10918 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THIRD ANNUAL REPORT 194 7 - 1948 THIRD ANNUAL REPORT TO THE BOARD OF GOVERNORS 1947 - 194S8 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT WASHIlNGTON, D. C. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT September 27, 1948 My dear Mr. Chairman: In accordance with Section 10 of the By-Laws of the Interna- tional Bank for Reconstruction and Development, I have the honor to submit to the Board of Governors the Third Annual Report of the Bank, as approved by the Executive Directors. This report includes financial statements as of June 30, 1948, based on an audit of the accounts of the Bank made pursuant to Section 19 of the By-Laws. It also incorporates, pursuant to Section 19 of the By-Laws, an administrative budget for the fiscal year ending June 30, 1949, prepared by the President and ap- proved by the Executive Directors. While the financial statements cover the fiscal year ended June 30, 1948, the remainder of the report reflects the activities of the Bank for the period from August 10, 1947 to August 31, 1948. Sincerely yours, JOHN J. MCCLOY, President. Chairman, Board of Governors, International Bank for Reconstruction and Development. TABLE OF CONTENTS Page INTRODUCTION ....................................................................... 5 ROLE OF THE BANK ........................................................................7 Europe Bank Operations in Europe to Date ........................................................................ 7 The Nature of Europe's Problem ........................................................................8 The European Recovery Program ........................................................................ 9 Future Bank Financing in Europe ....................................................................... 13 Dependence of Europe on Other Areas .................................................................... 14 Latin America, Asia, Africa and the Middle East Potentialities and Basic Problems of Development ................................................ 14 Pattern of Development ....................................................................... 17 Provision of Technical Assistance ................................................................... .... 18 Stimulation of Investment from Other Sources ........................................................ 20 LOAN ACTIVITIES ....................................................................... 21 Loans Granted ....................................................................... 21 Use of Loan Proceeds ....................................................................... 24 Loan Discussions ....................................................................... 24 Results of Operations and Loan Charges ....................................................................... 25 Administration of Loans ....................................................................... 25 Enabling Legislation .................................................. 26 MARKETING ACTIVITIES .................................................. 27 Borrowing Operations .................................................. 27 Legislative Program ................................................... 28 Condition of United States Market and Future Marketing Plans . ........................................... 30 MISCELLANEOUS ................................................... 30 Management and Organization .................................................. , , 30 Advisory Council ................................................... 31 Relationship with Other International Organizations ................................... 31 Increases in Membership ....................................... . 32 Subscriptions and Voting Power of Member Countries .................................... 32 Election of Additional Executive Directors ....................................... 32 Financial Statements and Reports ....................................... . 32 Administrative Budget ........................................ 32 Additional Reports to Board of Governors ....................................... 33 Appendices ........................................ 33 A. Balance Sheet as of June 30, 1948 ............................................................. 34 B. Statement of Income and Expenses for the Twelve Months Ended June 30, 1948.. 35 C. Statement of Loans as of June 30, 1948 ............................................. 36 D. Statement of Members' Currencies Held by the Bank as of June 30, 1948 ............ 37 E. Statement of Subscriptions to Capital Stock and Voting Power of Members as of June 30, 1948 ......................................... 38-39 F. Notes to Financial Statements ........................................................ 40-41 G. Opinion of Independent Auditor ........................................................ 42 H. Administrative Budget ......................................................... 43 1. Governors and Alternates as of August 31, 1948 .............................. 44 J. Voting Power and Subscriptions of Member Countries as of August 31, 1948 .45 K. Executive Directors and Alternates and Their Voting Power as of August 31, 1948 .46 L. Officers of the Bank as of August 31, 1948 .48 INTRODUCTION THIS THIRD ANNUAL REPORT of the International Bank for Reconstruction and Development records the Bank's activities during the period from August 10, 1947 to August 31, 1948. The story it tells is one of solid if modest achievement. During the period covered by this report, the Bank authorized the granting of its first credits for development purposes. The pattern set by this financing is promising, especially by reason of the cooperation shown by the borrowing country in adopting measures designed to put its economy on a stronger and more stable basis and to improve its credit position. The year has also witnessed the Bank's first loans to private enterprises and its first use of its guarantee powers. There has been an impressive increase in the number of projects brought to the Bank for consideration; active discussions are now being conducted concerning such projects in more than 20 member countries. At the same time, as a result of these discussions, of extensive trips made by the top officials of the Bank within Europe and South America and of a number of field investigations undertaken by the Bank, there has emerged a much clearer understanding, both by the Bank and by its members, of the essential nature of the Bank's task and of the conditions necessary for its satisfactory fulfilment. There have also been encouraging developments in con- nection with the creation of a broader market for the Bank's securities; in particular, the Bank has been able to consummate the first sale of its non-dollar bonds. The amount of money which the Bank has been able to invest during the year in sound, productive projects has not been large. The reasons are not obscure nor are they, from a long- range standpoint, disheartening. So far as European reconstruction is concerned, substantial loans by the Bank have been precluded primarily because of the uncertainties which have existed, first with respect to the shape and content of the European Recovery Program and later with respect to the manner in which loans by the Bank could best be brought into harmony with that pro- gram. So far as concerns other areas of the world, large-scale Bank financing has not yet been possible, due largely to the length of time required for the preparation of specific projects up to the point where they are ready for financing. In part, too, it is due to the need in some cases for the borrowing country to take steps to rectify unsound economic and financial conditions which affect its credit and which, if not remedied, would impair both the effectiveness of any Bank loan and the prospects for its repayment. These are not long-term obstacles. It may reasonably be expected that the Bank's role in relation to the European Recovery Program will become clarified during the forthcoming months and, to the extent that the program helps Europe to regain stability, it will facilitate the Bank's operations. In other areas, considerable progress has already been made in drafting detailed plans for projects proposed for Bank financing and in initiating necessary economic and financial re- forms; these steps should soon make possible a substantial increase in the amount of Bank in- vestment for development purposes. [5 ] The fact must be frankly faced, however, that full realization of the Bank's potentiali- ties cannot be expected as long as economic and financial stability in large areas of the world continues to be threatened by political tensions and unrest. The prevailing political uncertainties undermine confidence, hamper productive investment and disrupt normal trade relations. So long as this condition continues, the Bank will be faced with difficulties not only in making good loans but also in convincing the private investment market, to which it must look for the major portion of its loanable resources, that its investment portfolio is sound. Only as the world political situa- tion becomes more stable can the Bank proceed with full momentum toward the accomplishment of its declared purposes. The Bank's field of activity is still new, new to its clients as well as to the institution itself. The ultimate pattern of its operations is not fully predictable; it will depend in large part upon world economic conditions and trends which the Bank itself can only in small measure shape. But by developing its activities in different directions, both with respect to the size and character of its loans and with respect to the techniques it employs to channel capital into productive in- ternational investment, the Bank has grown in flexibility, strength and stature. As it continues to acquire experience and to gain the confidence of its members, the Bank should gradually be able to play an increasingly effective role in helping to raise production levels and living standards throughout the world. [6] ROLE OF THE BANK Post-war experience has shown that the dis- gram and continue to represent a unique co- tinction made in the Bank's Articles of Agree- operative effort to achieve rehabilitation and ment between reconstruction and develop- long-range economic development throughout ment is overshadowed in importance by the the world. distinction between the Bank's activities in EUROPE Europe and its activities in other areas of the world. In Europe, the devastations of war, phy- Bank Operations in Europe to Date sical and moral, have had the most far-reaching As the Bank mentioned in its Second An- economic impact upon the world. Unlike the nual Report, the assumptions about European other areas, Europe enjoys for the most part recovery made at Bretton Woods in 1944 when a mature economy; in the import field, its need the Bank's charter was drafted have proved is less for capital equipment than for food, fuel to be both too simple and too optimistic. The and raw materials, and in the investment field, conception of Bretton Woods was that the its need is more for modernization, expansion critical short-range relief needs of Europe after and more effective utilization of existing pro- the war were to be met through donations by ductive facilities than for the construction of UNRRA; the external financing needed for new facilities or for the introduction of new more permanent recovery programs, to the ex- industries. Europe, too, has available highly tent that it could not be furnished from other developed technical skills and know-how. And sources, was to be supplied by loans from the finally, the Bank's role in Europe is affected, Bank. Recovery was conceived of primarily in in a way that it is not affected elsewhere, by terms of the rebuilding of factories, mines, the financial assistance which has recently been railroads and other specific productive facilities. made available by the United States to a num- It was not until the winter of 1946-47 that ber of the European countries in the form of the Bank was organized to the point that it the European Recovery Program. could seriously consider making its first loans Accordingly, the problems of Europe and for European reconstruction. By that time it the potential contribution of the Bank to the had become clear that the physical devastation, solution of those problems will be discussed disruption of trade and industrial and govern- first. This will be followed by an analysis of mental dislocations caused by the war were far the needs of the Bank's members in other areas greater than had been envisaged at Bretton of the world and of the manner in which it ap- Woods. The economic problems with which pears that the Bank can be most helpful in the European nations were confronted at the meeting such needs. end of the UNRRA period involved much If in the course of this discussion frequent more than the reconstruction or modernization mention is made of the European Recovery of specific productive facilities; there was also Program, it is because that program marks per- urgent need for assistance to prevent interrup- haps the most spectacular evidence of an eco- tion of the flow of imports, primarily of food, nomic trend commenced even before the close fuel and raw materials. By the end of 1946, of the war-the plan of extraordinary and con- European resources of dollar exchange had centrated aid moving from one country or area fallen to dangerously low levels and credits toward other areas less fortunately situated. from the United States and other Western The extent of such aid has assumed such an Hemisphere countries had largely been ex- economic significance that no serious resume of hausted. the Bank's past and future activities could pos- The loanable resources upon which the the Bank's past and future activities could pos- Bank could rely at that time without borrow- sibly be attempted without frequent reference ing in the market amounted to only about $730 to it. Having said this, however, it is appro- million, representing the 20% portion of the priate to add that the activities of the Bank United States' capital subscription required to extend far beyond the European Recovery Pro- be paid in dollars and the small portion of the [ 7 ] other members' subscriptions paid in gold or the Bank could not make large loans to Eu- dollars. This was obviously far less than was rope; none of the ERP countries, in fact, urged required to fill the financial gap in Europe, the Bank to do otherwise. There were several even apart from the pressing and justifiable reasons for this position. In the first place, until demands upon the Bank from other areas, but the amount of ERP aid, and particularly its the urgency of Europe's need could not be de- division as between loans and grants, were nied. In the spring and summer of 1947, there- known, the prospects for repayment of a Bank fore, the Bank granted a series of four Eu- loan to any of the ERP countries could not ropean loans-to France, the Netherlands, properly be estimated. In the second place, it Denmark and Luxembourg-totalling $497 was clear from the beginning of the debate that million. These loans, by permitting the