeed, some previous speakers have made reference to them, and I am also thinking of Mr. Escobar's paper which was circulated to us some weeks ago. also some remarks Mr. Tazi made in his paper concerning the social premise which he thought should underlie the Bank/IDA approac to development, or at least should be ·taken into account. And I think Mr. Skjerdal raised some of these issues, as did Mr. vome Hofe and Dr. Machado. The question of what is the general Bank strategy and approach to the Bank/IDA strategy to individual countries. 96 STRICTLY ONFIDENTIAL Now, I don't think that we have to list these broader issues for discussion now, but I do hope that as the months go by, we'll be able to get into some of the questions that have been raised. I would like to say now that to all intents and purposes, we agree with the recommendations in the paper and your covering memorandum concerning terms of IDA assistanc, counterpart funds, and rate of commitment. I will come back at the end to the question of terms and counterpart funds, very briefly. At this time I'd like to speak mainly to the question of the criteria for distribution of IDA funds. It is, however, difficult, I find, to come to a conclusion of how IDA funds should be distributed without knowing how much IDA will commit over the next two years, and indeed over an even longer period. We believe that the problem before us is reduced and made easier, the more soft funds IDA has to commit; and in listening to this very excellent discussion today, I could not help but conclude that many of our problems would be removed, if only we were discussing an IDA which had significantly more resources than was involved in this particular replenishment. What I say concerning the distribution of IDA 97 STRICTLY ONFIDENTIAL funds is anyway, at least for today, based on the assumptions that IDA will make a concerted effort to commit all available resources during the next two years, and that there will be significant profit transfers from the Bank, at least for this year. I might add here, as an aside, that we'd see no point, really, in transferring any profits from the Bank to IDA, unless attempts were made to commit all available resources, including the transfer of profits. I also assume that the Bank and IFC will significant y increase their activities over the next two years. It is perhaps misleading to think of the distribution of IDA funds in isolation. Any inequities which may appear are sometimes offset by the fact that the Bank and IFC are active, and will be presumably more active in countries where IDA is not so active. While with others we do recognize the advantages of a fairly broad geographical distribution of funds in an international organization, the starting point su ly of international development institutions must continue to be a ~iscriminating objective development criteria, and if I could describe our reaction to the various criteria listed in the paper, I could first start, perhaps, with those criteria which we do not place much weight on. For example, we don't place much weight on the criterion of the need for projects to show a high rate of return, if this is defined as a quantifiable economic rate 98 STRICTLY CONFIDENTIAL of return. This might rule out assistance to countries where the long-term economic and social benefits of priority projects . cannot be easily quantified and measured. For example, this might apply to some kinds of educational projects and some kinds of agricultural projects. Nor do we give weight to the insufficiency of creditworthiness criterion -- I should say nor do we give much weight to that criterion, because as has been pointed out in the paper before us, this criterion does tend to penalize poor countries who apply sound policies and keep thei debt service problems under control. Now if I could turn to the criteria on which we place considerable importance, they are first the criterion of performance and the criterion of the relative stage of economic development or per capita income, to the extent that per capita income can be measured. Now having mentioned these two criteria, I think perhaps I should pause to take a closer look at what we mean, first of all, by performance; and secondly by this concept variously described as relative stage of economic development, per capita income, or poverty. I agree with the general definition of performance that is contained in the paper; in other words, the extent to which the country is making reasonable effort to mobili~A STRICTL CONFIDENTIAL 99 domestic resources for development, and in this respect I think I might be disagreeing with Dr. Machado and Mr. Tazi, but I think this is an example of an issue which -- a funda- mental issue which we can perhaps discuss in later months. Now on this question of the per capita income criterion or poverty or whatever it is, I think we should perhaps ask ourselves or remind ourselves why it is that in discussions in development circles of how soft money should be allocated, why it is in these discussions which are not just confined to this institution, why it is that so much weight is placed on this question of per capita income in discussions of how soft aid should be allocated amongst countries. Now, is this not because a country with a relatively high average per capita income has consid- erably more domestic resources which it could at least potentially mobilize, not only for economic development but also for debt servicing~ whereas is it not true to say that the opposite is true for the poorest countries, which over the long run, no matter how good their performance, would have greater difficulty in mobilizing enougp savings to pay significant amounts of interest on loans? Now, if this is true, Mr. Chairman, it follows that the poorest countries should tend to get more scarce soft aid than countries with higher average per capita STRICTLY ONFIDENTIAL 100 incomes? But this by no means entails that these higher income countries, which are certainly still poor, should be ignored. On the contrary, many of them are receiving soft aid from other sources; and, provided they follow appropriate domestic policies, these countries have now and potentially the ability to service more loans at connnercial rates of interest, more loans than they are now receiving, and I think this means greater effort should be made by the capital- exporting countries to free more capital on these commercial terms, particularly capital in untied forms, such as flows of the World Bank, that efforts should be made by capital- exporting countries to free capital to move to the higher income developing countries, and this is not to say that we not should/continue our attempts to soften the average terms of total aid flows, so that there can be more soft aid as well as commercial aid, and so that these soft funds can be more widely distributed. I think also when it comes to the problems of developing countries with higher per capita incomes, I think it is _now generally agreed there should be debt rescheduling operations when appropriate, in cases where there is pile-up, a short-term pile-up of external debt; and of course an international effort should be made to help all developing countries to increase their foreign exchange earnings and debt servicing capacity. 101 STRICTLY CONFIDENTIAL As I mentioned before, we do place heavy emphasis on the criterion of performance and relative per capita income. We also agree with paragraph 14 of the criteria paper, that "IDA can hardly escape giving consideration to the amount of assistance prospective IDA borrowers may be receiving from other sources of finance," and here we have in mind soft assistance. Also in applying these various criteria, I think they should be employed not to just establish a list of eligible countries, but to determine the relative allocation of funds among countries. Thus, in applying these criteria, other things being equal of course, a country only barely meeting performance tests ought not to receive as much as a country with an outstanding record of devotion to econom development. A poor country which has less potential debt servicing capacity should receive more than a richer country, and generally speaking, a country which receives relatively less soft aid from other sources should receive more than the country receiving relatively high levels of soft aid. By contrast, richer countries, because of their inherent ability to service interest-bearing loans, provided they follow appropriate policies, can frequ·e ntly qualify for high levels of Bank assistance, as sometimes can countrie 102 STRICTLY CONFIDENTIAL which are receiving soft aid from other sources. Now having said this, Mr. Chairman, I think I can indicate that our position is flexible because when we look at these criteria, we do consider that all three of them are interrelated. For example, a country which is receiving high levels of soft aid from other sources may be at a low level of economic development, or it may have a high level performan e, as I think Mr. Rice made this point or part of it. I think it could be noted that stress on per capita income does not mean that all of the poorest countries receive high levels of aid from IDA because if we bring in the performance criterion, it is only those countries which have an dequate performance or a good performance which will be receiving substantial funds from IDA. Turning to the criteria paper, paragraphs 17, 18, and 19 mention ways of avoiding a situation where the application of criteria might result in an undue concentra- tion of IDA assistance, and I'd like to conunent on these paragraphs but I think it is true to say that eventually the best way to broaden distribution of IDA funds would of course be to replenish IDA at a higher level next time. It is surely because IDA has insufficient resources at its disposal that we have to resort to such rationing devices as, for example, per capita income ceiling. 103 STRICTLY ONFIDENTIAL But turning to the proposals in paragraphs 17, 18 and 19, we place particular if not almost sole weight on paragraph 19(b), and indeed we believe that this approach alone might well achieve the desired results, without contra- dicting the criteria. We therefore wholeheartedly welcome the proposal that IDA intensify its efforts to assist other- wise qualified countries, particularly the poorest countries, in improving their economic performance and in preparing projec s. If this policy is successfully pursued, much larger amounts of IDA funds will go to many of the poorest countries, which have so far received little or no assistance from IDA. As a result, the share of India and Pakistan would inevitably decline significantly from the previous 70 percent level which I agree is too high for an international institution, but our point is that it would not be consistent with the application of the criteria to crystallize any set percentage for these two countries, or, for that matter, any other groups of countries. But if any percentage is nevertheless formulated, and we would regret this, but if it is, it is essential that there still be an absolute increase in the amount going to thee two countries, bearing in mind the amount of soft aid which these countries should have on the basis of the criteria. After all, the populations of these two countries are on the order of well over 600 million, and I would agree very much 104 STRICTLY ONFIDENTIAL with what Mr. Lynch and Mr. Jagannathan said, that is about the distribution of soft aid on a per capita basis amongst developing countries. I think that this figure shows that the per capita distribution of soft aid for these countries is particularly low. I was glad to note, Mr. Chairman, in your covering memorandum that you did say that there would be room for increase in absolute amount of aid from IDA going to these countries. We have done a few calculations on this and we did calculate that if, for example, unfortunately a percentage of 52-1/2 percent was chosen, we calculate that IDA would have to commit $600 million annually over the next two years, if the absolute amounts going to India and Pakistan during the three-year replenishment period was merely to equal the two preceding years; and we ask ourselves, would these amounts be adequate? We should bear in mind that the Bank is not now extending as much assistance to India and Pakistan as it did in the past, so that the total Bank group contribution to the consortia is declining at a time when total resources available to the Bank group may be rising; at a time when bilateral commitments may possibly be declining; and at a time when we may possibly be on the verge of breakthroughs in India and Pakistan, provided there is sufficient external support. STRICTLY ONFIDENTIAL 105 ....__ situation? ( Mr. Chairman, is this really a tolerable Since India and Pakistan are very poor countries which are receiving relatively little soft aid on a per ·capita basis, we believe that such a situation might be tolerable if two things occurred: firstly, if the consortium countries stepped up soft bilateral aid to the subcontinent; and secondly, if IDA commits at least $600 million over the next two years, so that the absolute amounts can be significantly increased, even with a reduced percentage. We hope that the Bank and IDA, as chairman of the consortia, will be- able to use its influence on the bilateral donors. I would like to add here that I do agree with what Mr. Lynch said concerning the arguments in favor of continuin some industrial import assistance to countries which are in the same situation as India and Pakistan, at least pending an increase in foreign exchange earnings. If I could say a few words about the terms of IDA credit, we agree strongly with your recormnendation, Mr. Chairman, that there be no change in the terms of IDA credit, at least at the present time. we feel that the practice of lending can be employed to a very great extent to meet the requirements of individual situations, both now and in the future. The slight added flexibility gained by changing IDA terms would be much more in our view than offset by the complications and difficulties of applying 106 STRICTLY ONFIDENTIAL any formulas. But the point I'd like to stress is that we would lose one great presentational and psychological advantage which arises from the fact that IDA lends all of its funds on an interest-free, SO-year basis. This is a point that Mr. Skjerdal made this morning. This presentational or psychological advantage is that IDA terms provide an example or a target which bilateral donors can aim at. The Canadian development program was a direct copy of IDA terms. If IDA terms are hardened, it may represent a setback to attempts to soften- terms or maintain existing soft terms, both of bilateral programs and of contributions to multilateral programs. We shall continue to underline that there's no getting away from the fact that grants and long-term, interest free credits remain an essential element in financial flows to developing countries. I think it is also true to say that if IDA terms were