bor- United States financial assistance to Europe, rowing countries to sustain for a time the nec- whatever the precise amount appropriated, essary volume of essential imports, helped to would greatly exceed for the time being prevent a disastrous drop in production and any amounts which the Bank might lend. possible economic collapse. It seemed desirable, therefore, that, instead of The Bank was fully aware, however, that providing what would have amounted at best these loans, vital as they were, provided only merely to stop-gap aid in meeting current Eu- a partial solution to Europe's problems. It ac- ropean balance of payments deficits, the Bank cordingly pointed out in its Second Annual reserve its not unlimited resources to finance Report that "there must be continued assist- productive projects in other areas of the world ance from other sources, such as that contem- and to supplement ERP by helping the partici- plated ... by the so-called Marshall Plan . . . ," pating countries in their long-term investment and that developments in connection with fur- programs. Finally, and not least important, ther United States assistance to Europe would most of the ERP countries were reluctant to "greatly affect the role of the Bank in the add to the burden of their debts by borrowing process of European reconstruction." from the Bank until they knew the amount and For eight months after those words were terms of the financial assistance they could se- written, a vigorous and healthy debate on the cure from the United States. European Recovery Program was conducted on These considerations did not stop all Bank both sides of the Atlantic. During part of this activities in Europe. Negotiations have been period the most urgent needs of a number of conducted with respect to a number of small the European countries were met through large loans for specific productive purposes which grants made by the United States under the seem clearly desirable irrespective of the ulti- Interim Aid Act. Finally, on April 3, 1948, mate form of ERP. One such loan has recently the Economic Cooperation Act of 1948 was been made-$12 million to four Dutch ship- enacted into law, authorizing United States ping companies for the purchase of six cargo financial assistance for a recovery program for ships-and several others are in the negotiation Europe to cover a period of slightly more than stage. In the main, however, the Bank's Eu- four years and the establishment of an Eco- ropean operations are now and will necessarily nomic Cooperation Administration (ECA) to continue for the next few years to be condi- administer such assistance. An initial sum of tioned by developments in connection with the $5 billion was made available for this purpose. European Recovery Program. On April 16, representatives of the sixteen Eu- ropean participating countries and of Western The Nature of Europe's Problem. Germany met in Paris and signed a convention It may fairly be said that in most European establishing the Organization for European Eco- countries the emergency reconstruction phase nomic Cooperation (OEEC) to implement the is over. Industrial production in all of the ma- European undertakings which formed the basis jor Western European nations, except Ger- of the program. many and Italy, has closely approached or ex- During the period while these developments ceeded the pre-war level. Transportation and were taking place, the Bank took the position power facilities have, in general, been restored. that, until the form and content of the Eu- And although agricultural production is still ropean Recovery Program had taken shape, well below the pre-war average, considerable [ 8 ] improvement is being made. Detailed facts and terms unrealistic. New and bold concepts are figures with respect to Europe's post-war pro- required if some of Europe's fundamental duction record are given in two recent publica- weaknesses are to be corrected and new sources tions, "A Survey of the Economic Situation and of strength provided. The volume of produc- Prospects of Europe," prepared by the U. N. tion must be greatly increased and the costs of Economic Commission for Europe, and The production substantially reduced. There must Eighteenth Annual Report of the Bank for In- be a new pattern of production which will per- ternational Settlements; they will not be re- mit both a reduction of imports and an in- peated here. crease of exports. And there must be a re- The extent of the progress made to date, orientation of Europe's trade channels to con- while noteworthy, provides no ground for com- form to the fundamental changes which have placency. In the case of post-war Europe, re- taken place in world conditions. In short, if construction is not synonymous with recovery Europe is again to become self-supporting at -the existing volume of production, despite a tolerable standard of living, the need is for its approximation to pre-war levels, is still far a fundamental readjustment in the structure from satisfying consumption, investment and of its economy. The basic objective of the Eu- export requirements. ropean Recovery Program is to enable Europe, The many reasons for this have frequently by its own efforts, to achieve just such a re- been stated. One major factor is the increase adjustment. in Western Europe's population by approxi- The European Recovery Program. mately 8 % since before the war. Another is the It is necessary in any discussion of the Eu- change in the terms of trade to the detriment ropean Recovery Program to distinguish be- of the Western European countries as a whole, tween the problems connected with the allo- and particularly of the United Kingdom, prices cation and use of ERP funds, on the one hand, of the food and raw materials which constitute and the problems connected with the readjust- the bulk of their imports having risen consider- ment of Europe's trade and production, on the ably more than the prices of the industrial goods other. which they export. Again, the necessary liquida- The ERP countries as a group are large tion of foreign investments and the destruction producers of capital equipment; in the case of merchant vessels as a result of the war have of such major items as coal-mining machinery substantially reduced Europe's invisible income, and power equipment, as much as 95 % of At the same time, military expenditures, vastly their requirements can be manufactured within increased over pre-war requirements, are ab- the area. For the most part, therefore, ERP sorbing as much as 20% or 25 % of the entire funds are not needed to finance equipment national budget of some of the ERP countries, imports. To the contrary, they are required causing in certain cases a severe drain on their primarily to finance food, fuel and raw mate- foreign exchange resources. Finally, the physi- rial imports designed to enable the ERP coun- cal devastation has been so great that, despite tries to enlarge their productive and export the capital investment already made, a portion capacities, largely out of their own manufac- of Europe's productive output must still be di- tures, without at the same time suffering a dis- verted to repair of war damage, particularly astrous decline in their levels of consumption. housing. The effect of ERP cannot, therefore, be Financially, these difficulties are reflected in measured either by the particular types of goods the balance of payments deficit of Western it enables Europe to import or by the specific Europe, primarily in relation to the dollar area. uses to which those particular goods are put. The over-all deficit in 1947 amounted to nearly The test is a much more fundamnental one. It $8 billion, of which more than 90% was with is whether the European countries participat- the Western Hemisphere. ing in the program, during the period while It will not suffice, therefore, to restore Eu- ERP funds are available to help support their ropean production and trade as they existed consumption standards, will be able to use the before the war; indeed, the magnitude of Eu- opportunity thus afforded to expand, modern- rope's problems makes thinking in pre-war ize and reorganize their productive mechanisms [ 9 ] and to effect the necessary changes in the pat- ment of the European economy are likely to tern of their trade. prove fruitless. The stated goal of ERP is to enable the (2) VOLUME OF PRODUCTION. Note- ERP countries, by June 30, 1952, to reduce worthy accomplishments in productioft have al- their balance of payments deficit from the ready been achieved, considering the difficul- 1947 level of nearly $8 billion to a level of ties arising from the war and the existing eco- from $2-$3 billion, or by 60% to 75%. At- nomic organization in Europe. Further mate- tainment of this goal may well appear suffi- rial progress depends both upon more effec- ciently difficult. However, it would still leave the tive utilization of existing productive facilities ERP countries with a formidable deficit. If, by and upon the modernization and, in certain key the end of the ERP period they are to become areas, the expansion of such facilities. independent of extraordinary outside economic It would clearly not be appropriate for the assistance, more must be accomplished than Bank to attempt any analysis of how the ERP has yet been faced up to. The measure of ac- countries can best improve the utilization of complishment must be what is necessary rather their existing piant and equipment. Yet no ob- than what has been possible in the past. jective appraisal of the requirements for Eu- The problems are many and complicated. ropean recovery can fail to note the substantial And the time for their solution is short, since opportunities which exist to increase industrial there is no basis to assume that, if European output through better management techniques, recovery is not in the main achieved by the the standardization, concentration and speciali- end of the ERP period, further United States zation of production, the removal of unneces- assistance will be forthcoming. It will not be sarily restrictive trade union practices and, in easy to maintain a sense of urgency over the some cases, longer hours of work. The poten- entire four-year period; yet if the availability tialities are not susceptible of accurate statistical of ERP funds is permitted to conceal the im- estimate, but they are undoubtedly great. mediacy and gravity of Europe's difficulties, However, the possibilities for improved utili- ERP will in large measure be self-defeating. zation of existing facilities do not detract from There is general agreement on the main pre- the need for, and indeed in large measure depend requisites for recovery. It may, however, be of upon, a very substantial program for the mod- value to summarize them briefly. ernization and expansion of Western Europe's (1) FINANCIAL STABILITY. World- plant and equipment. This cannot be accom- wide inflation has followed the most destruc- plished without continued diversion of a con- tive of all wars and Europe has suffered mark- siderable part of production from consumers' edly from this plague. The principal causes to producers' goods and without restricting ex- have been the severe shortage of goods at the penditures for the improvement of housing and end of the war, investment programs which public services to the minimum essential to over-taxed available resources, governmental achieve the production goals. Such a policy is expenditures for purposes not directly produc- severe. It means that, in most of the ERP tive and the lack of firm fiscal policies. Re- countries, it will not be possible to raise exist- cently, strong efforts have been made by many ing living standards to any marked degree for of the European countries, with varying de- a number of years. Yet unless the ERP coun- grees of success, to bring inflationary pressures tries maintain the discipline necessary for car- under control; however, stability has not yet rying out this policy, it is difficult to see how been achieved. they can become self-supporting by 1952. The Third Annual Report of the Interna- (3) FREEING INTRA-EUROPEAN tional Monetary Fund analyses in some detail TRADE. Increase of production will not be the problems of inflation in Europe and the enough unless there are accessible markets in steps necessary to correct the existing situation. which to dispose of the expanded output, and It suffices for purposes of this report, there- unless efficiency is improved to an extent which fore, to emphasize that without the firm eco- will enable the producers to compete in those nomic base which only monetary stability can markets. Modern industrial techniques and provide, all other efforts to effect a readjust- equipment depend to a large degree upon [ 10 ] standardization and specialization which are the Western European countries can by union possible only where there are broad markets or otherwise find the key to unlock the gates in which goods can be freely sold. which now obstruct the free flow of goods, During the period between the wars there manpower and capital among them, there is was an increasing development of trade, cur- grave doubt whether they can in the foresee- rency and other restrictions which hampered able future sustain their peoples at a standard the free flow of goods and narrowed the mar- of living approaching pre-war levels. kets for European products. In the post-war The world has long since passed 1938. Pro- period such restrictions have increased. The ductive processes and national financial and free markets now available to most of the economic policies which may have been tol- separate European countries are not sufficiently erable in those days are now inadequate. It is broad to permit full development of modern- time to focus attention, not on the difficulties ized production at economical cost. of bringing those processes and policies abreast Unless the markets for European products of the times, but on the necessity of overcom- can be broadened and greater freedom of intra- ing such difficulties. European trade can be attained, the hope for Cooperative effort to that end in one form ultimate European recovery will be dimmed or another, but in some effective form, would and the opportunity afforded by ERP will be seem to be a sine qua non to progress. The lost. Trade barriers in whatever form tend to OEEC may well be the best available vehicle breed productive inefficiency. They enable in- for furthering that effort. It may be hoped efficient and uneconomic enterprises to survive that this organization will be permitted to do and prevent efficient producers from reaching more than just recommend how United States the markets they need to improve their efficiency financial assistance shall be allocated. If, in ad- and increase their production. dition, it is increasingly entrusted with respon- In existing conditions certain trade restric- sibility for guiding the necessary readjustment tions may be necessary in order to conserve of the ERP countries' production and trade, it the dwindling foreign exchange resources of should become a powerful force for the eco- the Western European countries and the re- nomic unification of Western Europe. The moval of those restrictions may not be immedi- more strength and influence that