hardened, there would be less Bank money in the blend or in other words, if our objective is to significantly increase the level of Bank lending, we should at the same time keep IDA flows as soft as possible, particularly at a time when the Bank interest rate must be increased to historically high levels. There have been some comments on the proposal that 107 STRICTLY ONFIDENTIAL after 20 years the maturity period of an IDA credit might be reduced or hardened if there was a significant turn- around in the economic prospects of the borrowing country. I would not really favor any formalization of this approach, but I think I would certainly go along with what I think Mr. Lynch and Mr. Rice had in mind, that in such a situation, the country would be under some moral obligation tocgree to negotiation of the maturity period of IDA credits, and I think that such a country would certainly still be expecting to receive a significant amount of Bank money at that time and I would have thought the Bank and IDA together would be in a position to achieve desired results. Finally, on the question of counterpart funds, we don't really approve of any move in the direction of influencing use of counterpart funds, and we are not really happy about the middle ground approach mentioned in paragraph 6. We don't really think the cake is worth the candle here. Nor do we favor Mr. Skjerdal's suggestion of using counterpart funds to finance local costs of IDA projects, because we consider that such an approach would really be tantamount to reducing the extent to which IDA finances local costs, and there would be a backward step, bearing in mind the inability of certain countries to raise sufficient domestic resources for local cost financing, nor do we feel that STRICTLY ONFIDENTIAL 108 IDA should attempt to scatter its resources among more projects than necessary. We think that if we want to scatter our funds amongst more projects, we should wait until IDA has more funds available. Thank you. MR. McNAMARA: Thank you very much, Mr. Reid. Mr. Suzuki. MR. SUZUKI: Thank you, Mr. Chairman. I'd like to make a comment on four points raised im1 your papers. First, about the geographical distribution, I expressed some views in favor of advanced geographical allocation in the former discussion with Mr. Knapp, but I also realize the difficulty of advanced geographical allocation, so I don't insist on this matter. I also agree with the views of management that a broadly based multilateral institution like IDA must bear in mind the desirability of achieving a wide geographica distribution or being fair to each member country. The word "fair" is more easily said than defined, but perhaps we an more easily point out what seems to be not fair. In this context I would like to draw attention to the fact that in Southeast Asia there are several countries that are apparently qualified, both from the standpoint of need STRICTLY ONFIDENTIAL 109 and absorptive capacity, to receive IDA loans, but so far any. have not received _ Perhaps correcting this apparent Unfairness would help to achieve better fairness. About loans to India and Pakistan, it is very difficult for me to comment because -- about a precise percentage -- because it depends on the needs of India and Pakistan, and also what amounts come from other sources. But in view of the amount which is available for the Second Replenishment IDA lending, I think the two countries should be asked to agree to a reduction in their percentage share, if such reduction is necessary to achieve greater overall fairness of distribution. But what the percentage should be, I'm rather openminded on that. An important element in such overall fairness in distribution, I think for instance a countr~ like Indonesia should be entitled to a substantial share, and that IDA should endeavor to bring about such a change. Regarding the criteria set forth in your paper, I broadly agree with the four criteria mentioned in your papers; and among the four criteria, I think emphasis should be on {b), economic performance. I think that this criterion should be applied rather strictly. I'd like to ask the management to study some way of finding a 'l formula by which such performance can be measured, and in this context I'd like to add that economic performance should 110 STRICTLY ONFIDENTIAL encompass efforts made in other non-economic fields that would contribute directly or indirectly toward higher productivity. I am also in sympathy with some of the previous speakers who emphasized the importance of IDA helping those countries, particularly the poorest countries, in improving economic performance, as mentioned in paragraph 19(b) of this paper, ~ince many of these cou.ntries need real help, and don't know where to start ±h try±ng·torimprove their performance. On the point of raising the per capita criterion on which a country becomes qualified for an IDA loan, I don't see so much necessity to raise it at this moment from $250 to $300. However, I can agree as being a direction which might help toward more flexible lending to achieve broader geographical distribution. Turning to lending terms, generally speaking, I think that a single rate of 50 years, no interest is rather too concessional and that some diversification of terms is needed, although I appreciate the practical or political difficulties involved in such diversification. I think aanagement should make further studies of ways to give more variety to the terms of IDA loans, not just a single SO-year, no interest, 3/4 service charge. I think such variety can be effected according to types of projects or by countries or h· - ~-' V ' , STRICTLY ONFIDENTIAL 111 by some other suitable classification, such as the difference between project lending or non-project lending. I think sometimes too soft terms might discourage self-help on the part of the recipient countries. Too much of a gift element could dampen the willingness of the recipien toward self-help. In this connection, I recall some discuss io that occurred in the Second Replenishment meetings, maybe in the future there will be a limit on the funds available to be loaned out 50 years, no interest, and if IDA wants to increase the overall quantity of its resources, it might sometime be necessary for it to be prepared to pay for increased cost by hardening its terms, not only in types of contribution, by borrowing money from Part I countries, so in some cases I think a variety of terms may be necessary in the future. But having said this, I would be prepared for the time being, rather reluctantly, to go along with the proposal to maintain the present lending terms, pending the outcome of such further studies as I mentioned . I would like to add blending would be more appropriate in cases where high-priority social projects are involved, such as education, water supply, and sewage; but r · think still the practice of blending has some limitation~ . I think sometime in the future some variety of these lending terms might be necessary. 112 STRICTLY ONFIDENTIAL Next, the counterpart funds. As I have already stated, all recipient countries should be rather encouraged performance? to maximize their own/(inaudible) and thereby enhance self- help, so I personally favor rather tighter .control ·over counterpart funds, but I understand the amount of counterpart funds in the usual project lending isn't such a big amount, so I can agree with the management view that only. general commitment would in fact be practicable. Lastly, about the rate of commitment. From the peculiar circumstances which obtain now, namely, the degree of replenishment reduction, it seems there remains little choice other than acceptingthe management proposal, which seems to me the only sensible way out. However, I'd like to stress two points. First is that in spending this money, great emphasis should be placed on the self-help endeavor of recipient countries, so I take it even if we plan to commit $550 million in the next two years, certain slippage might be inevitable if we apply this criterion of performance rather strictly, so I think that such slippage resulting from strict application of economic performance is not only inevitable, but sometimes welcome. The second point I wish to stress is that too big fluctuation in the flow of IDA funds might upset the smooth and continuous ~plementation of the program by the recipient 113 STRICTLY ONFIDENTIAL country. An even flow should be the rule. In this regard, I think it should be noted that next year and 1969-70 are exceptional years, and the diversion to a more even flow should be achieved as quickly as possible, and from the Part I countries' side also too much fluctuation of the funds might cause some difficulty in appropriations, because eve~ parliament will look at how much money will be disb nsed, so too much fluctuation isn't so welcome in some of the Part I countriei. I think slippage should be naturally occurred in these years, since the amount of money involved is $600 million a year, and with a Bank transfer to IDA, this is a very large amount indeed. Thank you very much. MR. McNAMARA: Thank you very much, Mr. Suzuki. Mr. van Campenhout. MR. VAN CAMPENHOUT: Mr. Chairman, as a rule and in substance, I go along with the essential trend of the four papers, the very interesting ones which you have submitted to us. I will therefore make only a few comments on each of · them. on the criteria for distribution of IDA funds, I am inclined to think that once a Part II country qualifies for IDA financing, it meets the test of insufficiency of creditworthiness, whatever that may be. 114 STRICTLY ONFIDENTIAL Then the question of effectiveness of aid is of paramount importance. I think all the members of the Association have, in the long run, an interest in the effectiveness of the aid, as well as Part II and Part I countries. My difficulty is somewhat with the po~rty criterio, not that I don't think this is an important factor to be taken into account, but I have difficulty in looking at it as a more or less independent criterion. It is certainly part of the appreciation of creditworthiness, no doubt about that, and I should think that poverty, so to speak, should create a favorable presumption, other things being equal, which means effectiveness being equal; My main difficulty, however, is in paragraph 18 of the paper, not th~ I find it difficult to accept that the level of $250 should be rai!!ed to $300, but that there ·· should be a level practically as a strong presumption against IDA ' lending,.. I think there are two reasons for that reaction on my part: one is that first, the basis of the calculation of per capita income is open to question. I am not a specialist on that. But mostly the significance of this level of income may vary from country to country, and the choice of a fixed determined figure seems to me also to lead to the danger mentioned this morning, of creating two classes in Part II countries. So if we for convenience, and I would say rather 115 STRICTLY ONFIDENTIAL administrative guidance, we would go along with any of the figures, I would on my part join those who believe they should be looked at simply as a guidance, but to which exception can be brought for good reasons, and they should not be necessarily regarded as a strong presumption against lending to countries which would be somewhat above it. I know these are qualitative judgments, but I don't see how to do it better. On the terms of lending I have always been inclined to be in favor of diversification, if only to start with a second category of terms on the basis of 20 or 30 years. However, I give way to what I understand is a rather serious objection, at least at this stage, against such an approach and I would go along with maintenance of a uniform basic rate. Nevertheless, I would favor a provision authorizing an entitling the Association to initiate negotiations with countries whose economic fortune is one which has become better in the course of time than expected. I think that this would be a useful provision. I am not suggesting a unilateral right of changing the terms or rate, but the right of initiating negotiations, so as to bring whatever is the normal moral pressure on the countries, in, of course, very obvious cases of countries who could afford to accelerate 116 STRICTLY ONFIDENTIAL the rate of their repayment to IDA. I think all Part It countries, particularly, have and will have in the long run an interest in seeing the resources of IDA reconstituted by that way, more speedily, so if it were feasible to do it, I'd favor that. On the problem of counterpart funds, I feel that it is desirable that these funds be used for the same general purpose to which the original financing by the Association is indebted to contribute. Tha mains economic development as a whole. It seems to me it would be a sound principle. There is great strength, however, in the argument whereby control of the implementation of this principle, either specific or general, might be cumbersome, difficult to exercise, might lead the Bank into undesirable and irritating interference with fiscal domestic affairs, and most important, be altogether illusionary. Nevertheless, I think I would not conclude from the importance I give to this objection that nothing should be done, and would follow the line of thought which you proposed in suggesting that a provision, a credit arrangement could provide, in cases where counterpart funds arise, that these funds be employed for the purposes of economic development. I would, however, make one conunent, and then one suggestion in this respect. I think such a provision should be no more than an expectation from the Association and a STRICTLY ONFIDENTIAL 117 declaration of intention from the borrowing member, rather than a clear legal -obligation. The reason I think so is that I think we should not introduce in a lending agreement misleading clauses, and we should not create the illusion that the Association would have the intention of controlling such an undertaking more than we really intend to do. I nevertheless also think that this should not be a window dressing provision; it should have some substance, and what I am going to suggest is simple and I must say I thin very modest, but nevertheless it might be useful. I would seriously favor an undertaking in the lending agreement by the borrowing member to report periodically to the Association the amount of counterpart funds effectively receiv d, and the use they make of it or intend to make of it. I see three advantages in that simple undertaking: One, it could be a useful reminder to the borrowing country that they are funds which should be used for a certai purpose. The second one is that in the course of the usual relation between the Association and the borrowing member, this information may serve as a basis for useful recommenda- tions, without making it a formal affair. And finally, when we review the policies of the Association, it would provide us with information we don't 118 STRICTLY · ONFIDENTIAL have, and which might be useful to progress in the path of the best use possible of these counterpart funds. I thought the idea proposed by Mr. Skjerdal was interesting, and I'd like to see it studied further. However, I'm a bit afraid that they fall into an objection which many suggestions have been made in informal conversation. One of them may be that you don't know the future about the relationship between the Bank group and the borrowing country, and you may by an application of the kind proposed, create dle resources, and so on. Nevertheless, it is worth looking into, but this could be based on the basis of information I'm suggesting that we should receive. On geographical distribution, it seems to me obvious that within the limits permitted by the criteria, and by the amount of resources, the broadest possible geographical distribution should be achieved. I agree that there's no possibility a priori to make a partition by region. What might be possible, in the long run, is to improve the distribution as time goes on, on the occasion of a periodic review of what has happened and what might happen. I think it's on a concrete basis of the (inaudible) actually that I think we might achieve the best possible distribution. As far as India and Pakistan are concerned, I agree that the share should be somewhat reduced, and I agree 119 STRICTLY ONFIDENTIAL tentatively for the time being with your proposal, which seems reasonable. I understand very well the logic of the arguments of Mr. Lynch on the percentages, but there are not here, as I understand them, a priori percentages; they seem to be somewhat empirical but based on past experience, and on prospects, and I noted a remark made somewhere -- I have forgotten where -- that these percentages would still give India and Pakistan an increase in absolute amounts of aid, a factor which I think is worth underlining. I would not consider, however, a percentage of that kind as categ~rically binding, and as things go on, again I think as we review year by year the disttioution of aid, I for one would not use this percentage as a final argument against other reasons to increase or decrease. On the rate of commitments for the next two years, I have really no observation to make except to say that I found your paper and your suggestions reasonable and convincing. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, sir. Mr. Stone. MR. STONE: Thank you, Mr. Chairman. Mr. Chairman, I have, of course like other Directors, spent a lot of time in the last few weeks thinking about these papers and listening, I must say, with great 120 STRICTLY ONFIDENTIAL respect, as I always do, to the views of my colleagues who preceded me today. There are a few things I'd like to say, in more of a philosophical mood than any other, because I think that broadly speaking, the outcome of today's dis- cussion is already fairly clear. Perhaps I can just start by taking the various criteria for IDA lending which are mentioned in paragraph 2 of the first of these papers, because this gives me an opportunity, I think, of stating some of my agreements and disagreements with those of my colleagues who have spoken already. I want to say that there appear to me, Mr. Chairman, to be three of these criteria here which are very much more, shall I say, a criterion in their own right, than the last of them; namely, the state of development or poverty criterion is, although I think a good deal of the discussion that goes on about this question relates from a failure to accept the fact that the poverty criterion, so-called, is intimately related, and indeed I would say virtually covered by the other three criteria, anyway, so far as the practical effects are a:mcerned . Let me start, first of all, with what is called in this paper the insufficiency of creditworthiness criterion, and in passing I would like to say, incidentally, that I 121 STRICTLY ONFIDENTIAL think perhaps it would be better if we were to use a somewhat different phrase than "creditworthiness" and talk about debt service capacity which has perhaps somewhat less pejorative flavor to it. Now as I recall the fact, when IDA was set up in 1960, it was indeed this very criterion the insufficiency or at that time the project!"~sufficiency, in many cases, of debt servicing capacity in the future which was the primary stimulus to the foundation of the IDA, because it was seen and rightly seen that a number of Bank borrowers were coming to a stage where it would be clearly difficult for them to go on acquiring additional debt on conventional terms, for reasons which in some cases went quite beyond their control. There were simply changes in markets for their major export commodities. I think while of course it is always open for people to argue about or differ about the meaning of particular words and particular Articles of Agreement, I don't have any doubt in my mind that this was in fact the basis of the IDA, and without this debt servicing capacity argument, IDA would never have been established. And so to me the basic position from which I start when I seek to find a list of qualifying countries under the IDA arrangements is this one, and I don't, in 122 STRICTLY ONFIDENTIAL passing, entirely agree in fact, I don't really agree at all with the view which is stated in I think paragraph 6 of the memorandum, that the main disadvantage of such a criterion is that it would tend to or it tends to penalize the poor countries who apply sound policies and keep-~ their debt service problems under control. I don't think that follows at all because quite clearly one would not push this argument on creditworthiness to the point of saying that until a country goes bankrupt, until it is in a situation where it is in the hands of a debt relief consortium or something of that kind, that it should not be eligible for IDA finance. Simply I think one would make the reasonable judgment that at any given level of economic development, and ' under any given level of economic performance, a point I will come to in a moment, a country has a certain ability to incur debt on what may be regarded as reasonable projections of its likely future ability to service it and beyond that poi t, it must be assisted and that I think is what IDA funds were originally provided to do. Now it is clear of course that any country's ability to incur debt and hence any country's debt servicing capacity is affected by both its stage of developmen which is here referred to as poverty, because that of course affects the country's ability to marshal its own domestic 123 STRICTLY ONFIDENTIAL savings and to allocate them to external debt servicing, and secondly, of course, within the circumstances of any given country, by that country's economic performance; and we are all familiar with particular examples of countries which are roughly comparable, at least to the outside observer, in economic fortune, which have in fact performed very differently in this way, in this aspect; but I think it is a confusion to argue from these facts that poverty as such represents a criterion for IDA financing, Now I have a further reason for that view, a number cf reasons, and this view has been very much strengthened or these reasons, I should say, have been very much strengthened by listening to what has been said around the table today. It is very clear, I think, to anyone listening and to anyone who has observed the fortunes of IDA in the past few years, that there is within the membersh' of IDA, a considerable, and I believe a most unhappy split between various Part II members who have been regarded as being eligible under the poverty criterion and those which have not, and I think this is a great pity and I think it's the more a pity because in many instances I think members who have been excluded from access to IDA funds under the poverty criterion, would probably have been excluded from IDA funds under the other criteria, anyway, if we had to take note of the $250 limit, so while this is not true in all 124 STRICTLY ONFIDENTIAL cases, in some cases certainly I think nothing very much has been achieved by the $250 expedient other than the creation of a certain amount of bad feeling. I have a further reason for stating this point which I think is a somewhat more exotic one, but I'll mention it in passing, because it is not entirely without importance. Perhaps I can embark upon it by reverting to a point which I think was made earlier by Dr. Machado when he referred to the fact that when IDA was first established, there were Part I and Part II countries, and I think it was certainly the general expectation at that time that Part I countries would provide the funds, leaving aside the 10 percent, the original subscription, and the Part II countries would use them, if I may put it very bluntly; and I think that was in fact how things began. But as time has gone on, there has developed a distinction between Part II A countries and Part II B countrie , which as I have already said I think has had unfortunate effects politically and in other ways, but it has a particular effect of a kind which may be worth mentioning, and that is in relation to the transfer of Bank profits to IDA which we shall be considering next week with respect to the year just ended, because, as you are aware, sir, the whole basis of the transfer of Bank profits to IDA is a 1964 resolution STRICTLY ONFIDENTIAL 125 which speaks of such transfers occurring when, in the judgmen of the Directors, such a transfer could have prudently been distributed as dividends to shareholders in the Bank. Now, so far as Part I members are concerned, of course that's quite straightfoward, and so far as those which are called Part II B members are concerned, it is straightforward, also, because if the choice is between the distribution by way of dividends to them as shareholders in the Bank, on ~he one hand, and a distribution by way of transfer of profit to IDA, to which they subsequently have access, on the other, then there may not -- and I emphasize that I said "may" because there are still perhaps some residual differences regarding distribution -- but there may not be too much difficulty. But in the case of members who represent what I call Part II A countries, that is not really so, and I think this is a point which causes some hard feelings, and perhaps which we ought not to entire! overlook. I mention it not because it's a major point, I think, but because I think it is a question which perhaps we will hear more of. Now I have said in passing I think that of course the growing up of a list of qualifying countries on the basis of the creditworthiness -- sorry -- I'm using your word, although earlier I said I thought I had a better word -- the debt servicing capacity criterion, could of course be 126 STRICTLY ONFIDENTIAL accompanied by attention paid to economic performance, but of course it should also be accompanied by attention to the question of project acceptability, and here I want to joint what I think has been almost, perhaps an almost univers statement of opinion, that so far as the countries' abilities to prepare and present projects are concerned, I certainly warmly support the suggestion put forward in the original paper which is now referred to in your covering memorandum, in the fourth paragraph thereof, that special efforts should be made to assist countries to improve their economic per- formance and to identify and prepare projects acceptable for financing. I think this is particularly important in the case of those members of IDA whose national administra- tions have had little experience in project preparation and so on. Now it does seem to me that in fact if IDA were to follow a practice of laying a good deal more stress than it now does -- perhaps I am wrong in saying that, but at leas as is now highlighted in this paper -- on the debt servicing capacity criterion, we'd have probably very much the same kind of distribution of funds as we now have, but they would have a good deal less argument about it, qualified, of course, as I just said, by our attention to economic performance and project preparation criteria; and in passing,- I notice also that although the paper refers to 127 STRICTLY CONFIDENTIAL in respect of the debt servicing capacity criterion, refers to the view that a disadvantage of that criterion would be that it tends to penalize poor countries who apply sound policies and keep their debt servicing problems under control, it does not refer to precisely the same argument which can be advanced against the crude poverty criterion; namely, countries which get beyond the $250 or what is now the $300 line, should be cut off the IDA list, which I think could equally be made if one accepts the argument in one case as one does in the other. I don't accept it in either case. One of the reasons why, of course, I don't accept it in either case, and particularly not in the second case, is that we must, I think, have regard to, among other things, to what IDA is trying to do. It has been said rather bluntly by a number of people that IDA is not a charity Well, in terms of the terms on which IDA funds are provided, of course it is as to 80 percent, effectively gift money but that is as it should be. I don't think there is anything particularly improper about that. What I do think is important to keep in mind, however, is that merely because these funds are provided as to 80 percent by way of gift, we shouldn't feel that they are not meant to produce as great an increment to world economic development as possible. 