the OEEC ately practicable. In the meantime, however, possesses, and the more it comes to be a truly it is vital that the Western European coun- international body and not merely a grouping of tries see to it that their investments in the im- conflicting national claimants, the more it will provement and expansion of their productive contribute to fulfilling the great hopes which resources are so directed that they do not ag- ERP has inspired. gravate the situation and constitute new sources (4) GERMANY. The problem of Germany of pressure for continued and increased trade deserves special mention. Production in Bizon- restrictions in the future. That will require a ia, although it has shown a steady rise during degree of economic cooperation among West- the past year, is still only about 5 0 % of pre-war. ern European countries which they have never This is not attributable in major degree to the achieved in the past. lack of productive facilities. The principal fac- Whether or not the existing obstacles to tors have rather been chaotic monetary con- freedom of intra-European trade can be re- ditions, the lack of working capital, the absence moved without some kind of European union of effective political mechanisms, the almost is a question on which opinions differ. The complete disruption of trade connections, the difficulties of achieving such a union are fre- inevitably dampening effects of military occu- quently underestimated by those who overlook pation upon all sectors of the economy and the historical and deep-rooted differences in the over-all political uncertainty. language, customs, traditions and national The condition of Germany has direct and habits and prejudices among the European immediate repercussions upon the economic countries. At best the attainment of such a situation of the rest of Europe. Before the war, union may be a slow process. Germany accounted for approximately 11 % The fact remains, nevertheless, that unless of the international trade of the ERP countries; r 11 I in 1947 the comparable figure was about 2%. States dropped from 7.1% to less than 5.7% Clearly, therefore, more effective utiliza- of the total and, in volume, were considerably tion of German productive facilities, to the below the 1938 figure. This occurred despite extent consistent with security precautions, is the substantial tariff reductions made by the an essential requirement for European recov- United States in recent years, the absence of ery. Some improvement may be hoped for as import quotas, and a national income in the a result of the recent currency reform, the steps United States almost three times the 1938 being taken to improve governmental machin- level. While exports to the Western Hemi- ery and the considerable increase in imports sphere as a whole amounted to 15.7% of the which ERP aid will make possible. A further total as compared with 13.5 % before the war, liberalization of the conditions now governing this increase is far from sufficient to compen- Germany's international trade would also be sate for the increased demand for dollar im- of substantial help. The pace of recovery in ports and for the loss of dollar earnings from Germany, however, may depend to a great trade with the Far East. extent upon the settlement of German political Equilibrium cannot, therefore, be achieved issues by the occupying powers. without a readjustment of production and (5) PATTERN OF PRODUCTION AND trade so as to promote larger exports to the TRADE. Before the war Western Europe nor- Western Hemisphere, even at the cost of some mally depended on its trade with and invest- sacrifice of established markets in Europe or ments in the Far East, particularly Southeast other areas. Further development in the de- Asia, to provide it with the dollars to finance pendent areas of the production of raw ma- its import surplus from the Western Hemi- terials such as chrome, lead, copper and tin, sphere. The importance of Southeast Asia as a in which the resources of the United States are source of dollar supply resulted from the fact deficient, would seem to afford particularly that it was the only major region with which the promising opportunities. There is also a large United States had an import surplus before demand in the United States for consumer the war. This situation no longer obtains. Re- goods, especially those in the luxury or semi- covery in the Far East will be a long process luxury categories, and for other special manu- and, even when it is achieved, it may be antici- factures of traditional high quality. Canada and pated that the relation of the Far Eastern Latin America offer substantial and ready economy to Europe and the United States will markets for capital goods and industrial prod- have been substantially altered. The Far East ucts of all kinds. may be able to provide Europe with increased For European producers to reach the Amer- raw material imports to replace some existing ican market effectively, more is required, of imports from the Western Hemisphere, but it course, than the adjustment of their production cannot be relied upon to provide Europe with to the demands of that market. Steps will also a substantial portion of the dollars necessary have to be taken, possibly through collective to meet its dollar import requirements. Since action, to create promotional, distributing and Europe cannot depend upon an export surplus sales mechanisms which can fit successfully with any of the other areas outside of the West- into established American marketing pro- ern Hemisphere to provide it with dollars and cedures. Similarly, it is important that the trade since only a moderate increase can be expected policies of the United States be adapted to its sinc ony amodeateinceas canbe xpeted position as the great creditor nation of the in Europe's invisible dollar earnings, the long wiorld. run need is clearly for Europe both to increase its xpors tothedollr ara ad todecrase It cannot realistically be expected, however, its exports to the dollar area and to decrease that the ERP countries will be able to expand its imports from that area. their exports to the dollar area sufficiently to No substantial progress has yet been made finance the present level of dollar imports. It towards attainment of the first of these ob- is for this reason that the ERP countries are jectives. Although the over-all exports of the emphasizing the production of additional goods ERP countries increased by approximately of a type which will reduce their dependence 50% in 1947 over 1946, exports to the United on dollar imports. The progress already made [ 12 ] is reflected by the substantially increased out- first is the necessity that the ERP countries put of such items as iron and steel, coal, auto- maintain as high a rate of investment as is com- motive equipment, shipping, chemicals, ma- patible with monetary stability. The second chinery and numerous other products, and ex- is the insufficiency of ERP furds to meet all of isting investment programs contemplate further Western Europe's investment requirements. It increases in such production. In addition, plans should be noted, too, that in determining the are under way for investments in Africa de- amount of United States aid, it was expressly signed to increase the supply of fats and oils assumed that the Bank would advance substan- and cotton. tial credits to Western Europe during the ERP Reference must also be made to the vital period. irnportance of East-West trade within Europe It seems clear, therefore, tlhat there is a real itself. In 1938, Eastern Europe accounted for need for Bank financing in addition to the around 8% of Western Europe's trade; quali- financial assistance made available by ECA. tatively such trade was more important than Furthermore, since the first claim on ERP funds its aggregate quantity indicates, since each will necessarily be for those imports most im- area provided the other with a high percentage mediately essential, the long-range investment of certain key products. In 1947, however, field seems obviously the one most appropriate Western Europe's imports from Eastern Eu- for Bank assistance. rope amounted to only 4.4% of the total, Accordingly, it is the intention of the Bank while only 6% of Western Europe's exports to supplement ERP, to the extent that the went to Eastern Europe. An expansion of this Bank's resources (in the light of the other de- trade from its present levels would make avail- mands upon them) and the credit standing of able to the Western European nations addi- the ERP countries permit, primarily by financ- tional supplies, particularly of foodstuffs, coal ing projects which involve permanent additions and timber, which they need to replace present to productive capacity. The Bank will be par- dollar imports, and would make available tO ticularly interested in those projects which will the Eastern European nations increased benefit more than one of the participating na- amounts of the capital equipment and indus- tions and which will generally promote inter- trial raw materials they require for their re- national trade. construction and development programs. The The Bank will take steps to ensure that proj- recent unanimous resolution of the Economic ects which it finances are not inconsistent with and Social Council of the United Nations, re- any over-all investment program which may questing its Economic Commission for Europe be formulated for purposes of ERP. To this to take steps to promote trade throughout the end, the Bank proposes to consult with the whole of Europe, is encouraging in this respect, OEEC and ECA with respect to prospective since it indicates a general recognition of the loans to any of the participating countries. The importance of East-West trade and some agree- Bank will also keep itself continually informed ment to move towards its improvement. with respect to the activities and policies of the OEEC and ECA, particularly in connection with loans proposed to be made out of ERP The European Recovery Program is still too funds. new, and the policies of both ECA and OEEC It does not seem feasible at the present time are still too much in the formative stages, for to make even an estimate of the amount of a definite statement to be made at this time loans the Bank can and should make to the with respect to the manner in which the Bank participating countries, either during the first may most effectively supplement the financial year or over the entire period of ERP. Any such assistance being furnished by the United States estimate would involve too many imponder- to the ERP countries. ables, such as the amount of its own bonds Two points which have been emphasized in which the Bank may be able to sell in the mar- the foregoing discussion, however, furnish a ket and the timing of such sales, the amount significant indication of what may reasonably of the other justifiable claims which may be be expected to be the Bank's proper role. The made upon the Bank's resources and the pace [ 13 ] of European recovery. The extent of possible Dependence of Europe on Other Areas. Bank assistance depends, too, upon whether No discussion of the European problem the amount and terms of ECA loans impose would be complete without reference to the upon the recipient countries such a burden of inter-dependence of European recovery and repayment that they cannot assume further economic progress in the rest of the world. The indebtedness to the Bank. It is obvious, how- rehabilitation of Europe, by providing both ever, that to the extent that ERP funds are an increased source of supply for the capital made available in the form of grants rather and other industrial goods needed for the de- than loans and that loans are made on terms velopment and further industrialization of which do not interfere with Bank financing, Latin America, Asia, Africa and the Middle ERP aid will facilitate rather than impede the East, and an increased market for their prod- Bank's operations in the participating countries. ucts, particularly foodstuffs and raw materials, Such aid should serve to improve the economic will contribute substantially to their prosperity. position of the recipient nations to a point where Equally, however, the further development of loans by the Bank will not only be a better risk, these areas, as both a market and source of but will be more likely to serve their intended supply, is essential to the long-run economic purpose of making a lasting contribution to- well-being of Europe. wards increasing Europe's productive capacity. In the foregoing discussion particular em- LATIN AMERICA, ASIA, AFRICA AND phasis has been placed on the future role of THE MIDDLE EAST the Bank in the ERP countries, because it is evident that ERP and its administration are Potentialities and Basic Problems bound to have an important bearing on the Bank's future operations in Europe. As is indi- o cated in the discussion, the Bank is not unmind- The Bank's continued interest in assisting ful of the importance of the economic devel- European recovery has not prevented a defi- opment of its member countries in Europe nite increase in its activities in other parts of which are not participants in ERP. the world during the past year; in fact, the It is unfortunate but nonetheless re that problems of the Bank's underdeveloped mem- the existing political difficulties and uncertain- ber countries are more and more occupying ties in Europe present special problems which the major portion of the Bank's attention and, have thus far prevented the Bank from mak- in the long run, they will undoubtedly consti- ing loans in those countries. The Bank is fully tute the Bank's primary concern. cognizant of the injunction in its Articles of Some indication of the extent of both the Agreement that its decisions shall be based only potentialities and needs of the underdeveloped on economic considerations. Political tensions countries of the world is provided by the wide and uncertainties in or among its member coun- disparity which exists between their produc- tries, however, have a direct effect on economic tivity and, therefore, their standards of living, and financial conditions in those countries and and those of the more highly developed coun- upon their credit position. tries, notably in North America and Western The Bank believes that there are substantial Europe. It is estimated, for example, that the opportunities for the development of the pro- average income per head in the United States ductive resources of ith eelmbe countries i- is over $1300, in the United Kingdom is ductive resources of its member countries in between $700 and $750, and in the Western Europe which are not participants in ERP. It '~ ~ ~ ~~~unetite E uropean countries as a whole iS somewhat hopes, therefore, that the existing uncertainties above $500. The bulk of the underdeveloped can be clarified to an extent which will en- countries, on the other hand, are estimated to able it to render financial assistance in the have an average income per head of only development of such countries, which will not around $100; in a number of them, particu- only be of benefit to them but to Europe gen- larly in the Far East, the figure is somewhat erally, and it is continuing to explore such lower and in very few