128 STRICTLY ONFIDENTIAL On the contrary, I think, as a lot of people said, we should have as much in mind the need for the economic productiveness of these funds as we do in the case of Bank funds. Now in this and other connections, a number of speakers have alluded to the statement in paragraph 14 of the paper in which it is suggested that IDA can hardly escape giving consideration to the amount of assistance that prospective IDA borrowers may be receiving from other sources of finance. I just want to say in passing that I just don't agree with that comment. Like I think, if I understood him correctly, Mr. Rice, my own feeling is that IDA is a multilateral, multinational institution; it should have its own policies for distribution of its funds, and those policies should be related to specific criteria which in fact we have tried to relate them to in this paper; and that the distribution which emerges from the application of those criteria should emerge and shouldn't be distorted artificial}~ by the fact that a particular country is receiving aid in som other form from some other donor. And again I think one could put forward in this connection a somewhat similar argument, one to which I referred in other connections, but in this case I would agree with the argument that if in fact IDA is to have its allocation policy distorted, as I put it, by reference 129 STRICTLY ONFIDENTIAL to what is being provided by other donors, then we may well find a very counterproductive effect in terms of the overall aid program in the world, of those other donors themselves feeling that they should reduce their aid to the country concerned because they're simply doing what IDA would other- wise do, and I think that would be most undesirable. So I just want to say on this that I don't think that IDA is here to fill residual gaps created by the actions of par- ticular donor countries. Now so far as the question of India and Pakistan is concerned, which is being very properly the subject of a great deal of comment, I think I'd agree with the comment which I think originally was made by Mr. Lynch and by a couple of other people, that there is to a degree a logical incon- sistency between the position taken in this paper on the irrationality of prejudging geographical allocations, on the one hand, and the view that we have to have a fixed figure, or something like a fixed figure for India and Pakistan, on the other. I think that view seems to be sound -- I mean the view that this is an illogical position does seem to me to , be sound. But I think, like Mr. van Campenhout also takes the view, that I don't imagine the management had very much alternative in the sense that clearly India and Pakistan's needs are so great that even with the application of the criteria we have, we could, if we were to apply no arbitrary 130 STRICTLY ONFIDENTIAL and I think they are arbitrary -- constraints of this kind -- we could have a situation in which a very large share indeed of IDA's resources was going to two countries, and from a purely pragmatic point of view, I think like others that I would have to agree with the general view stated in the paper that this is not politically an acceptable situation in terms of the activities of a multilateral institution which deperids for its funds upon the beneficence, if that's the word, of donor governments. So I don't have any particular objection to make to the suggestion made in this regard in the paper, although I think there is something to be said perhaps for a view that percentages as such are not a wholly satisfactory way of approaching the question because they do depend or their effect, so to speak, does depend so considerably upon the actual performance not of the countries but of the Bank/IDA institution or of the IDA institution. In other words, if we are successful in committing $600 million worth of funds under IDA this year, India will get $240 million, and that may be what India needs; I haven't gone into that particular question. But if we're not successful, India will get some- thing less, and depending on whether or not the $240 million is the right figure or the figure which people judge to be right, then that will be a bad outcome, so I think it would be 131 STRICTLY ONFIDENTIAL a case in this particular instance for having this distinc tio between percentages and absolute amounts in mind. I don't have any particular proposal to suggest on this at this point , partly because I simply, as I say, have not had time to get into it. On the question -- since I think my predecessors have generally tried to cover the whole field, I might as well do likewise -- on the question of lending ter;nts, I feel there has been a very wide expression of opinion in opposition to any change in present policies, and I for one would not want to hold out strongly against that view. I do think that consistent with what I said earlier about the range of countries which perhaps should qualify for IDA lending, that a period of 50 years within which IDA terms cannot be varied, is in fact a very long time and does rest a great deal of weight upon people's views or implicit view, at least, that within that time, none of the countries will be in a better position than they now are. Well, I just want to say that I very much hope that that will not be so, and as a corollary to that I think it would be fair to say that should IDA borrowers during the course of that SO-year period come to be in a situation where their economic po_si tion has been transformed, then I would think it not improper that some '. I can't call the right word to mind -- "restitution" is not STRICTLY ONFIDENTIAL 132 the right word, but perhaps it conveys what I mean -- should be made. However, I'm not optimistic that one would be likely to get very far in that regard by an approach of the kind suggested in paragraph 7 of this paper, which in effect simply calls for a review. It may be that such an approach would not be wholly valueless, but in my experience, at least, Ministers of Finance are not generally such warm-hearted creatures as to feel that they have to make payments unless they have some contractual obligation to do so, so I wouldn't myself rest much weight or much optimism upon the outcome of reviews of that kind. But as I say, I think if I judge correctly, the general feeling seems to be not to make any change at all, so perhaps one shouldn't waste too much time talking about the possibilities. On the question of counterpart funds, I think my own view is quite clear. I see no purpose whatsoever in any provisions for tying up in any way or even making provisions for, in our creditcgreements, counterpart funds;if it is thoug that some optical purpose will be served by a provision such as that suggested in paragraph 6 of the document on this question, I wouldn't want to stand out against it, but I repeat that I see no worthwhile economic purpose, and that is the only purpose that I think I'm principally concerned with, in such a device. 133 STRICTLY ONFIDENTIAL On the question finally of the rate of commitment of IDA funds and the Second Replenishment, I have to say that it is the view of my authorities that in this respect, the recommendation that's made in respect of the rate of commitment over the last two years of the Second Replenishment period, is not wholly in accordance with the report of the Executive Directors, particularly that paragraph of it which is quoted in this report on the first page. In paragraph 11 of the Executive Directors' report it is stated that in the normal course of business, the Association would aim o commit the resources allotted to it over these three years a reasonably even pace. Now we know of course that uring Fiscal '68 just ended, that commitments proper amounted o I think $107 million, and what I think we'd be prepared o regard as commitments, and I think that's quite right, cunt to a further $169 million, making a total of $276 Now I think we are all aware that there have ·been easons why moral (?) documents relating to IDA credits have ot been brought to the Board on the subject of this replenish- ent basis, but I do want to say that it is the view of our uthorities that the result of this, namely to step up quite harply the rate of commitment from Second Replenishment funds, nd I say nothing of other funds, during the last two years of eplenishment period is, to say the least, unfortunate. I'll 134 STRICTLY ONFIDENTIAL say no more on that subject, other than to make the point which again I think has been made by others, that of course we're not, in any case, here talking only of the figure 530 but of the figure 530 plus and the "plus" may be bigger or smaller, depending particularly of course on the view that the Bank Board may take in a week's time when it comes to consider the question of your recommendations governing transfer of Bank profits with respect to Fiscal '68. Mr. Chairman, the only other comment I think I want to make is to say that I like others have very much welcomed the opportunity, at long last, to make comments in this Board, and we'_have all, I suppose, made them in privat_ , on this question of IDA policies and other associated questions, but to draw attention to the fact that there are indeed at least some aspects of the policies which have not been under discussion today, and which are listed for future discussions, to say apropos of that that there are, in my view, some obvious connections between those topics and topics we've -been discussing today, and to say that for that and more general reasons which I think are applicable in any case, that I don't think we should regard today's dis- cussion of IDA policies as settling this matter for good and all for the rest of the replenishment period. I think on the contrary we ought indeed to have further discussion of this 135 STRICTLY ONFIDENTIAL subject at some future appropriate time. I think it was, if I recall correctly, Mr. vom Hofe who suggested that perhaps during the winter, a time when we all have less to do, there might well be an opportunity for a further discussion. I personally would welcome that. Thank you. MR. McNAMARA: Thank you very much, Mr. Stone. Dr. Lieftinck. DR. LIEFTINCK: Mr. Chairman, like other speakers I greatly welcome the opportunity of discussing jointly the papers on IDA policies. I mention the word "jointly" because I attach ·great importance on having such discussions in the Financial Policy Committee or in the Board, and not in separa~ groups of Part I countries or Part II countries, or smaller groups, because I think today's discussion has clearly shown how useful it is that we hear each other's views and are in a position to act on each other's views, both the Executive Directors representing Part I countries and those representing Part II countries. I make one exception. I do think it has ·met a request of the Part I countries to have a separate discussion on the rate of commitment of the funds received under the Second Replenishment, and I think that is appropriate, but I also welcome the fact that the request has been handled in this manner, that the President has invited country 136 STRICTLY ONFIDENTIAL representatives, and that could be Executive Directors, but could also be not Executive Directors. I think on policies of IDA we should stick to our practice of having joint discussions. Now on the rate of commitment, because it's again on today's agenda, I have nothing to add to that which the Netherlands representative in discussion has advanced. I would only indicate for my part as an Executive Director that although I fully agree and support wholeheartedly that we should plan for a full commitment of the amounts available, we should not try to force our procedures in that respect, and not rush through the requests for IDA credits without the proper preparation which we are accustomed to. Tf~this would result in not having committed everything, as a result thereof, I tmuld not regret it. The other papers dealwi.th criteria of distribution, lending terms, and control of counterpart funds. Not before us are the papers we have been told are under preparation; namely, a paper on project versus program financing, the problem of industrial import credits, and secondly, the financing of local currency expenditures. I hope that we'll rather soon have an opportunity to discuss these two remaining subjects, because like Mr. Stone indicated, particularly between the problem of industrial import credits and the 137 STRICTLY ONFIDENTIAL criteria of distribution, the lending terms, and control of counterpart funds, there are certain connections and therefore I personally reserve my ultimate position on .the matters now before us until we have had an opportunity of exchanging views on the industrial import credits. Since it is not on this agenda, I will not accept the challenge of Mr. Lynch, who found that this was the time to advance certain views. I'm looking forward to an oppor- tunity of exchanging our opinions at a later time. The main subject I think of discussion are the criteria for qualification for IDA financing and the dis- tribution criteria. I make a clear distinction between these two. The criteria for qualification deal with a list of countries that qualify, and the criteria for distribution is how should we distribute the available resources among the countries on that list. It has been suggested that the Part I countries did not qualify and that the Part II countries would all qualify because they were Part II countries. I do not agree with this view. I think it is historically untrue. The distinction between Part I countries and Part II countries is a distinction between countries contributing in convertible currencies and countries contributing convertible in their own countries are not no more contributed(?) and at a very 138 STRICTLY ONFIDENTIAL early date, after the IDA charter had become effective, we had a policy-discussion and we adopted at that time certain qualifications for being recipients of IDA credits; and from the very beginning we agreed that not all Part II countries necessarily would qualify for IDA financing. It goes without saying that I consider the Part I countries as not qualified. It is also true and very clear from the charter that coun-ries that have a sufficient debt servicing capacity, and I too prefer that term, are excluded, so already that indicates that not all Part II countries qualify because if they have sufficient debt servicing capacity, by that criterion they're eliminated. And I only consider the debt servicing capacity criterion as a negative criterion, in this sense, that countries having sufficient debt servicin capacity do not qualify for IDA. This does not mean that all countries which have debt servicing problems as such qualify, unless they meet the other criteria. The main criterion which was adopted for qualificat'on was the poverty criterion, and that was also derived immediately from the text of the IDA Agreement, and Mr. Skjerdal quoted the text, that it was to assist the less developed countries of the world. It is an indication of the state of development and the degree of poverty. STRICTLY ONFIDENTIAL 139 We added certain criteria. All the criteria that have been under discussion today, have been under discussion and have been tentatively applied, and the only question we have before us, in my opinion, is whether there is need to change these criteria or give them better interpretation. Now before saying something on these criteria, I think it may be useful if we introduce another concept; name y, general guidelines for distribution. I would consider, to give substance to this concept, as a general guideline for distribution that we should try to obtain a wide geographical distribution on the basis of well prepared and high-priority development projects; and the purpose should be, it follows from the wide geographical distribution, to try to help all qualifying countries, and therefore I agree with those who have expressed some regret that there are on the list of qualifying countries still quite a few whom !DA has not yet been able to accommodate. When I speak of trying to help all qualifying countries, that does not necessarily mean all in the same year, but in the course of time and in a certain sequence. When we talk about the sequence, I avoid the word "priority" because that has another meaning, whether it's of great economic impact, but here I speak about the sequence of which should come first, which should be selected by the Area Departments for submission to the Board. That is a problem STRICTLY ONFIDENTIAL 140 which has not been touched upon. I think we should be guided by the urgency of the need and the speed and magnitude of the benefits, both in an economic