is it above $200. possibilities. To raise the income level of the underde- [ 14 J veloped countries requires an expansion of their war. Even in those areas where a substantial production, primarily through technological increase in production has been realized in re- development and increased capital investment. cent years, their standard of living has not im- This has always been a primary objective of proved correspondingly, and frequently has not the underdeveloped countries but its impor- improved at all, because of the large increase tance is now more sharply focused than ever in their population. It is natural, then, that before because, as a result of modern means the underdeveloped countries should press for of communication, their peoples are becoming faster progress in developing their resources, increasingly aware of the contrast between to narrow as rapidly as possible the economic their status and that of the peoples of the more gap between them and the more advanced na- economically advanced nations. The more ad- tions. vanced countries, too, have a vital interest in In focusing attention on this goal-which is promoting the development of the underdevel- also a primary goal of the Bank-it is easy oped areas, for the more effective utilization to forget that development is necessarily a of the vast resources of those areas will result process measured in decades, not years. Some directly in an increase in trade between them of the difficulties involved are inherent in the and, the more developed countries, to the sub- fact of underdevelopment; others arise out of stantial benefit of both. the special strains of the war and the post-war Considerable progress has been made by period; still others result from local conditions some of the underdeveloped countries in re- peculiar to particular countries. cent years. It is estimated, for example, that A fundamental obstacle to long-range de- the aggregate output of the Latin American velopment is the lack of capital to build the countries as a group increased by from 15 % necessary productive facilities and buy equip- to 25% from 1937 to 1947; that their pro- ment; to provide schools and shops to train duction of electric energy nearly doubled in workers in new skills; and to establish the that period; and that in a number of these housing, public utilities, transportation and countries employment in manufacturing indus- other services needed for an efficiently func- tries rose by 30%o to 40%. The steel produc- tioning economy. A considerable portion of the tion of India (including the territories now capital needed must be derived, in the initial constituting Pakistan) rose by about 35 % stages at least, from external sources. Since, during the period from 1938 to 1945, and however, foreign capital cannot be relied upon its cement production, a good index of construc- to do more than supplement local development tion activity, increased by over 50% during efforts, it is important that the underdeveloped the same period. In the Middle East, the de- countries take all possible measures to encour- velopment of oil production and the construc- tion of pipe lines and refineries have been of age local savings and their investment for pro- substantial benefit in improving the economic ductive purposes. situation of the region, and there has been con- A second obstacle is the shortage of tech. siderable increase in industrial output in Egypt nical and managerial personnel, particularly and Turkey. Again, in the colonial areas of those with advanced training and experience. Africa, there has been a substantial expansion This difficulty, which is applicable to public and diversification of agricultural and mineral administration as well as to industry and agri- production, especially during the war, and a culture, retards development at all stages. It promising beginning has been made towards is necessary for almost all underdeveloped coun- the establishment of local processing and other tries, therefore, to secure help from foreign manufacturing industries. In all these areas technicians and also to institute programs of agricultural improvements have been intro technical training to build up an adequate local duced on a progressively wider scale. suppl skilled tonnel. up investent On the other hand, some of the less devel- supply of skilled personnel. Direct investment oped countries were extensively damaged dur- by foreign business enterprises has the special ing the war and a number of others suffered advantage of supplying technical and man- serious economic dislocations as a result of the agerial skills as well as capital. E 1S ] Economic instability often imposes a third is substantially smaller than was originally obstacle to healthy development. Many under- expected. developed countries are suffering from mount- This fact is due in part to the length of ing inflation and chaotic monetary conditions. time required to complete the engineering and In many instances these problems have been other technical studies necessary to bring proj- precipitated or intensified by the war and its ects up to the point where they are ready for after-effects, but often, too, they are due in financing. In large measure, however, it reflects large measure to unsound fiscal and monetary the difficulties which have been mentioned- policies followed by the governments con- the lack of economic, financial, and in some cerned and to the inadequacy of their finan- cases political stability, the lack of technical cial mechanisms. skills, the lack of adequate planning. And it Again, there is lacking in many countries provides proof, if proof be needed, that sound any well-formulated concept of the over-all development requires much more than simply lines along which sound development is most making available large sums of money. likely to make progress. In the absence of such The Bank is convinced that its resources a general pattern of development, it is diffi- cannot be used effectively to expand produc- cult to estimate the relative importance and tion and to raise living standards unless they urgency of different undertakings, their ability are invested in well-prepared and well-planned to function economically, and the need for projects. It is also convinced that sound de- power, transportation and other basic facili- velopment is best promoted, not by sporadic ties to support them. injections of large amounts of capital, but Another factor retarding development is the rather by a steady flow of capital in moderate low educational level of the mass of the peo- amounts. The Bank's approach to its underde- ples of most underdeveloped countries. To im- veloped member countries has been framed prove standards of living requires more than accordingly. That approach is one of willing- raising the average per capita income; it in- ness to help its members to analyze their de- volves equally an ability on the part of the velopment problems, to work with them in people to utilize such increased income to mapping out the broad lines along which their achieve a better life. development may be advanced most soundly Finally, in a number of countries unsettled and rapidly, and whenever possible to select political conditions impair confidence in the for initial financing those projects which seem future and thus impose an important restraint most likely to contribute to such advance. upon capital investment not only from abroad Where economic or financial conditions in but also out of domestic savings. In such coun- the borrowing country are such that they en- tries progress on the economic level depends to danger the productive purposes and the re- a large extent upon similar progress in the achievement of a reasonable degree of internal payment prospects of a Bank loan, such a loan political stability. will normally be conditioned upon measures de- These problems, in all their complexity, signed to bring about financial and monetaryr directly affect the Bank's operations in the stability and, where necessary, re-establishment development field. To date, the Bank has of the country's credit. been able to grant only one loan for devel- This approach by the Bank necessarily varies opment purposes; it has made commitments from country to country. Nonetheless, the to Chile, aggregating $16 million, for hydro- Bank's experience to date has indicated that electric projects and for the importation of there are a number of guideposts of more or agricultural machinery. Although several other less general applicability These may perhaps development loans are now in an advanced best bedeal withby conse in turnath stage of negotiation and discussions are 'n bas re in reatontidering i turn the progress with regard to various projects in Banks role in relation tO (1) the pattern of many different countries, it remains true that development, (2) the provision of technical the number of sound, productive investment assistance, and (3) the stimulation of invest- opportunities thus far presented to the Bank ment from other sources. [ 16 ] Pattern of Development. is an essential aspect of sound development in almost every case. It will normally be advisable, Thldeveoimpota profr, woringmot an .ov however, to lay initial stress on light consumer all development program, to milnmze spotty goods and processing industries which employ and wasteful investmrent, has already been small amounts of capital equipment per work- emphasized. It appears axiomatic that such a er and can often build upon traditional skills in program should be related to and based on ?he introduction of mechanized techniques. the existing natural resources, the country's Furthermore, because they result in a relatively location, climate, and type of population quick increase in the supply of goods, these and the financial and administrative resources industries stimulate further development by available. It should attempt to balance the in- providing incentives for increased productive crease of economic production to meet essential effort domestic needs with the development of ex- . . . s ports to accessible markets. It should favor the Uni hs ale tgso nutilzto kh ave produced sufficiently broad home markets, application of the limited supplies of capital to there will generally be lacking the basis for projects which will result in the greatest increase creation of heavy industries, either to supply in production and trade in relation to the size of domestic needs at economic prices or to com- the investment. If these practical ends are kept pete in world markets. This principle is, of in view it should not be too difficult to out- course, subjecr to individual exceptions, espe- line a balanced program setting forth a general cially where the world demand situation and pattern of development, on the basis of which the existence of the requisite natural resources public policies and projects can be intelligently make the establishment of some particular formulated and appropriate private enterprise heavy industry economically justifiable. stimulated. In almost all underdeveloped countries a The shape of appropriate programs will major part of the necessary investment must be vary widely. In some countries the most effec- made for transportation and communication tive means of development may be through facilities, port developments, power projects, intensive application of capital and improved water and sewage systems and other public techniques in agriculture and related activities. utilities which form the basis for the develop- The productivity of the underdeveloped coun- ment of all other sectors of the economy. If tries in agriculture is generally quite low. Sub- housing and similar facilities are included, re- stantial possibilities exist for increasing the quirements in this category may amount to two- amount of food and other agricultural products thirds or more of the total capital needed. both for local consumption and for export, Moreover, it is of major importance that ade- through use of modern agricultural machinery, quate provision be made for such less directly diversification of crops and application of mod productive investments as those required for technical training and other educational activi- ern methods of cultivation. Irrigation, reclama- ties, and for nutrition and medical programs, tion, and measures to combat erosion offer which are essential to efficiency and morale. important possibilities. In some cases migration The extensive capital required for all of these or resettlement programs may also be required. purposes emphasizes the need for application Development of agricultural production may of the remaining capital to immediately pro- usefully be accompanied by industrialization in ductive uses rather than to premature or dis- related lines, such as the processing of agricul- proportionate development of heavy industries. tural products and the production of agricultural The Bank is not, of course, interested in pro- equipment and supplies. This is the pattern of moting any particular pattern of development development which has given New Zealand, nor has it formulated any detailed policies re- for example, one of the highest standards of garding the types of projects which it is willing living in the world. to finance. Nonetheless, there are certain broad The establishment or expansion of appro- general principles which must guide its action. priate manufacturing and processing industries First, because the Bank's resources are limited E 17 3 in relation to the total development needs of vestment and tend to produce relatively quick its member countries, it must emphasize those and substantial returns. Since the output of these strategic projects which will eliminate produc- industries is generally sold mainly in the local tion bottlenecks or generate increased output market and since their development can be of related goods or in related areas. Second, as undertaken gradually, they are apt to be of an international agency, the Bank is particu- particular interest to, and within the reach of, larly interested in projects which are likely to local entrepreneurs. contribute to a better balance in world trade. Some other fields of investment which are Third, the Bank's Articles of Agreement pro- equally essential to well-balanced development vide that "the most useful and urgent projects, may frequently be less attractive to private cap- large and small alike" must be dealt with first; ital, either because of the size of the invest- the Bank must satisfy this requirement either ment required, or the smallness or uncertainty by financing such projects itself or by metreere,oltesmlnesonucrtit bo promog suchronitis ntseessay helping of the returns, or the prospect of government torpfornote conditions necessary for their intervention or control. Large irrigation and financing from other sources. And finally, the reclad ation projects, public utilities, health and Bank's loans must be confined to projects for .anin progets, pbi uilities,healt and fiacn thog prvt or ote chan- trainig programs and migration schemes are which . . likely to be subject to these difficulties. While nels is not available on reasonable terms. ,D,, . . . ~~~~~~many investments made by private capital in The application of these general principles the past have been in transportation, commu- to any particular project proposed for Bank nications and power facilities and additional financing must obviously depend upon all of investments may be anticipated, the trends of the relevant facts of the case. By and large, recent years suggest that this is the type of however, it may be expected that private capi- development that is most apt to require as- tal will be most readily available, and Bank sistance from the Bank, either in the form of financing will therefore be least necessary, for projects within two broad categories: first, the direct loans or through guarantees production and processing of primary materials, Bank investment in meritorious light indus- agricultural and mineral, where a large per- try and other projects is certainly not excluded centage of the output is destined for export in cases where private capital is not available. and second, the development of light manufac- In particular, such financing by the Bank may turing industries. sometimes be required, under present condi- Projects within the first of these categories have tions, to provide an initial stimulus to develop- attracted and should continue to attract private ment before private capital will be attracted. foreign capital, provided favorable conditions In the long run, however, if the Bank is to play exist. The principal incentive for such invest- its proper role of encouraging and supplement- ment is the world demand for the materials ing, rather than supplanting, private interna- produced-petroleum metal ores timber sugar tional investment, it must emphasize those produsedsadthe lieta. Thene for mano basic undertakings which, on the one hand, oil seeds and the like. The need for many of are relatively less attractive to private capital these products is growing, while existing sources and, on the other, will help to promote the flow of supply for some of them are being seriously of such capital into other sectors of the econ- depleted. Furthermore, foreign investment in omy. projects of this type is apt to involve less of a transfer risk than the financing of other Provision of Technical Assistance. types of development, because the direct re- S sult of the investment is to make additional Successful development depends in most goods available for export, thereby providing cases just as much upon the provision of tech- the foreign exchange necessary for ineet nical assistance fromn abroad as upon the availa- thiend foreignd amortzatonge n sarym interest, bility of foreign capital. It is an important con- cern of the Bank, therefore, not only to provide Light consumer industries are also likely to financial help but also to ensure that adequate be attractive'to private capital because they do technical assistance is available to define the not usually involve any very large single in- shape of a sound over-all development pro- [ is I gram, to assign priorities and prepare specifica- tries to establish suitable machinery to under- tions for projects within that prograrn, and to take or coordinate comprehensive surveys of formulate and help effectuate the economic and development possibilities, to establish priorities financial policies necessary for its success. for projects to be undertaken under govern- Clearly the Bank cannot by itself provide a mental auspices, to work out appropriate sources major share of the external technical assistance and methods of financing, both domestic and that is required. Such assistance will have to be foreign, to propose measures for encouraging sought largely from independent consultants private investment and to review economic and private enterprise; in appropriate cases, and financial policies in the light of develop- too, assistance may be secured through inter- ment needs. Where desirable, the Bank is governmental arrangements or from other mi- willing, acting so far as possible in cooperation ternational organizations, such as the United with the International Monetary Fund, to ad- Nations, the International Monetary Fund and vise with the government of the country con- the Food and Agriculture Organization of the cerned on the ways and means by which such United Nations. The Bank can, however, play machinery might best be established. a constructive role by helping its member coun- tries to secure technical assistance from these (3) The Bank iS also prepared to assist otriesr securces tehnic advsiwith them from member governments in mapping out the gen- other sources and by advising th gem frn eral contours of an appropriate program of eco- time to timne concerning the general pattern noicdvlpeticuigncsarim of their programs and the economic and finan- novmc development, including necessary im- cial problems which confront them. The Bank provements in the country s financial structure is in a particularly good position to be of help as well as additions to its productive capacity, in these connections, not only because it i and providing for measures to encourage pri- recognized to be objective in its approach, but vate investment as well as for government- also because, as one of the principal Sources of financed projects. The Bank does not, of course, ialsonbecause,as fineaoftheprincing,pc s es atof b attempt to impose a particular conception of international financing, its advice is apt to b development on any country. Any development persuasive. program, if it is to have the necessary popular In formulating its policies with respect to and governmental support, must emerge from furnishing advice to its member governments, the thinking of the responsible leaders of the the Bank has borne in mind that it must avoid country itself. The proper role for the Bank is any gratuitous interference in the internal af- rather that of providing impartial counsel and fairs of any country, or the assumption of of stimulating and crystallizing local thinking financial or other commitments which it can- toward agreement on a sound program which not fulfill, or too deep an involvement in the will enlist the support of all elements within details of a particular program. The general the country. approach it has adopted may be summarized as follows: (4) The Bank itself is in no position to pro- (1) Insofar as possible, in the light of its vide extensive aid in working out the details other responsibilities, the Bank is prepared to of particular development programs. Upon re. undertake, upon request, a broad investigation quest, however, it is ready to recommend quali- of conditions in any underdeveloped member fied independent experts in various fields, such country. This provides the basis for general as agriculture, industry, engineering, finance conclusions as to the country's development and taxation, to provide the assistance required. needs and possibilities, the principal obstacles ( 5 ) After the general outlines of a develop- to development and the internal measures re- ment program have been formulated, the Bank quired to overcome those obstacles. Such Bank is ready to consult periodically with the gov- investigations have already been undertaken ernment concerning the progress made and the or are in process in Bolivia, Chile, Colombia, problems encountered in carrying out the pro- Ecuador, the Lebanon, Mexico, Peru and the gram and concerning any alterations that may Philippines. A number of additional investiga- be required to meet changed conditions. tions are planned for the near future. The granting of loans by the Bank need not (2) The Bank encourages its member coun- await the formulation by the borrowing coun- ( 19 3 ty of an over-all development program or the inter-governmental and International Bank adoption by it of all necessary economic, finan- loans. In the long run, however, development cial and administrative measures. To the con- on the scale that is within the range of practi- trary, it is hoped that it will frequently be pos- cability needs financial assistance in amounts sible for the Bank to select particular meri- which only the free flow of private capital can torious projects for financing concurrently with provide. Furthermore, it is desirable that a con- the initiation by the borrower of such measures. siderable part of the foreign capital employed for development purposes be in the form of Stimulation of Investment equity investments in order to avoid an undue From Other Sources. burden of fixed charges which might impair It is inherent in what has already been said the credit of the borrowing country or intensify that t jits balance of payments problems during a that the major effort in the development of any period of declining trade or falling prices. One country must be made by that country itself. of the principal objectives of the Bank, there- Foreign assistance may be important, even es- fore, is to help to create conditions which will sential, but the initiative, the labor and the encourage a steady and substantial stream of greater part of the capital must be supplied private investment, particularly equity invest- locally. Indeed, in the long run foreign invest- ment, flowing into its underdeveloped member ment may impede rather than accelerate devel- countries. opment along sound lines unless domestic con- Many of the Bank's policies, already men- ditions furnish a firm economic base for such tioned, may help to overcome some of the ex- investment. isting obstacles to private international invest- A prime concern of any country seeking to ment. It has already been pointed out, for ex- promote rapid development, therefore, must be ample, that the Bank, when considering a loan to make the most effective possible use of local application, takes into account the willingness capital resources. In some cases the amount of of the borrowing country to take effective local wealth available is substantial, but because measures to promote economic and financial of unstable conditions and lack of effective stability, to eliminate discriminatory restrictions financial mechanisms to channel it into pro- which impede the flow of private capital, to ductive investment, much of it may be held rehabilitate its credit standing, where that may abroad or applied to purposes which do not be necessary, and otherwise to create conditions contribute to the development of the country. which will attract private investment. It has In some cases, loans by the Bank and other also been pointed out that the Bank is prepared foreign financing may help to correct this situ- to help its members in obtaining the technical ation by facilitating the establishment of more assistance required to implement these meas- stable economic and financial conditions. But ures and to work out sound development pro- the major responsibility for promoting produc- grams. To the extent that the Bank's efforts tive investment of local resources must be as- along these lines are successful they should con- sumed by the local government itself, by fol- tribute substantially to an increase in the flow lowing sound fiscal and monetary practices, by of private capital. adopting tax policies designed both to encour- There may well be cases, too, whe:e develop- age increased capital formation and to channel ment projects which come to the attention of it into productive enterprise, and in appropriate the Bank appear suitable for private financing. cases by encouraging the creation of an active In such cases, the Bank may be able to suggest local capital market. Action along these lines possible sources of capital, or to bring the proj- will not only help to increase the amount of ects to the attention of investing groups, or local resources available for development, otherwise to assist in arranging the necessary thereby reducing the need for foreign financing, financing. The Bank may sometimes also be but will also assist greatly in attracting such able to facilitate the raising of private capital foreign capital as may be required. for meritorious projects by making loans to Some part of the necessary foreign capital cover part of the capital cost. Bank participa- may be obtainable from public sources, through tion in such investments would reduce the f 20 ] amount of capital that would have to be raised to capital-exporting and capital-importing coun- privately and at the same time the Bank's tangi- tries alike. On the one hand, private investors ble demonstration of confidence in the sound- must recognize the necessity for conducting ness of the investments should increase their their affairs in accordance with the public in- attractiveness to private investors. terest of the underdeveloped countries; note- Through the use of its guarantee powers the worthy progress has, in fact, already been made Bank can itself assume the risk of loans made in this direction. On the other hand, the under- from private funds. Such loans, of course, do developed countries must increasingly recognize not constitute private international investment that extreme protectionist measures resulting in in the usual sense of the term, but they do estab- the inequitable treatment of private foreign lish a direct relationship between private lender capital are neither required nor justified and and borrower which may lead to other credit are harmful to the development of their operations without the Bank's intervention. In economies. addition, the Bank is examining the possibili- It seems clear that the real measure of the ties of granting limited guarantees-for ex- Bank's effectiveness will be, not so much the ample, a guarantee of transfer of interest-to number or amount of its loans and guarantees, reduce the special risks involved in interna- significant as they may be, but rather its suc- tional financing without eliminating the private cess in influencing attitudes-in promoting a character of the investment. realistic, constructive approach to development Finally, the Bank may be able to contribute problems on the part of its members and in to the flow of private capital by encouraging fostering a greater degree of confidence among the development of principles and practices fair investors. LOAN ACTIVITIES Loans Granted merchant fleet had greatly impaired the effici- As of the date of the Second Annual Report, ency and competitive power of the Danish two loans had been granted by the Bank: a economy. Energetic measures have been taken French loan of $250,000,000 and a Dutch to promote recovery, and with the budget bal- loan of $195,000,000. Following is a descrip- anced, production increasing and price and tion of the loans granted since that date. wage levels under control, Denmark has at- tained a degree of economic stability. The loan DANISH LOAN. On August 22, 1947, an constitutes approximately 9% of the estimated agreement was signed granting a loan of $40,- net capital expenditures to be made during 000,000 to the Kingdom of Denmark. The 1947-1948, the bulk of the reconstruction ef- loan bears interest at the rate of 34 % per an- fort depending upon private enterprise and num, in addition to the special commission of private financing. The Danish loan is in accord 1 % per annum. The loan is for a period of 25 with the Bank's mandate to foster the economic years, with amortization beginning after the recovery of member nations and is justified by fifth year. It came into effect on October 