and social sense, to be expected from these projects. I do feel that the role of IDA should not remain a passive role and just wait for the presentation of well- prepared projects, but that IDA, Bank should stand ready to assist countries, particularly the poor and less developed countries, in the selection and preparation of their projects, and I feel that the staff should be anxious to try to present to the Board the~most,p~essing projects. Now all kind~ of considerations could be brought .to bear on giving substance to what are pressing projects, but I do think this is a consideration our Area Departments should have in mind. I consider pressing projects, projects that with respect to which there's an urgency in the physical sense, economic sense, and psychological sense, both. For instance, projects that are required in order to prevent development of famine conditions. Therefore I do feel IDA should give great attention to agricultural projects. If we find a country where famine conditions are threatening, then I do feel that that is a priority project in the sense of deserving an early processing. A project to prevent an economic breakdown, for instance because a power system isn't adequate, I think that is a pressing project and should 141 STRICTLY ONFIDENTIAL be given time priority. Generally speaking, I feel that abolishing of development constraints, in other words the pnime~pumping in the development process in individual countries should be carefully considered by the staff, and again such projects should be considered as pressing, as urgent. In certain countries educational projects may be of that character. In other countries, for instance, the tourism project could be of that character, where one feels that the country is becoming attractive and has to have facilities as soon as possible to accommodate tourists. I think such considerations should play a role in the order of submission of the projects in the countries, and the staff should in my opinion be very conscious of selecting and assisting in preparation of projects in all the qualifying countries, but agree among themselves which they think can be processed the earliest, the quickest and which should be submitted to the Board. Now with respect to distribution criteria, if we're going to allocate 52-1/2 percent of our resources to India and Pakistan, then the whole prbblem of distribution criteria remains meaningful only for the remaining countries, and for the 47-1/2 percent. I'm not very happy about the fixation of a percentage of our resources to two countries. I fully agree that there is every reason now to have highly in our 142 STRICTLY ONFIDENTIAL inds the problems presented by Indonesia, and that may affect hat we can do for India and Pakistan, without cutting off co much for the rest of the world. I think there is a good reason to assume that a eduction of the present share of India and Pakistan would llow better distribution of the total IDA resources, and ive more satisfaction with I.DA in both donor and recipient countries; and therefore, I do feel that we should go along ith a reduction in percentage of these two countries, and althou~h I do not favor setting new percentages, I have been able to discover one reason for which I would go along which is namely the protection of the other members against too large an allocation as a result of preparation and submission of projects to the Board; and as such, as a protection of the other countries, I am prepared to go along, also having in consideration that the absolute amounts to be allocated on the basis of the lower percentages, the absolute amounts will probably not be lower than they have been in recent years. I think we should also have in mind that the recent success of India and Pakistan in their agricultural performance does constitute, in my opinion, an additional justification for lowering their percentage. Now I come to the criteria proper for distribution of the remainder, and here I do not hesitate to express ) a strong preference for the availability of good and urgent STRICTLY ONFIDENTIAL 143- 144 projects, and I think that gives the challenge for the staff and the management, to try to find as widely distributed among qualifying countries as possible, good projects. I do not require that only the very best projects -~ 'be submitted, that we take the rest of the world as a whole and pick just the top projects that are to be found among a great number of countries. I think we should try and look not at the criteria but general guideline, as I called it, try to assist as many countries as we can, not by spreading the money available too thin and only accept small projects, in order to increase the total number of prgijetts, and embrace all countries at the same time. I don't think that is what I have in mind, but to have this general guide- line constantly in mind of the wide distribution in submitting good projects and assisting in preparation of good projects. I also feel that the second c-riterion to which I attach much significance is the relative performance, but performance I take in the sense as again Mr. Skjerdal indicate , not necessarily actual pefforrnance, because there have been countries which haven~t been able to perform at all, so to speak, particularly young countries; but the demonstrated wish to perfqrm, and if that's absent, I think we should leave'them alone. There are countries where performance has been so notoriously lacking and unacceptable that the~e I 145 STRICTLY ONFIDENTIAL take the realistic position that in these countries we cannot yet operate, but apart from these very few cases I do feel tha the will to perform, the demonstrated will to perform and mobilize itself as much resources for development as they can afford, and the administration they try to develop and willingness to accept advice of foreign consultants, all these factors belong to performance criteria. On lending terms, I can be very brief. I'm not in favor of differentiation with respect to lending terms. The only exception I would make but that would require an amendment of the Articles, is to introduce the full grant and we could accept the full grant if we were to go or stay in the field of financing imports for current productive consumption. I consider it very difficult to justify, to finance such imports on a long-term credit basis because they have to be continued, and they build up foreign debt and foreign debt and foreign debt, and I think such imports-- I am not in favor that we do it -- but if they are going to be made, I'm in favor of a pure grant, of making them available on pure grant. I am not in favor of the adjustment suggestion, that if a country makes great progress in the SO-year period, we should either bilaterally or unilaterally try to change the terms of the existing IDA credits, for two reasons: 146 STRICTLY ONFIDENTIAL These are reasons which have not been advanced today. Firstly, if a country passes through a process of rapid economic improvement, it will still remain a borrower and then it will have to switch from the most concessional IDA terms to harder terms, so at the end, when it becomes a rich country it will still have a pretty heavy foreign debt, but mixed, not only the early IDA credits but also the later corning non-concessional credits. There is a second reason, that if we were to harden in the future the IDA terms, it would increase the debt burden on the country and reduce the margin it has for borrowi g on conventional terms. I think we should not do that. We should be happy that the country has improved so much that it can now borrow on non-concessional terms, and we would reduce that improvement in its debt-bearing capacity by hardening the old IDA terms, and it is for that reason that I am not in favor of adjustment which might have some attraction at first sight, but if we consider the process of reaching a higher level of economic performance, then I think we should come to the conclusion it's not the right thing to do. On the control, finally, of counterpart funds, I am not in favor of any of the proposals made, except what I understood the staff proposal not to enter into the field of counterpart funds. Here again a number of suggestion 147 STRICTLY ONFIDENTIAL have been made, in order to satisfy criticism and from all those I've heard, the one Mr. van Campenhout advanced is the least unacceptable. {Laughter) DR. LIEFTINCK: But I have another point of view. think once the Bank/IDA has made a loan and the loan has been disbursed and the unused control has taken place, then the only further concern should be that the borrower repay, and if we're now going to assume additional functions, then there's no end to the functions the Bank would undertake. I think that consideration, besides other ones which I'll not elaborate on, overcompensate everything that could be said in favor of controls. Thank you, sir. MR. McNAMARA: Thank you, Dr. Lieftinck. Dr. Chen. DR. CHEN: Thank you, Mr. Chairman. I am in a rather awkward position because the Republic of China is not a donor and no longer a recipient of IDA credit. Recalling Dr. Mejia's definition of classification, I'm speaking as a representative of a Part III country. Fortunately, however, one of my other constituents, namely, the Republic of Korea, has been and is still eligible for IDA credit. Therefore, Mr. Chairman, I shall be speaking STRICTLY ONFIDENTIAL 148 without any prejudice to Part II countries. In general, Mr. Chairman, I can give you my support to your second paper dated July 16. Point by point I would like to elaborate on the way I support your paper. Point 1, inso~ar as geographic distribution of IDA credits is concerned, the Governor for China has con- ngs of the sistently advocated at all meetings, annual meeti_ Bank Group, ever since 1963, that there should be a fair, equitable, and wider distribution to all needy member countries in Asia, Africa, and Latin America. This view is now shared by the Governor of Korea. However, I do not think we should fix in advance a rigid and arbitrary percentage as to how much this or that country should receive of the fresh IDA funds. There should be more flexibility in my opinion, depending upon applicability of the four criteria as stated in your paper, and also the amount of IDA funds available. I shall deal with these criteria later. Point 2, as to terms of IDA credit, I too share the feeling of Mr. Suzuki and Mr. van Campenhout as to the rigidity in not changing the terms of new IDA credits; so much so that at the second seminar on July 11, I even made a short statement suggesting certain formula reducing the amortization from 50 years to 40 years, and a number of other points. However, having read your paper today, I 149 STRICTLY ONFIDENTIAL am quite ready to support your recommendation that there be no change at the present from the terms hitherto applied by IDA. If I may use the same language as Mr. Suzuki, I ~rrender reluctantly to your point of view. Point No. ~3, on the counterpart funds I take a alightly different view than Dr. Lieftinck. I think while the borrowing country may use these funds for furthering economic development, they should be subject to consultation with IDA, and IDA in turn should have some reasonable control emphasis on the word "reasonable" -- not interfering with, you might say, domestic management, reasonable control over its disbursement and implementation. -~ Point No. 4, on the question as to what extent .J sfiould IDA credit be used to finance local currency expendi- tures, I reserve my comments until the 13th when we shall be given an opportunity to discuss the general policy more fully in relation to IDA operations. Point No. 5, rate of commitment of IDA funds, I feel strongly it should be on an ad hoc basis, without any predetermined rate; as long as there are good, sound projects of high priority, IDA funds should be appropriated as far as possible at a rate commensurate with availability of the funds. Finally, Mr. Chairman, I would like to say a few 150 STRICTLY ONFIDENTIAL words regarding the four criteria submitted to us in Attachmen I of your paper. I am in full agreement with all four criteria; however, I'd like to rearrange them in the following order of priority: like Dr. Lieftinck, I'd give poverty the highest priority. This is in keeping with the principal objective of our Association as defined in Article V, subparagraph (b). What is called the relative stage of economic development in your paper -- I firmly believe that the poorest country should be given prior consideration, all other things being equal. On this point I've not strong feeling as to raising minimum per capita income from $250 to $300, because as Dr. Machado pointed out, it would affect only three or four countries, so I've no firm view on that. However, I do share the same feeling as Mr. Suzuki and Mr. Mentre, that perhaps we should give some thought to allocating a pretty large slice to Indonesia, if she could come forward with good projects of high priority. Second I would say the criterion would be economic performance, and here I won't go into elaboration on how this should be defined. Third, insufficiency of creditworthiness. This however to my mind is linked with poverty, because if a country is very poor, naturally it would not have creditworthin ss. I could probably merge 2 into 1. 151 STRICTLY ONFIDENTIAL Last but not least, as the language of your paper puts it, ability to present acceptable projects. In substance I would like to change it to read "good, sound projects of high priority." Having said all this, Mr. Chairman, I'll give my full support to your paper. MR. McNAMARA: Thank you very much, Dr. Chen. Mr. Gutierrez Cano. MR. GUIERREZ CANO: Thank you, Mr. Chairman. I welcome this opportunity, Mr. Chairman, to examine and discuss such an important matter as this IDA policy is, and I'd like to say I basically agree with the conclusions included in your paper of July 16, which I find well oriented and prudent. As was stated, in the Articles of Agreement, IDA was created to promote economic development, increase productivity and thus raise the standard of living in the ~ess developed areas of the world, the conditions of its assistance being more flexible and less heavy than those of conventional loans, contain also an element of balance of payments relief and can consequently further the developmen objectives of the World Bank and supplement its activities. In this statement in the .ARticles of Agreement of IDA, . ' there are in my opinion included various considerations and objectives of the institution. 