17, the record of the Danish people in their en- 1947. deavor to regain economic stability. The loan is designed to assist Danish eco- LUXEMBOURG LOAN. On August 28, 1947, nomic recovery by financing the import, during an agreement was signed granting a loan of 1947 and 1948, of essential capital goods and $12,000,000 to the Grand Duchy of Luxem- raw materials, such as agricultural and textile bourg. Since some of the proposed expenditures machinery, machine tools, trucks, steel, textile under this loan were to be in Belgian francs, fibres, non-ferrous metals and chemicals. the loan offered an opportunity to use a por- By the end of the war, German depredations, tion of the equivalent of $2,000,000 in Bel- the depreciation of farm and industrial ma- gian francs which the Belgian Government chinery, and the loss of 40% of the pre-war had made available to the Bank for lending [ 21 3 purposes out of its paid-in subscription to the 20 years, with an annual interest rate ot 32 %, capital stock of the Bank. Part of the loan to in addition to 1 % commission. Amortization Luxembourg, therefore, represents the Bank's begins in. the sixth year. first use of its non-dollar capital in its lending The purpose of the loan is to provide foreign operations. The loan bears interest at 3¼4% exchange for the construction of additional per annum in addition to 1 % commission, and hydro-electric plants and related transmission is for a period of 25 years, amortization begin- lines, for the installation of additional generat- ning at the end of the second year. The loan ing units in existing plants and for the installa- came into effect on October 24, 1947. tion of pumping equipment for irrigation. The The purpose of the loan is to finance the existing supply of power is insufficient to cover purchase of equipment for the Luxembourg present and prospective needs. In view of the steel industry and of rolling stock for its rail- high cost and relative insufficiency of coal and ways. Iron and steel is the major industry of liquid fuels, the development of Chile's exten- Luxembourg, and exports of metallurgical prod- sive potential hydro-electric resources is of ucts in the years directly preceding the war ac- prime importance to the Chilean economy. counted for up to 80% of all exports. Owing The second Chilean loan, of $2.5 million, to under-maintenance during the war, the in- is to the Fomento organization for the pur- dustry is in need of modernization and its pro- chase of agricultural machinery. This loan is for duction requires adaptation to post-war market a term of six and one-half years, with amorti- requirements. zation beginning in the third year. Interest is The railways of Luxembourg are also of vital at 2 3/4 % per annum, in addition to 1 % com- importance both as adjuncts to the country's mission. The agricultural program, which this heavy industry and as international carriers loan is designed to assist, is expected to decrease linking the Ruhr, the Saar, Lorraine, Switzer- the cost of production by increased mechaniza- land and other inland areas and the Low Coun- tion of agricultural equipment and to increase try ports. At present the railways of Luxem- the amount of land available for agricultural bourg are suffering from a shortage of rolling production by bringing into cultivation areas stock. now covered by forest, turning pasture land The loan from the Bank, by providing the into crop land, and shortening the time re- means for raising the volume of traffic over quired for harvesting in certain areas. Special Luxembourg's railways and for expanding the attention is being given in connection with this country's capacity to produce the type of steel program to the technical training of personnel products for which there is a heavy demand, is in order that full advantage may be taken of designed to increase Luxembourg's national the equipment to be made available. production and its export potential. In addition, Both loans are to be guaranteed by the Gov- because of the critical shortage of rolling stock ernment of Chile. A bill to authorize such in Europe and the part which iron and steel guarantee has been introduced into the Chilean play in the reconstruction of the continent, the legislature and is expected to be enacted short- loan should contribute to Europe's recovery. ly. The loans will not come into effect until CHILEAN LOANS. On March 25, 1948, com- such guarantee is given. mitments for two Chilean loans, totalling $16 The Bank has observed with satisfaction that million, were entered into by the Bank. The the Chilean Government has taken steps to first is a loan of $13.5 million for hydro-elec- remedy certain conditions to which the Bank tric development in Chile. The borrowers are drew attention as likely to impair the efficacy Corporaci6n de Fomento de la Producci6n of a loan and to deter the resumption of inter- (Fomento), an instrumentality of the Chilean national investment in Chile. The budgetary Government created to promote Chilean eco- situation has been improved and progress has nomic development, and Empresa Nacional de been made in arresting inflation. Early this year Electricidad, S.A. (Endesa), a subsidiary of the various foreign bondholders' associations Fomento engaged in generating and distribut- accepted proposals put forward by Chile for a ing electric energy. This loan is for a term of readjustment of the country's external debt, the E 22 1 full service of which had been interrupted by an equal portion of the original loan. In sub- the depression of the 1930's, and the Chilean stance, the transaction was merely an arrange- Congress has recently passed legislation mak- ment enabling the Bank to utilize, for the ing this readjustment effective. Netherlands loan, the Swiss francs acquired for this purpose through a sale of the Bank's 2;/2 % SUPPLEMENTAL DUTCH LOAN. On May Swiss Franc Serial Bonds to the Bank for Inter- 25, 1948, a Supplemental Loan Agreement was national Settlements. The Supplemental Loan entered into between the Bank and the King- Agreement became effective on June 1, 1948. dom of the Netherlands providing for certain modifications in the Loan Agreement dated DUTCH SHIPPING LOAN. On July 29, August 7, 1947, by which a loan of $195 mil- 1948, agreements were executed providing for lion was granted to the Netherlands. These loans to four of the principal Dutch shipping modifications took the form of a new loan of companies to finance the entire purchase price 17 million Swiss francs (the equivalent of ap- of six merchant vessels, each costing $2 mil- proximately $4,000,000) and a cancellation of lion, for the Dutch mercantile marine: Shipping Company No. of Ships Amount of Loan N.V. Nederlandsch-Amerikaansche Stoomvaart-Maatschappij "Holland-Amerika Lijn" (Holland-America Line) ............ 1 $ 2 million N.V. Vereenigde Nederlandsche Scheepvaartmaatschappij (United Netherlands Navigation Company) ...................... 1 $ 2 million N.V. Rotterdamsche Lloyd (Rotterdam-Lloyd Line) ................ 2 $ 4 million N.V. Stoomvaart Maatschappij "Nederland" (Nederland Line) 2 $ 4 million Totals ........................ ................................... 6 $12 million These ships, which are being acquired from current costs of construction, at a time when the Waterman Steamship Corporation, were delivery of similar new ships could not be guar- formerly "baby flat-tops" and have been recon- anteed in less than 18 months. They will thus verted, or are in process of reconversion, into be able to take full advantage of the favorable srcam-turbine cargo liners. All are expected to ocean traffic prospects during the ERP period, be in commission by the end of October, 1948. and their low operating costs should enable Easis secured by a Nether- them to maintain profitable operation. The bor- Eacdship mofrthges landis representedbyser rowing companies have a long-standing repu- lands ship mortgage and is reented b al tation for sound and successful management. mortgagernotes ry in teant ieuahl The addition of these vessels to the Dutch mer- yearly maturitoes of 100,000, bearing Interest cantile marine is expected to save or earn for at the rate of 2½ % per annum. In addition, tthe Netherlands over the period of amortiza- the borrowers are to pay to the Bank a commis- tion at least sufficient dollars to meet the whole sion of 1 % per annum and a service charge service of the loans, entirely apart from the re- of 1-16% per annum. The payment of princi- turn in other currencies. pal, interest, commission and service charges is The Bank has also given due weight to the fully guaranteed by the Netherlands Govern- fact that, despite the continued handicaps im- ment. posed by disrupted economic relations with In making these loans, the Bank has taken Germany and the Netherlands East Indies, into account the importance of shipping earn- there has been substantial progress in the re- ings in the Dutch balance of payments. The construction of the Dutch economy, to which six ships have been acquired at a price below a significant contribution has been made by [ 23 I the $195 million loan granted by the Bank As was to be expected, most of the expen- in 1947. ditures financed by the Bank's loans were made in the United States. Nevertheless, substantial Use of Loan Proceeds amounts were spent in other countries. As of At the date of this report, the entire amount June 30, 1948, out of the $470.1 million dis- of the French and Dutch loans and of the loan bursed by the Bank, the geographical distri- to the several Dutch shipping companies has bution of expenditures, in round numbers by been disbursed, an aggregate of $457 million groups of countries, was as follows: Approximately $21 million has been dis- Amount bursed under the loan to Denmark and $9 Area of (In millions of million under the loan to Luxembourg. Expenditure U. S. dollars) Most of the disbursements were made for United States 356.4 the purpose of assisting in financing large gen- eral programs of reconstruction. In these pro- Canada 12.5 grams, the Bank's loans played a significant Latin America 50.0 but by no means preponderant role. It would Europe 47.7 obviously not be possible fully to appraise the Near East 2.2 effect of the Bank's contribution without a de- Africa 1.2 tailed analysis of the programs, the goals they Far East .1 were designed to achieve and the extent to which these goals have been attained. It may be useful, nevertheless, to set forth some of 470.1 the principal categories of supplies and equip- Loan Discussions ment to which the proceeds of the Bank's loans have been applied, as an illustration of rhe It iS not possible to summarize the current saveoso thee Eoplied,an economy iuston w the state of the Bank's loan discussions by compil- Bank's activities have made themselves felt. ing a simple list of outstanding applications, each characterized by a definite amount and FRENCH LOAN-Tankers, general cargo purpose. The earlier contacts between the vessels, river barges, tugs and light-ships; trans- Bank and a prospective borrower usually take port aircraft and spare engines; locomotives the form of an indication by the borrower, in and parts for the construction and repair Of general terms, of its development or recon- locomotives and freight cars; equipment for a struction aims and of tentative inquiries as to continuous strip steel mill, for automobile and the possibility and conditions of Bank assist- truck manufacture, for oil drilling and for agri- ance. These inquiries may develop into ex- culture; earth-moving equipment; fuel; indus- ploratory conversations leading to an invita- trial materials, principally steel products, cop- tion to the Bank to study the reconstruction per and cotton. or development program of the borrower or per and cotton. specific projects which the borrower proposes DUTCH LOAN-Ships; equipment for the to undertake; this generally involves sending shipbuilding, metal and textile industries; fuel; a Bank mission to the country in question. feeding grains and cakes; fertilizer; industrial Only after the Bank and the borrower have materials, principally steel products for the selected the portions of the borrower's pro- shipbuilding and food-processing industries. gram which are suitable for financing by the Bank is it possible to begin technical study of DANISH LOAN-Agricultural, textile and selected projects and negotiations in terms of chemical equipment; rolling-mill steel prod- a definite sum. The Bank's experience indi- ucts; copper and fibers. cates that an informal and flexible approach of this nature is more fruitful than the sub- LUXEMBOURG LOAN-Equipment for a mission at the outset of a definitive applica- steel rolling-mill; locomotives and other rail- tion. way rolling stock. The Bank has at present under considera- [ 24 ] tion projects in more than 20 member coun- proximately $4 million in borrowed Swiss tries. Discussions are in various stages, rang- francs, was advanced out of capital funds ing from exploratory talks to detailed nego- rather than out of borrowed funds. Since cap- tiations. They cover a great variety of proposed ital funds are available to the Bank without projects, such as power developments, trans- cost, in contrast to borrowed funds on which portation and communication facilities, irri- the Bank must pay interest, the preponder- gation, reclamation and other agricultural ance of loans out of capital has obviously had projects, shipbuilding, migration programs, a favorable effect on the profit-and-loss ac- mining development and industrial plants. In count. Until additional amounts of the Bank's the course of investigating these various loan capital become available for lending, the pro- requests, the Bank has sent technical missions portion of loans made out of borrowed funds to 13 countries and a number of similar mis- will increase as the Bank's loan operations sions are planned for the near future. expand and the rate of profit in relation to the volume of loans outstanding will there- Results of Operations and Loan Charges fore tend to decrease. As reflected in the annexed Statement of During the past year, the level of interest Income and Expenses (Appendix B), the rates rose in the United States mark-et. Since Bank's operations during the fiscal year ended this development affected the estimated cost June 30, 1948 resulted in an excess of in- of money to the Bank, appropriate increases come over expenses of $4,094,652 (exclu- were made in the interest rates charged on sive of loan commissions credited to the Spe- Bank loans. The extent of the change, as related cial Reserve). The excess was sufficient to to long-term transactions, can be measured by cover the deficit accumulated in prior years comparing the rate of 31/2 % charged on the and to provide a net profit of $3,030,847 as 20-year loan to Fomento (Chile) in 1948 of June 30, 1948. In addition to this net profit, with the rate of 3¼ 4% charged on long-term $3,084,930 has been set aside in the Special loans in 1947. No change was made in the Reserve. rate of commission, which remained at 1 5'c. The Bank believes the results of its first year During 1948, the Bank entered the field of active operations indicate that its loan of specific project loans, involving disburse- charges have been adequate and reasonable. ment of loan proceeds over extended periods. Those charges are related to the cost to the Typical applications for such loans contem- Bank of funds secured by the sale of its own plate disbursement over three, four and five obligations; they are low compared to the years, in contrast to the periods of six to 18 historical rates for foreign lending and to the months that characterized earlier applications. rates which have been paid in recent years The Bank's policy has been to require the bor- for the small number of foreign loans sold i rower to bear a substantial part of the cost forthesmal nmbe o foeig lons oldin to the Bank of undisbursed funds held in the United States market. The Bank is not o th e cofiunts. With helon organized for the purpose of making large order to meet commitments. With the longer profits, and its charges should clearly not be disbursement periods, that cost would increase so high as to impose unreasonable burdens on substantially. Accordingly, on loans made in its borrowers. Nevertheless, it is in the inter- 1948, after an initial six months period at est of the Bank, its members and its security 1½ % commitment charge, borrowers were holders, and ultimately of borrowers and po- charged full interest on undisbursed funds tential borrowers as well, that the Bank ac- subject to a credit calculated to approximate cumulate reasonable reserves against future the rate earned by the Bank on its short-term contingencies. investments. In reviewing the results of the Bank's op- Administration of Loans erations for the past year, there should be taken into account the fact that the entire One of the significant developments of the amount disbursed on loans, except for ap- past year has been the establishment of proce- [ 25 ] dures in conformity with Section 5 (b) of Article borrower. If they are adequate for the purpose, III of the Bank's Articles of Agreement, which the subsequent investigations are based on the requires that the Bank "make arrangements to borrower's records, with suitable checks and, ensure that the proceeds of any loan are used in appropriate cases, physical inspection. When only for the purposes for which the loan was necessary, the Bank suggests to the borrower granted, with due attention to considerations of supplementary procedures. economy and efficiency and without regard to Procedures for disbursement and end-use political or other non-economic influences or supervision must, of course, vary with the considerations." varying problems presented by different loans. When a loan is granted, the goods and As the Bank deals more and more with specific services to be purchased with the proceeds of projects in the development field, involving the loan are determined by agreement between construction in accordance with detailed en- the Bank and the borrower. The proceeds of the gineering plans and specifications, the Bank loan are subject to withdrawal by the borrower expects that it will be able to place more em- only upon satisfactory certification that expen- phasis on following the general progress of the ditures have been made or will be made for the project from an engineering standpoint. The purchase of authorized goods and services, that Bank's concern in such cases is to see that the the cost and terms of purchase thereof are proceeds of the loan are devoted exclusively reasonable and that the cost has not been and to the furtherance of the project and that the will not be financed out of any other credit project is carried through to completion with available to the borrower. The borrower must due efficiency, economy and diligence. The also submit to the Bank in due course docu- Bank is, therefore, interested in the project as mentary evidence of the purchase, payment and a whole and not primarily in individual items delivery. of supplies and equipment financed by the These disbursement operations are similar to Bank. Comparison of accounting and engineer- those of commercial banks in making payments ing progress reports with original estimates, under documentary letters of credit. In practice, supplemented by inspection of the project by the Bank frequently makes disbursements on engineers and other technicians, will be the the basis of reports by commercial banks that normal procedure. payment has been made by them under letters While these procedures for control of dis- of credit. This procedure not only reduces the bursements and end-use supervision satisfy the administrative work of the Bank but also en- requirements of Section 5 (b) of Article III of ables the borrower to use normal banking fa- the Bank's Articles, there is also need for con- cilities. In appropriate cases the Bank deposits tinuous cooperation between the Bank and its funds with commercial banks as security for let- borrowers so that the Bank may keep fully in- ters of credit for the purchase of goods which formed of economic and financial 'develop- are to be financed out of the proceeds of a Bank ments in the borrowing countries. The Bank's loan. loan agreements contain appropriate provisions These procedures keep the Bank informed to that end. of the goods and services purchased with the proceeds of its loans, the suppliers of such Enabling Legislation goods and services and the destination to which The first loans made by the Bank were rati- the goods are sent. This forms the basis of the fied by the legislatures of the borrowing gov- Bank's subsequent investigation of the end use ernments. This procedure is clearly desirable to which the goods are put. The checking of the in the case of relatively large loans made di- end use is generally carried out in the borrow- rectly to governments. However, in the case of ing country by field representatives of the loans made to private enterprises and to certain Bank. In the first instance this checking relates types of government agencies, the ratification to the adequacy, accuracy and efficiency of the procedure may be found to be unduly cumber- control systems and records maintained by the some, particularly when the loans are relatively [ 26 ] small in amount. Even in those cases, of course, the desirability of enacting general enabling the loan must be guaranteed by the member legislation, authorizing designated officials to government or its central bank or comparable give the government's guarantee to loans from agency and the Bank must be satisfied that the the Bank and to execute such legal documents execution of the guarantee is authorized by law. as may be necessary for this purpose. It is de- As a method of dealing with this problem, sirable that the Bank be consulted in advance the Bank's members, particularly those who regarding proposed legislation of this kind so foresee the possibility of a series of loans from as to avoid subsequent questions with respect to the Bank to official agencies or private enter- its legal sufficiency as applied to particular prises in their territories, may wish to consider loans. MARKETING ACTIVITIES Borrowing Operations Bonds of 1948, in an aggregate principal The first issue of bonds by the Bank on amount of 17,000,000 francs (the equivalent July 15, 1947, reported in the Second Annual of approximately $4,000,000). The entire is- Report, afforded the Bank ample funds to sue was purchased for investment by the Bank cover its dollar needs during the past year. for International Settlements at par and ac- Accordingly, no public issues of the Bank's crued interest. The bonds are dated April 1, dollar securities were made during that period 1948 and mature in 1953 and 1954. The However, the Dutch shipping loan provided proceeds of the issue were immediately ad- an opportunity for a marketing transaction of vanced to the Kingdom of The Netherlands a different kind. On August 6, 1948, the Bank under the Supplemental Dutch Loan to which sold, with its guarantee, to a group of 10 reference has already been made. Although the United States banks a block of $8.1 million amount of the Swiss issue is relatively small, of the notes received by the Bank from the the transaction is significant as the Bank's first Dutch shipping companies under this loan, borrowing of a currency other than United This transaction was the result of a series of States dollars. discussions between the Bank, the Netherlands To date the funds available to the Bank for authorities and the United States banks. Notes lending have come very largely from United covering the balance of the principal amount States sources, either from the 20% paid-in of the loan, amounting to $3.9 million and portion of the subscription of the United States including the longer maturities, have been re- Government to the Bank's capital or from the tained in the Bank's portfolio. proceeds of the sale of the Bank's bonds in the The Bank's only direct borrowing operation United States investment market. These funds, since July 15, 1947, was the sale on June 1, expressed in round numbers in terms of United 1948 of an issue of 21½2% Swiss Franc Serial States dollars, consist of: 20% paid-in portion of subscription of the United States ...................................... $635,000,000 2% portion of subscriptions of other countries paid in in gold or dollars .............. 98,300,000 Part of the 18 % portion of the subscription of Belgium paid in in local currency ...... 2,000,000 Proceeds of two bond issues in the United States .................................................. 250,000,000 Sales of Swiss Franc Bonds to the B.I.S .......................................................... 4,000,000 Net available funds from operations to June 30, 1948 .......................................... 3,200,000 Total .......................................................... $992,500,000 [ 27 ] Only slightly more than 10% of the total There would appear to be some avenues amount, it will be noted, has come from which offer promise of increasing to a limited non-United States sources. extent the loanable resources of the Bank even Although up to the present time the Bank in countries not presently in a position to per- has had ample funds for its loan operations, mit additional exports of capital. All countries nevertheless from a long-range viewpoint it require foreign exchange reserves which usually seems clearly desirable that the Bank should include individual holdings. These holdings, al- supplement its borrowing in the United though they cannot safely be reduced below a States by tapping other sources of capital. minimum level, can in many cases readily be This would provide a wider market for the shifted from one form of investment to another Bank's bonds, would reinforce the Bank's in- and, if already invested in dollar securities simi- ternational character and, to the extent that lar in nature to those of the Bank, could be the Bank would be enabled to lend money other reinvested in the Bank's dollar securities with- than dollars, would tend to lessen the transfer out placing any additional burden on the ex- problems involved in eventual repayment of change position of the country in question. If Bank loans. Accordingly, the Bank has en- the Bank's members should encourage the re- deavored to explore all possible means of ex- investment of holdings of this kind in dollar panding the available amount of non-United bonds issued by the Bank, they would thereby States capital, either by use of the 18% capital provide a means of mobilizing for productive subscriptions of other member countries or by international investment foreign dollar funds sale of the Bank's bonds outside the United or investments held by their nationals. The States. favorable yields on the Bank's dollar bonds, The fact that the Bank has not been able coupled with their tax status under United to obtain consent to the use of larger amounts States income tax laws, should make them at- of non-dollar capital, or to the sale of non- tractive to non-American holders of dollars or dollar bonds in markets outside the United dollar securities, including those who are re- States, is due primarily to difficulties which are luctant to convert their holdings into local inherent in the present economic situation of currency. Such purchases of the Bank's bonds the world. Most of the traditional capital ex- by non-American nationals might well support porters in Western Europe have deficits in their the Bank's marketing activities in the United current balances of payments; it is not to be States because they would properly be regarded expected that they can at the same time sub- as constituting an expression of confidence in stantially expand their foreign investments. the Bank's operations and would underline the And even the relatively few countries which Bank's international cooperative character. Ac- have maintained a favorable foreign exchange cordingly, discussions are being conducted with position are increasingly hesitant to undertake several member countries with respect to the substantial foreign loan commitments for fear possibility of the sale in their markets of dollar of aggravating domestic inflationary pressures bonds of the Bank. or unduly depleting their foreign exchange re- L serves. But the Bank cannot function with full Legislative Program effectiveness as an international agency, and In the United States, institutional investors, cannot fulfill its purpose of promoting a better such as insurance companies, banks and trusts, balance in world trade, unless it can draw funds constitute the largest group of potential pur- for its loans from expanded sources of capital. chasers of securities issued or guaranteed by It is hoped, therefore, that those countries the Bank. Investments by these institutions are whose productivity and trade position permit strictly regulated by the laws of the several the export of capital will increasingly make it states and, in certain instances, by federal law. possible for the Bank to use for loans the At the time when the Bank actively commenced 18% of their capital subscription paid in in operations, there were only a few states where local currency, or to sell the Bank's non-dollar institutional investors could legally invest in securities in their investment markets. the Bank's securities. Unless this situation could [ 28 ] be remedied, there was little prospect that the One further legislative project should be Bank would be able to sell any substantial mentioned. During the spring of 1948, as a amount of its securities in the United States. result of consultations between the Bank and Accordingly, the Bank in 1947 undertook United States Government officials, legislation a program to qualify its securities for institu- was introduced into the United States Congress tional investment in the United States. By July authorizing national banks to deal in the Bank's 1947, these efforts had been sufficiently suc- securities (purchases by national banks for in- cessful to etisure an adequate market for the vestment and for customers' account being al- Bank's first public offering. Nevertheless much ready authorized) and exempting the Bank's remained to be done to prepare a market for securities from the provisions of the Securities future bond issues and the Bank has therefore Act of 1933 and the Securities Exchange Act continued and intensified its efforts during the of 1934. In