152 STRICTLY ONFIDENTIAL Taking first distribution from the geographical point of view, I consider that since IDA is an international organization, it has to broaden as much as possible its scope of assistance from a geographical point of view, and include as many as possible member countries which are eligible and qualify for its assistance. Therefore I think it helps for this purpose, definition of some sort of limitations, of ceilings, and I am sure that this will add to IDA's popularity and prestige which it deserves, and it should also be very well expanded among the various member countries. However, I think limitations of the kind envisaged here should always be in accordance with the basic need to promote economic development, so as not to create in any case idleness of funds, although a shortage of resources and almost unlimited need of them would make this almost impossible. Regarding criteria for geographic distribution, I do not think it is possible to set up a definite rule which could control such distribution, but at the same time I think we shouldn't rely exclusively on the per capita allocation, because we could come to some extreme cases in which assistance to a small member country with an economic development project of medium size or even small size would already create such basis for very high per capita assistance, 153 STRICTLY ONFIDENTIAL and exclude this country from further IDA assistance. In connection with criteria for distribution of IDA funds, I think that a fundamental criterion should be poverty. The poverty is actually what has been guiding our actions, and going up the scale, this has also been a leading factor in our World Bank policy for eligibility, so I do not think it would be inappropriate to consider poverty as the first condition for eligibility for IDA assistance. Together and not necessarily subordinated to it, should be considered insufficiency of creditworthiness, or as Mr. Stone put it, the difficulty in~rvicing foreign debt by a given country, together with economic perofrmance, that means subordination to all means available for the purpose of maintaining a good economic performance. I think that the point which refers to the absence ' of suitable projects is merely a factual consequence, and should not be considered a formal element for disqualificatio , since it arises from the fact of poverty; as we've been stating on many occasions, one of the consequences of economic underdevelopment is precisely the absence of adequate expertise and the inadequacy of human resources for economic development purposes, and consequently the absence or difficulty in obtaining adequate and acceptable \ I development projects. 154 STRICTLY ONFIDENTIAL In connection with this problem of meeting external debt, I welcome the statement of the paper which refers to the maintenance of a combined assistance, or blend assistance of the Bank and IDA, so as to come to the help of a coun~ry before this country has actually exhausted its creditworthiness and would have to rely exclusively on IDA. In the future, my view would always favor expansion of this blend policy, in order to prevent, as I said before, such an unwelcome situation. With regard to economic performance, I consider that we should approach it from a general point of view, since it's also admitted in the report that in stages of very low underdevelopment, economic performance could be affected by factors outside the control, beyond the control of the authorities; but I basically agree with the principle of self-help which is of vital importance for any sort of help coming from the outside. I welcome very much, Mr. Chairman, the position of increasing IDA support to developing countries in the preparation of adequate projects. I think this is one of the most important ways to help developing countries, and I think, too, that we should envisage in the future a larger amount of investment in human resources, in order to help developing countries to be self-sufficient in the most important sector there is, of human resources and management. 155 STRICTLY ONFIDENTIAL With regard to the poverty criterion, I welcome also the lifting of the indicative limit on the per capita income from $250 to $300, although I think I should warn against statistics since by the fact of devaluation a country could go back to this qualification for IDA, although internal income level would not have been affected by that sensibly. In this connection, I think that this $300 per capita should be a little bit expanded in order to include countries like Nicaragua, for instance, which has slightly $20 or $25 over this limit, and should for this reason not be included in future IDA assistance. With regard to terms of IDA credit, after carefully considering various alternatives, I am inclined to favor maintenance of the present system; that is, a single service charge and single maturity period, since it favors the purpose of clarity and impartiality and makes it easier for IDA to help countries, and also avoid difficulties which would certainly arise if we were to apply discriminatory rates ana repayment periods to member countries. Despite the attractiveness of terms more adequate to specific projects, I think again it is more helpful to maintain present conditions both in terms and amortization. With regard to the form of IDA assistance, I believe very strongly, Mr. Chairman, that IDA assistance has to be granted in accordance with the terms in Article V(b), that is, through projects, and only in exceptional circumstanc s STRICTLY ONFIDENTIAL 156 should there be a departure from them. Such assistance granted through projects increases the value of IDA's contribution to the members' economic development and helps also improvement of human resources, which are very much needed in developing countries. Through projects assistance, also, IDA can have a better follow-up of its contributions, and would be more in accordance with its purposes as stated in Article I. Finally, with regard to counterpart funds, I agree on the difficulties of such an exercise, as well as on the possible burden it would represent for IDA. Never- theless, I think we should not discard this very important element since through its use, use of counterpart funds, we would be able to expand quite importantly our development effort, and so the purposes of IDA would be greatly served; but in the meantime, until we can take this up in a very specific consideration, I think progress should be made toward the goal of better use of such resources by generally earmarking them for economic development purposes. And finally, Mr. Chairman, I have no objections to distribution of available resources, once the Second Replenishment of IDA has been completed. Thank you. MR. McNAMARA: Thank you very much. STRICTLY ONFIDENTIAL 157 Mr. Bake. MR. BAKO (through Interpreter): Thank you, Mr. Chairman. Your memorandum of the 10th of July--there was an exchange of views. The problems of this last go back to distribution of funds. It seems to me that on other points your recommendations do not stick to the procedure which has been the practice for the past few years. I limit myself then to the problem of distribution of funds of the Association. The countries which this last aid are greater in number, and a mass of capital is at the distribution of each one which is in accordance with their relative needs. They also appreciate the conditions under which it might be granted to them, the loan conditions. I am happy to state about these conditions that Note 2 proposes that a change in the conditions which would be unfavorable for the countries of the organization -- they would be speeding up reimbursement of credits, and if things go well, the same question would apply for the countries to find out what to do in order to receive capital in sufficient quantities. The result of the first decade for development draws attention to an increase of development aid by perhaps new means, and I would find it difficult to 158 STRICTLY ONFIDENTIAL understand if IDA would choose an orientation in this directi I think that the loan conditions of the credits of the Association should remain as they are, corresponding to the situation of the member countries of the Association. If the conditions of the loans remain the way they have been in distribution of Association funds, I would like to say that the problem of the moment is distribution. Note 1 uses a group of criteria to explain distribution as it has been practiced up to the present. It uses criteria one element would be influenced in the distribution I have the impression that the existence of these criteria are meaningful only for the countries to which we would like to apply them. They seem to show the treatment in many cases by application of these criteria would remain reserved territory. Under these conditions, to speak of an equitable distribution of funds becomes a difficult exercise. The first reaction concerning these criteria is that since they have not assured a satisfactory distributi of funds, I should like to say that the criteria influencing decisions to be made should not be presented as being determinative but continuous distribution might be brought about, and each one in my opinion would -- the third criterion seems to me less important in itself, since the asking countries should be able to express the merit of a plan. The Association has used, as in the past, these criteria STRICTLY ONFIDENTIAL 159 for a limitation, so certain countries have received financial means greater than have other countries; and this was used in determining the quantities to be applied, The criterion about projects might be suitable. However, before we are faced with unequal treatment of member countries which through administrative means, I think damages the possibilities of certain projects which should be returned. I hope that these criteria will not be an obstacle in the distribution of credits of the Association for those countries which have been less favored. I recognize that setting up new criteria, the problem is put out in Noe 1 where in any case resources would be put into an agreement by the Association, and here I find the relative percentages are very high. As one of the previous speakers said, I think that a decrease of these percentages would guarantee a better distribution of funds. I should like to take the liberty of saying that I think there are higher criteria which would allow us to understand the attitude of the Association faced with the problem of distribution of its funds. In the charter of the Association and the discussion which usually takes place when there's a question of replenishing the funds of IDA, I think these discussions give an indication about th way to manage funds of IDA, and here I have the hope that 160 STRICTLY ONFIDENTIAL this has been the case recently, setting up the principles for a new equitable distribution among all member countries. Thank you, Mr. Chairman. MR. McNAMARA: Gentlemen, nineteen of the twenty Directors have spoken today. Mr. Escobar, do you choose to speak? I'd be delighted to recognize you. Go right ahead. MR. ESCOBAR: I was waiting for my colleagues to express their opinions. I don't want to be conspicuous by being on the side lines, but anyway, Mr. Chairman, I had an opportunity to express my views rather fully in a meeting that we had under the chairmanship of Mr. Knapp, of the Part II countries, and I don't want to elaborate on this. I don't want to make a long statement, mainly because my opinions are well known to you and my colleagues on the Board. I wrote you a memorandum on Bank lending policies and that was circulated to the Executive Directors, and I still think that expresses my own views very well. I certainly realize, as you my colleagues will, that these papers before us today do represent the reaffirma- tion of the old policies of the Bank, which are well- established, sound financial policies; but certainly don't constitute any departure from old techniques of project financing, and I think that in that framework, these are very good papers and I am willing to support in general the STRICTLY ONFIDENT-IAL 161 technique that in general within that framework are very well spelled out here. Now my own views would be that the Bank and the Association should try new techniques of development financing :Which depart from the project approach and pay more attention to developmental efforts, to the development strategy a country is following, and solving in that manner problems of counter:part funds, amortization procedures, rate of interest, Bank/IDA blend, and all of that kind of particular problem that we're discussing here. I think we could discuss for hours what should we do with counterpart funds or amortization periods, and so on, but honestly speaking, if we're going to keep, as is the intention of these papers, the project approach, that discussion in fact I don't think has much meaning, honestly speaking. Let's assume that we say we are going to control counterpart funds. What is the actual meaning of that? The other day we discussed that, and if you say, 11 Well, we're going to make a million dollar - loan for agriculture," then any countiry·can tell you, 11 Look. The counterpart funds are going to be used for what? You name it. Location, transportation, anything." Because every country will spend in those sectors much more than counterpart funds of STRICTLY ONFIDENTIAL 162 $1 million, and if we are only dealing with one project, we cannot solve the basic problem involved here, of what is the :all~cation of the limited resources that the country has available for investment, both local and foreign. So as long as we don't want to deal with a development program as a whole, taking into account all available sources, both local and foreign, for a development program and policies, I think that the criteria identified here are perfectly all right with me, but my basic approach would be quite different, as you know. But I don't want to elaborate on that, because I don't want to take the time and I don't think we are going to change this, but within these criteria here, I just want to associate myself with those who have said that we should not be too strict about the per capita income criterion. I think that, as Dr. Machado put it, it would be better just to have Part I and Part II countries, and be very dogmatic. My own suggestion, as a whole, would be perhaps that we might take these pa~ers before us today as general guidance for the staff and for you, sir, for submitting recommendations to the Board, and keep these papers and the record of discussion as sort of references for the President and the staff; and then you might submit your recommendations to the Board for IDA loans for particular cases in particular countries, and in analyzing the actual needs of the country, then you 1< ,• 163 CON Fl DENTIAL could say, "Look. I'm suggesting here an IDA loan for this country, because this is the situation of the country as a whole; not because this is just a good project, but because IDA money would be justified in this country in the light of its development strategy, in the light of its development program, in the light of the present economic conditions of the country, and the future economic situation that we can forecast in our analysis," so with that kind of pragmatic approach, we could play with the four criteria mentioned, let these criteria have their relative weight according to each particular case, and we can apply these to different countries according to the needs of the country, not according to the needs of the papers; but according to the needs of the country. In my view, we have to move away from the project approach toward an approach which wou mean a financial program tailor-made to meet the actual needs of the country, and that might mean in one case more Bank money, less IDA money; in a different country, a different situation. In one country that might mean a 20-year loan, a 20-year period of loan amortization; and in another country, it might mean a 50-year loan. In one country it might mean no grace period; in another country, it might mean a 10-year grace period. It would depend on the actual needs of the country, on the quality of its development program, the development strategy, the STRICTL CONFIDENTIAL 164 commitment of the country to ideas of development, to the sacrifices of the country which it's willing to make, and then consequently to the support that the country merits because of its own internal efforts, so that I would say is a different approach. But still I think if we are -- even keeping these papers as they are -- if we agree at least to be very pragmatic and not be too strict about this, perhaps we could give you the opportunity of more flexibility so that we could shape in the future our policy to meet the actual needs of the country and to experiment a little bit in perhaps, if not new, slightly new techniques of developmen finance. MR. McNAMARA: Thank you very much, Mr. Escobar. Now I earl say that I believe twenty Directors have spoken, and I am going to exercise my prerogatives as Chairman to draw the discussion to a close with one minor exception, in a moment, and to try to summarize where I think we stand. Dr. Machado has asked to make a brief comment on one of the other speakers, and I recog11ize him for that purpose. DR. MACHADO: Mr. Chairman, I am going to refer to Mr. Skjerdal's statement, particularly. Both Mr. Skjerdal and I think Mr. Lynch in his opening statement made reference to the size and populations in India and 165 STRICTLY ONFIDENTIAL Pakistan as justification for not applying geographical criter· . we look at Table ·III, · ·which ·we · all' have before us, agree with Mr. Lynch that the total population of Latin erica and Africa combined is less than the population of India and Pakistan, but when we look at Table III we find that India, according to that table, has 486,800,000 inhabitan ; Pakistan, 130.9 million; total, 600.7 million. But if you add the population of all Part II countries in the same list, it comes to 1,549 million. Now that means that India's population is 31.5 of the Part II membership of IDA; Pakistan's population is a little less, but let's say 8 percen. The total population of India and Pakistan is 39.5 percent -- I let's say 40 percent. Well, say India with 31.5, say 32 population has received 51.4 of total resources of IDA in eight years of operation; and Pakistan, with 8 percent, 19 percent. On the other hand, Latin America, with 18 percent of the population -- Western Hemisphere, I should say -- received only 6 percent. There is no question that there's been a dislocation or what I call a disproportionate distribution of IDA resources geographically. Now I support the recommendations contained in the 166 STRICTLY ONFIDENTIAL memoranda submitted by the President, This is not a geographi a l distribution that he's making; the President established the limitations which are normal and standard in all financial institutions. We all know that in any bank of any type, whether it's a central bank, commercial bank, or any financial institution, there is always a limit as to the amount of a single loan made in regard to the capital resources of the organization, and there is also a limitation as to the total amount that any one enterprise may receive of the total resources of the organization. I am sure that the most liberal of these are 10 percent and 20 percent, usually. Now here's a case where 70.5 percent of our resources have gone in the direction of two clients alone, so I think what the President intends in his memorandum is to say that he is going to put a limitation, not geographical limitation, but certainly a limitation to see that the resources of IDA are not one- sided or in only one direction, with the idea of attaining what is called in the Articles of Agreement, wide distribu tio Noy, Mr. Skjerdal proposed that we do away with geographical distribution, and I must say none of us has spoken for geographical distribution because geographical distribution would mean so much for each country; that has STRICTLY ONFIDENTIAL 167 not been mentioned. It says, "Let us use a standard system or standard formula for the concession of IDA." I am in agreement, but I am going to ask Mr. Skjerdal which standard, because I think in IDA we've been following a double standard. In the case of all IDA countries, we simply have been assigning credits on the basis of projects, but in the case of India and Pakistan, we first have decided in a consortium the amount of total aid that India and Pakistan would be receiving fromi.a.rious donors, including the Bank. The Bank has taken off, you might say, the balance that has not been taken by other countries. And then after tha~, they have come to the Bank and tried to find projects to justify the situation. Now do you want to follow the consortia approach? Fine. Let's have it a consortium of 50 member countries of qualified Part II countries to receive IDA. Or if we are going to have a uniform system, let India and Pakistan follow the same project approach as we do in our case. One more comment, and I'll be through, and thank you, Mr. Chairman, for your generosity in letting me speak. When we talk about performance, we have to be very careful because it's a very delicate subject. Now, Mr. Reid who agrees with me, and I agree on the criterion of performance, says that in his opinion performance is appropriate domestic 168 STRICTLY ONFIDENTIAL policies. Now, what does that mean? Does the fact that a country does not carry out the recommendation of the Fund on multiple exchange rates which the Bank has considered '.would be proper? What about a country which restricts the exploitation of mineral resources or oil to nationals? Is that an appropriate domestic policy? What about countries that feel that fisheries within 200 miles should be restricted to their own nationals? That is a domestic policy; is it wise? What about the countries that require a minimum percentage of national ownership in companies? This is again a domestic policy, but is it an appropriate domestic policy? What about those countries that have nationalized all commercial banks? And I could go on. What about a country that insists on unionized labor? What about countries that still feel certain public services ought to be subsidized? I can cite cases of railroads that operate on a deficit, but the country feels, however, i t is essential. What about countries that still feel that they need a certain amount of their resources for national defense? Is that an appropriate domestic policy? When we go into domestic policies, we're treading on very difficult terrain, and one that I certainly hope that this institution, either Bank or IDA, does not enter. Thank you, Mr. Chairman. 169 STRICTL CONFIDENTIAL MR. McNAMARA: Thank you, Dr. Machado. Gentlemen, we must draw this to a close. I recognize Mr. Lynch and Mr. Skjerdal for two minutes each, if they choose to reply, after which there will be no more speaking. Mr. Lynch. MR. LYNCH: Ten seconds is enough. On population, our dear dean1 has answered eloquently a point I did not make. I cited population figures in relation to total resourc~s of the regions of the world, and he was citing them in relation to IDA alone. I think my method of doing it wa much more in accordance with the policy in the paper than his. MR. McNAMARA: Mr. Skjerdal? MR. SKJERDAL: I have nothing. 1 STRICTLY CONFIDENTIAL 110 MR. McNAMARA: Gentlemen, we have spent somewhat over five hours today discussing IDA policies. To me, perhaps because I am still a relative newcomer, it's ~een an exceedingly interesting and helpful discussion; I've learned a lot. I hope that the rest of you feel the same way. I think that what it has demonstrated is, that with one possible exception, there is not general agreement on any significant change in the present policies. There is, I think, agreement as I will comment on in a moment, on some modifications of those policies but no revolutionary change. One proposal which has received broad acceptance, almost unanimous acceptance, is the proposal we have made that we give assistance, staff assistance to the poorer countries, where they can benefit from that in project prepar•• tion for IDA credits or in action that will assist them when they request it, to improve their economic performance; I think with one possible exception, all the Directors agree with that proposal. It is a major change in our approach to these poorer countries; it is one that I strongly support myself, and I think we can all agree we should proceed in that direction. A second general principle that I think there is agreement on, but perhaps without agreement on how to achieve· it, was a broader distribution of IDA credits geographically. - I think that that is going to occur almost in spite of ,oursel,$. 171 STRICTLY ONFIDENTIAL Assuming that we receive the Second Replenishment, the larger amount of funds available, and the progress that many nations have achieved in project preparation and economic performance almost surely will lead to a broader distribution of credits, regardless of what policies we adopt here today, and I think it is your view that there should be such a broader distribu- tion of credits. There was less agreement but still I think a clear majority in favor of a reduction in the percentage of credits to India and Pakistan. We proposed a reduction from roughly 72 percent to 52 percent. As I say, I kept a rather careful record as we went through today, and I think there is a clear majority in favor of that, without, however, a clear indication that they would set the percentage at 52 versus 48, or 56. I think there is an agreement by the majority that we should reduce the percentage from 72 toward 52, we should accept the 52 percent as a guideline, and we should take accoun of a number of other factors that might shift us during the year away from an exact percentage of 52 or any other exact percentage we might try to establish today. There is still less agreement, but still I think a majority agreement that we should move toward loosening or raising the $250 per capita income limit as it relates to eligibility of countries for IDA credit. Many of you felt 172 STRICTLY ONFIDENTIAL there should be no income eligibility standard; others would have held to the $250 standard or perhaps even lower it. I think1hat the general opinion would be that we should not have any ironclad limit, we should accept a figure somewhat higher than $250, perhaps $300, as a general guideline, taking account of other factors, and recognizing that during the year there would be exceptions to that higher limit. In general you accepted the four standards for allocating IDA credits, and we will continue to apply those. There is a clear difference of opinion among you as to the importance of the standard that we labeled "relative stage of economic growth," many of you feeling that it was merely one of the factors determining the degree of creditworthiness, and I think there is considerable logic to that argument, but I think what you didn't discuss today is how you determine creditworthiness. Once one gets into that, it is a very, very difficult concept to deal with and this "relative stage of economic growth" as a practical matter serves as a useful criterion, and I expect we will have to continue to follow it, although perhaps not as rigidly as in the past, with more exceptions than have been presented to you in the past. I think it was clear that a majority of the members, although certainly not all by any means, a majority of members of the Board did not wish at this time to change the lending terms and we will make no recommendation to you to do so. 4 173 STRICTLY . ONFIDENTIAL There was a general feeling that we should not exercise specific control over counterpart funds generated by the IDA credits prior to the time of repayment. I tried to keep a careful record of your opinions on the extent to which we should proceed as we have recommended in our staff paper, and my record shows that a majority felt we should proceed in that direction; but many of you who said, "I support the proposal on counterpart control as outlined in your paper" did so without any real enthusiasm, and I think that on that particular issue, I am prepared to withdraw my proposal and continue as we have been, unless some of you later wish to revive the issue. That brings me to my last point of summary. I think it was generally agreed we should not consider the tentative conclusions I've just outlined, assuming you accept them for the moment, we should not consider that they settle for all time the IDA policies to be followed during the Second Replenishment period, but we should have other discussions, on some policies sooner and on some policies later, during the Second Replenishment period. Now if I have correctly reflected your views, I would suggest we conclude our discussion as I have outlined, recognizing the right and privilege and responsibility of any one of you to raise any one of these issues at such date as you 174 STRICTLY ONFIDENTIAL choose, and if you feel that in advance of a further dis- cussion you would like to see additional staff papers prepared. on particular aspects of the questions you may raise, I'll be very happy to have such papers prepared. I neglected to mention one issue that Mr. Knapp just reminded me of, one on which there was a clear majority, and that was that it would be acceptable to have the rate of commitment of IDA funds as we have outlined in the paper. I say "acceptable" because I think all of you would say, as some of you did, that the rate of commitment should not be forced, it should be a function of the development of sound projects; but if the sound projects result~d in commitment of funds at the rate we outlined, that would be acceptable. If I have summarized your views properly, we'll proceed as I have outlined. Dr. Chen. DR. CHEN: May we have a copy of your last part of your statement? MR. McNAMARA: Yes, surely. Mr. Lynch. MR. LYNCH: I do beg your pardon for further intervention, Mr. Chairman MR. McNAMARA: No, go right ahead. MR. LYNCH: I am not absolutely sure of our position on the percentage. I wouldn't for a moment challenge your 6 STRICTLY CONFIDENTIAL 175 calculation, but my own private record is that there were only three Directors who gave unqualified assent to the 52-1/2, and there were about another six who raised no final objection to it. If there is a disagreement in this area, I think that possibly there is room for an accommodation of the different points of view, and if for your own purposes a percentage is necessary, it might be possible for us to actually agree upon a percentage which would be acceptable to everybody, except the three Directors who came down definitely in favor of the 52-1/2. MR. McNAMARA: I kept a record as you did, and found that while a majority did not agree exactly on 52-1/2, that the majority agreed on that or a lesser percentage. I think this is the issue, and many of those who did not specifically say, "I endorse 52-1/2," spoke in such a way that indicated uite clearly that their reason for not accepting 52-1/2 was that they seriously questioned whether they wanted to accept the complement of it, 48 percent, but I'd be quite happy, Mr. you choose, to go around the table. It isn't an issue. We do need it as a guideline. I want to mak lear whatever percentage we discuss here today, I would not ropose to accept as an independent variable, determining the pecific volume of credits to be submitted to the Board, but think the preparation of credits and degree of staff assistan e .1 176 STRICTLY . ONFIDENTIAL given to various countries, for example, in various areas of the world, we need this as a guideline. But if I have misinterpreted the views of the Board on this particular issue, the 52-1/2 percent, if I misinterpreted the views of those who did not specifically . endorse it but led me to believe the only reason they didn't ,endorse it was because they believed it too high, I'd be quite happy to go round the table. DR. MACHADO: Too high. MR. McNAMARA: Mr. Coleman, for example, and Dr. Machado, I marked both of them as not specifically endorsing 52 because they thought it too high, and I can go down the Directors, if you choose, Mr. Lynch, and ask them to record their view. I know how strongly you feel, I recognize that you are under instructions from your Government, and I am quite willing to take the time to do this if you wish to do it MR. LYNCH: I think in the circumstances I must ask that it be done. MR. McNAMARA: I think that is entirely reasonable, and I would be quite willing to do it. Let me ask Mr. Mendels to poll each Director, and let me suggest that the question be phrased this way: for the guidance of the management, is it agreed that the shar of India-Pakistan should be reduced to at least 52-1/2 percent 8 177 STRICTLY ONFIDENTIAL Yes, Mr. Skjerdal? MR. SKJERDAL: M:'. Chairman, as you know, I was in principle against any percentage, but since you now are pressing the point, I would like to know on what basis was this 52-1/2 percent established? It's not taken out of the air, I believe. MR. McNAMARA: Mr. Skjerdal, I would prefer not to get into that, if I may say so. This is a figure that has been developed and discussed many, many times in dis- cussions and I would simply like, at this point, to address myself to Mr. Lynch's feeling that I may not have properly .reflected the consensus of the Board in saying that I believed they would like to have the staff, as a guideline, work toward a reduction of from 72 toward 52-1/2 or less. MR. SKJERDAL: That's all right as long as we're not going to vote on it. MR. McNAMARA: Well, I would like to go around the table, and without voting, because the Financial Policy Committee does not vote, I would like to just check my own summary of the consensus so that I don't mislead you, and I will of course, if the Directors choose, raise this issue for formal vote in a Directors' meeting; I think there is something to be gained by not doing it, but I do know some of you, Mr. Lynch in particular, is operating under instructio s ? 9 STRICTLY ONFIDENTIAL 178 from his Government and I don't want to have misled him or others in my summary, and I'd just like to check my own notes, therefore, and ask Mr. Mendels to poll the members of the Financial Policy Committee, and ask them to give a yes or no: Do they favor the staff operating on the guide- line of reducing the India-Pakistan percentage from 72-1/2 ~ercent toward 52-1/2 percent or less? Mr. Stone. MR. STONE: Well, Mr. Chairman, with very great respect for the procedure you just suggested and with very great respect for Mr. Lynch's views and the instructions he is no doubt operating under from his Government, I just want to say that I have expressed my views on this matter during the course of the afternoon's discussion, and I don't propose, · with respect to you, sir, to answer the question you propose to put to me, because I don't believe it can be answered by a straight yes or no. MR. McNAMARA: All right, let me say this then: I will ask those who wish to answer to answer, and Mr. Mendel will call the roll. Those who choose to answer will say yes or no, and others will say, 11 I prefer not to answer. ' Mr. Mendels, will you call the roll? MR. MENDELS: Mr. Jahanshahi. MR. JAHANSHAHI: No. I mean it's too low. MR. MENDELS: Dr. Chen. 1-0 179 STRICTLY ONFIDENTIAL DR. CHEN: Abstain. MR. MENDELS:. Mr. Coleman. MR. COLEMAN: Yes. MR. ~NOELS: Mr. vom Hofe. MR. VOM HOFE: I have another proposal. MR. MENDELS: Mr. Escobar. MR. ESCOBAR: Yes. MR. MENDELS: Mr. Gutierrez-Cano. MR. GUTIERREZ-CANO: Yes. MR. MENDELS: Mr. Reid. MR. REID: Can't answer. MR. MENDELS: Mr. Bako. MR. BAKO: Yes. MR. MENDELS: Mr. Mentre. MR. MENTRE: I think I agree with Mr. Stone that it emerges from the statement I made, and in the context of my statement my response would be affirmative. MR. MENDELS: Dr. Lieftinck. DR. LIEFTINCK: Yes. MR. MENDELS: Dr. Machado. DR. MACHADO: Yes. It will leave 47 percent for th 60 percent remaining members. (Laughter) MR. MENDELS: Dr. Mejia. 11 180 STRICTLY ONFIDENTIAL DR. MEJIA-PALACIO: Yes. MR. MENDELS: Mr. Rice. MR. RICE: With respect I don't think I should have to answer that question at this time. MR. McNAMARA: Let me just stop there one second, Mr. Rice. Then I misunderstood your argument today, that is perfectly clear, and my notes are quite incorrect on record ing your views. MR. RICE: I don't think I took a specific -- MR. McNAMARA: All right, then I misunderstood. Go right ahead. MR. MENDELS: Mr. Stone. MR. STONE: I would simply say what Mr. Rice has just said, Mr. Chairman. I answered this question earlier but not in terms of yes or no. MR. MENDELS: Mr. Jagannathan. MR. JAGANNATHAN: I don't want to say anything now. MR. MENDELS: Mr. Skjerdal. MR. SKJERDAL: I will not vote for the reason that I don't know on what basis this figure is established. MR. MENDELS: Mr. Lynch. MR. LYNCH: No. MR. MENDELS: Mr. Suzuki. . . ' MR. SUZUKI: I cannot answer definitely • 181 STRICTLY ~ NFIDENTIAL MR. MENDELS: Mr. Tazi. MR. TAZI: Mr. Chairman, I will not vote but I'd like to give a further explanation. MR. McNAMARA: Surely. MR. TAZI: What I said clearly in my statement is that I was prepared to support the figures you have recommende to the Board, provided that for broader geographic regions, some ceiling will also be decided. That was my position. MR . .MENDELS: Mr. van Campenhout. MR. VAN CAMPENHOUT: As a guideline more or less. (Laughter) MR. McNAMARA: I'm sorry, I didn't hear you. MR. VAN CAMPENHOUT: As a guideline more or less. I don't care if it's 53 or 48 MR. McNAMARA: Yes. Let me just check it here for a second to see where it comes out. I think we should take this as the abstainers should be counted in effect as supporting the present 72 percent. (Laughter) MR. McNAMARA: Well, let me say I'll count it any way you want to, but look! you can't get a free ride, gentlemen; something's got to be done -- either you're going t hold to 72 or move to 52, and I'm perfectly willing to accept 13 STRICTL CONFIDENTIAL 182 any kind of guidance you have here, but on the question of counting the votes and determining how you stand, if you didn' t vote at all, I would assume you favored continuation into the future of the past policies. If that is not the proper interpretation, I will make a different assumption. Mr. Stone, when I said that, you questioned it. How would you like your position interpreted for the purpose of counting the votes, or let me rephrase that: how would you like your position interpreted from the point of view of determining consensus of the group? MR. STONE: Well, I just want to begin by saying, in answering your question, Mr. Chairman, that I think that I and other Directors did express ourselves at some length on this, this afternoon, and with all the qualifica tio s that were appropriate to an expression of opinion on an important question of this kind. Now one of the difficulties one has in answering this question is that we don't know what the level of IDA commitments achieved during the year ahead will be, and my position would in fact prove to be quite different on this, and I did say during the course of my statement earlier that I wasn't entirely sure that the percentages as such were an appropriate, were necessarily an appropriate basis for determining this question. There was a question of absolute amounts which would be STRICTLY 6 NF1DENTIAL 183 in mind as well, and what I had in mind in making this stateme is that one doesn't have absolutely an assurance that when the fiscal year 1969 is ended, we're going to have $600 million orth of commitments on the table. We may or we may not, and depending on whether we do or don't, the figure of 52-1/2 percent might be appropriate or it might not be appropriate and similarly again I think one's view about the outcome would be very different, depending on what the reasons for that shortfall were, if there were a shortfall--whether this was because insufficient projects had come forward from the other members of the IDA-eligible countries or had failed to come forward from India and Pakistan. There are many questions of these kinds which have to be answered. MR. McNAMARA: I think these points are well taken, and the interpretation you put on it initially I think is the correct interpretation, that you start with a plan for the year and against that plan this percentage applies. This, frankly, gentlemen, is the reason we need it. You just can't go through a week or month here without some plan in mind, and the percentage applied, to answer Mr. Stone's specific question, which I don't think anybody did and he phrased it very early in the discussion, the percentage should apply against a plan for the year, the planned level of commitment. MR. STONE: Well if, Mr . Chairman, the.question •. 184 ou are addressing to the Board is do we or do we not agree the 52-1/2 percent criterion in the context of that million, if that's the figure of the level of commitments, then the answer that I gave is yes. MR. McNAMARA: Yes, well, all right, then we'll refer to it as yes, because that is exactly the question -- exactly the question. Yes, Dr. Chen? DR. CHEN: Mr. Chairman, I was the first one to ,\ bstain at the time of the voting, for the reason that as I said in my short statement, I was not in favor of having igidity in fixing a percentage. However, if I had a choice etween the two, I'd prefer the lower limit; namely, 52-1/2. MR. McNAMARA: All right, thank you. We will record ou and Mr. Stone on that. Mr. vom Hofe, you raised a question a moment ago. MR. VOM HOFE: Yes, I said in my statement surely e have to keep in mind that we're an international institution nd more or less I think we all agree that not two countries have 75 percent when there are so many projects now coming p, so we all agree it has to be diminished; but nevertheless, e're not in favor of just fixing some figures, so if we ake this in mind then we have a guideline of what we want o do. We want to, to say it quite bluntly, diminish the part 185 STRICTLY 'oNFIDENTIAL that India and Pakistan had, the 75 percent, to about the fi~ure you spoke of and that I think is the same guideline Mr. van Campenhout is thinking of. MR. McNAMARA: Yes, and that is the specific word I used, as a "guideline" so we will record you as in favor of it, Mr. vom Hofe, for the purpose of my drawing a consensus from this group. Mr. Tazi. MR. TAZI: In the light of the explanation you have given now, I would say yes. MR. McNAMARA: All right, sir. Mr. Suzuki. MR. SUZUKI: Mr. Chairman, in the light of the explanation you gave, I think I could be counted as yes. MR. McNAMARA: Very good. I'm sorry I explained it so poorly initially. (Laughter) MR. McNAMARA: But I am happy to have you correct my explanation. Mr. Lynch, I am just simply trying to correct my own understanding of the views of the parties without treating this as a vote, but I think I have correctly reflected the consensus and would guide myself accordingly. Mr. Reid. 186 17 STRICT CON Fl DENTIAL MR. REID: Mr. Chairman, I put a great deal of weight and burden on the word "guideline," and taking into account your specific reference to the $600 million figure, I can just barely say yes. MR. McNAMARA: We will record your yes in faint writing, Mr. Reid. (Laughter) MR. McNAMARA: Well, gentlemen, we have spent almost six hours now on this subject. I think it has been an extremely helpful discussion, and I would like to conclude it by simply suggesting that we follow the statement many of you made that this is not the last discussion we should have, that we should have another as the months go by -- some of you suggested in the wintertime. We will of course discuss two important aspects of the subject within the next several weeks: one, the financing of local currency expendi- tures for both Bank loans and IDA credits; and the other, the question of program versus project loans currently not scheduled for a specific date but promised for some time afte the Annual Meeting, and I will be very happy to schedule discussions of other aspects of this as you wish me to do so. Mr. Coleman. MR. COLEMAN: Mr. Chairman, I simply want to say that 187 STRICT ~ ON Fl DENTIAL I recognize that this is a difficult subject, but I think the memoranda that you circulated have been ver.[ helpful in steering the thoughts and discussion in a very positive way, and for a future discussion, if this is desired, I think it would be very helpful if a paper were issued, bringi g out the points that ought to be discussed. MR. McNAMARA: We will do so. Or. Lieftinck. DR. LIEFTINCK: Mr. Chairman, in one of the papers it is stated that until we had a discussion on IDA policies, no further so-called program loans would be made. I under- stand -- do I understand correctly that this will continue-- MR. McNAMARA: I stated, Dr. Lieftinck, that at the time the last program loan was brought to the Board, it was not brought at that particular point for decision -- it was the loan for India in a sense subject to replenishment - that no program loans other than that one would be brought for decision. I would like to bring that for decision at th time, if and when replenishment is authorized, and subject to that qualification, no further program loan will be brou t to the Board until a discussion of program versus project lo has been presented to you. I am hopeful that will be someti e in the fall. In any case, with that quaJ;ificati6n, your 19 188 STRICT Y CONFIDENTIAL interpretation is correct. Thank you very much, gentlemen. DR. MACHADO: Thanks to you. MR. McNAMARA: It's been a very helpful day today. (Whereupon, at 6:11 p.m. the meeting was adjeurned.