the Bank's opinion, legislation of past year to obtain the necessary legislative and this character is needed to facilitate distribu- administrative action. tion of future issues of its securities. The pro- The program has been highly successfuL posed legislation, although favorably reported At the date of this report, the Bank's securities by the Senate Committee on Banking and Cur- are (or by legislation now enacted but not rency and passed by the Senate subject to a yet effective soon will be) legally authorized motion to reconsider, did not reach the floor investments for institutional investors, subject of the House of Representatives and thus failed to the qualifications and conditions set forth of enactment. The Bank expects that similar in the applicable statutes and administrative legislative proposals will be introduced into rulings, as follows: the next regular session of the Congress. For all national banks, and for other com- Although the Bank's legislative program nerciaa banks in 41 states and the during the past year has concerned itself pri- District of Columbia; marily with the United States market, the For savings banks in 22 states and the Bank is equally interested, as has already been District of Columbia; pointed out, in the possibility of placing its securities in countries other than the United For iustfurnc mn in8 states ; . the States. In that connection, it has made inquiries For Dtrustrfundsint 28 stlumbatesandt of all its members as to the possibilities of re- Cmoving any legal restrictions, other than for- On the basis of the latest information available eign exchange control regulations, which may to the Bank, this means that the Bank's securi- exist on investment in the Bank's securities by ties may now be purchased by commercial institutions in their territories and of making banks whose deposits amount to 93% of all the Bank's securities eligible for deposits re- commercial bank deposits in the United States, quired by law of foreign corporations doing mutual savings banks whose deposits amount business in their territories. The response to to 95 % of all such deposits in the United these inquiries has been desultory and it is States, and insurance companies and fraternal hoped that the Board of Governors will take insurance organizations whose admitted assets steps to urge upon their respective govern- amount to 93% of all such assets in the ments the advisability of vigorous cooperation United States. These figures indicate the ex- with the Bank in this field. The Bank intends tent of the progress made in opening the in- to pursue the matter further during the coming stitutional market in the United States to the year. Bank's securities. In addition to their signifi- The Bank has also obtained 'official rulings cance for future security issues, they provide from the United States Treasury Department evidence that legislatures and officials in the in regard to the taxability, under United States United States have come to understand the income tax laws, of interest paid on Bank bonds Bank's organization and operations and to rec- held by nationals of countries other than the ognize the sound investment quality of its United States. The Treasury Department's rul- obligations. ings are to the effect that interest on securities [ 29 ] issued by the Bank is exempt from United large institutional investors re-entered the mar- States income taxes, including withholding ket and the bonds recovered rapidly. The im- taxes, if paid to an individual who is not a provement continued during the early months national or resident of the United States, or of 1948 and on May 17 sales on the New to a corporation organized under the laws of York Stock Exchange reached a high of a country other than the United States, whether 98-30/32 for the 21/4's due 1957 and 99-30/32 or not such corporation is engaged in trade or for the 3's due 1972. Thereafter the bonds, business in the United States, unless the cor- again reacting to general market conditions, poration is a life insurance company and the sold off from these levels and on the date of interest is attributable, within the meaning of this report bids on the New York Stock Ex- the United States Internal Revenue Code, to change for the 214's and 3's were 96¼4 and the company's life insurance business in the 97¼4 respectively. United States. These rulings should be of sub- The market performance of the bonds dur- stantial assistance to the Bank in finding a ing this period has been highly encouraging. market for its securities in countries other than Being unseasoned issues, not generally familiar the United States. to investors and subject to special pressures be- cause of the continual flow of unfavorable in- Condition of United States Market ternational news, the bonds might well have and Future Marketing Plans been expected to show more weakness than the In July 1947, when the Bank's first bond market as a whole. In fact, however, the bonds issues were offered to the public, a strong mar- demonstrated a gratifying stability and resili- ket existed in the United States for high-grade ence and their performance, during the first bonds. Both issues were oversubscribed and year of their existence, was better than the soon sold at substantial premiums. In the fol- average market performance of comparable lowing months, however, the high-grade bond high-grade bonds. market experienced a severe decline, one of the As of August 31, 1948, the Bank had un- most drastic that had occurred since 1931. committed loanable funds amounting to ap- The period of general weakness lasted in its proximately $475 million. Until at least a acute phase until the end of the year, culminat- substantial portion of these funds is earmarked ing in the action of the United States Gov- for approved loans the Bank will be under no ernment authorities in reducing the levels at necessity to borrow. However, the Bank in- which prices of Government obligations were tends to consider carefully all opportunities supported. that may be presented to increase its loanable This weak and uncertain market, which per- resources by obtaining the consent of members sisted during most of the period covered by this to the use of their paid-in capital, by selling report, constituted a severe trial for the Bank's the Bank's securities in countries other than the bonds. By mid-January 1948 the bonds had United States, and by selling securities out of been forced to discounts of slightly more than the Bank's loan portfolio with or without the 5½2 points below their original offering prices. Bank's guarantee. Several projects of this na- However, as these low levels were reached, ture are presently under consideration. MISCELLANEOUS Management and Organization William A. B. Iliff, who came to the Bank The only change in the principal officers of from the United Kingdom Treasury. Mr. Pineo the Bank since the Second Annual Report was was the Bank's first Loan Director and held occasioned by the resignation of Mr. Charles that important office during the crucial period C. Pineo as Loan Director on October 31, 1947. of the Bank's initial operations. The Bank He was succeeded on February 5, 1948 by Mr. wishes to record its appreciation of his loyal [ 30 1 service. A list of the Bank's officers appears ful. There are practically continuous contacts as Appendix L. between officials of the two organizations at The Bank's organization and the functions all levels. of its several departments remain as stated in The Bank has also maintained close liaison the Second Annual Report, except that the with the United Nations and with other inter- Research Department has been renamed the national organizations whose fields of activity Economic Department and the function of are related to those of the Bank. The Bank making studies of economic and financial con- has been represented at all of the meetings of ditions in the territories of members has been the Economic and Social Council, the Economic transferred from the Loan Department to the and Employment Commission, the Subcommis- Economic Department.. sion on Economic Development and the Sub- As of August 31, 1948, the Staff of the Bank commission on Economic Stability and Em- consisted of 435 persons and 21 different na- ployment. It has also been represented at meet- tionalities. ings of the Economic Commission for Europe On May 31, 1948, the Bank put into effect and its various committees and subcommittees a pension plan for its permanent staff. The and at meetings of the Economic Commission plan contemplates a normal retirement age of for Asia and the Far East. Similarly, it partici- 65. The Bank corntribution to the pension pated in meetings of the committee established fund is estimated to be about twice the con- by the Economic and Social Council to con- tributions of staff members. sider the creation of an Economic Commission Advisory Council for Latin America. In addition, the Bank has participated in the Geneva and Havana con- The Advisory Council of the Bank consists ferences held for the purpose of drafting a of the following ten members: charter for the proposed International Trade Field of Organization. It has likewise been represented Name Interest at various meetings of the Food and Agricul- Arthur Salter, Chairman (U.K.) General ture Organization of the United Nations and Pedro G. Beltran (Peru) Agriculture at the annual meeting of the Bank for Inter- Edward E. Brown (U.S.) Banking national Settlements. R. D. Harkness (Canada) Industry The number of international meetings held Herbert Hoover (U.S.) Commerce at many different places throughout the world Leon Jouhaux (France) Labor to consider matters of interest to the Bank is Michal Kalecki (Poland) Economics very considerable and appears to be constantly C. V. Raman (India) Science increasing. This has imposed a severe strain on Lionel C. Robbins (U.K.) Economics the staff of the Bank and has resulted in some S. K. A. Sze (China) General instances in an inability on the part of the Nine of these councillors were selected by the Bank, without interfering with the conduct of Board of Governors at their Second Annual its own work, to participate in meetings held Meeting and the tenth by subsequent vote of at far distances from Bank headquarters. the Governors, completed on April 30, 1948. Contacts at staff level between the Bank The First Annual Meeting of the Advisory and the United Nations and other international Council was held at the principal office of the organizations have proved of particular value Bank from July 19 to July 23, 1948. A full and are believed to constitute the most effec- exchange of views took place with respect to tive means for coordination of the Bank's ac- the more important policies of the Bank. No tivities with those of the other agencies. For report was made. example, the Bank had a member of its Eco- nomic Department in Geneva for a substantial Relationship with Other International part of the past year in order to make possible Organizations effective liaison with the secretariat of the Eco- Relations between the Bank and the Inter- nomic Commission for Europe. It has also national Monetary Fund remain close and fruit- recently appointed a representative to maintain [ 31 ] liaison in Paris with the OEEC and ECA. 1948, the Board of Governors extended until Much value has also been derived from many July 31, 1948 the time within which Iran's informal exchanges of views on matters of increased subscription might be received by the mutual interest between representatives of the Bank. The subscription was received within Bank and of the Food and Agriculture Organi- the extended time limit and was accepted by zation of the United Nations. Furthermore, the Bank on June 28, 1948. frequent trips have been made by Bank offi- Through the admission of new members cials to Lake Success to maintain contact with and through increases in the capital subscrip- the United Nations Secretariat, with a view tions of Paraguay by $0.6 million, Egypt by to exchanging information on a wide variety $13.3 million and Iran by $9.6 million, the of subjects and avoiding unnecessary duplica- Bank's total subscribed capital increased from tion or overlapping on such matters as research $8,224.5 million as of August 10, 1947, to activities, the collection of statistics and the $8,336 million as of August 31,1948. handling of administrative problems. The Bank has also maintained excellent re- Election of Additional Executive Directors lations with the Organization of American The election of a thirteenth Executive Di- States. The President of the Bank, upon in- rector pursuant to Resolution No. 10 adopted vitation, addressed both the Inter-American at the Inaugural Meeting of the Board of Gov- Economic and Social Council and the Economic ernors was completed on August 22, 1947. Commission of the Ninth Conference of At that election, Professor Costantino Bresciani- American States. Turroni of Italy was elected as an additional The agreement between the Bank and the Executive Director, representing Columbia, United Nations, which the Board of Governors Denmark, Italy, Turkey and Venezuela, with approved at the Second Annual Meeting, was a total of 4,615 votes. approved by the General Assembly of the Pursuant to Resolution No. 23 adopted by United Nations on November 15, 1947. Pur- the Board of Governors at the Second Annual suant to its terms, the agreement came into Meeting, Mr. Stuart Gordon McFarlane of effect on that date. It has thus far proved Australia was elected as an additional Execu- entirely satisfactory. tive Director as of January 30, 1948, rep- resenting Australia, Lebanon and Syria, with Increases in Membershipatolof280ves a total of 2,860 votes. Membership in the Bank has increased from A regular election of elective Executive Di- 45 to 47 since the Second Annual Meeting of rectors is required to be held at the Third An- the Board of Governors, Finland and Austria nual Meeting in September 1948 and forms having become members on January 14, 1948 the subject of a separate report to the Board and August 27, 1948, respectively. of Governors. Subscriptions and Voting Power Financial Statements and Reports of Member Countries Attached as Appendices A to G, inclusive, In accordance with Resolution No. XIII are a Balance Sheet showing the financial po- adopted by the Board of Governors at the sition of the Bank as of June 30, 1948, a First Annual Meeting, Paraguay's subscription Statement of Income and Expenses, an Opinion to the capital stock of the Bank has been in- of Independent Auditor, and a number of creased from 8 shares to 14 shares. schedules giving further details concerning the At the Second Annual Meeting, the Board assets and liabilities, capital and financial op- of Governors authorized increases of 96 shares erations of the Bank. and 133 shares, respectively, in the subscrip- tions of Iran and Egypt to the capital stock Administrative Budget of the Bank. Egypt's increased subscription was There is attached as Appendix H the ad- accepted by the Bank on June 10, 1948. By ministrative budget of the Bank for the fiscal vote without meeting completed on May 28, year ending June 30, 1949. This budget has [ 32 ) been prepared by the President and approved Appenduix L-Office"r of the Bank as of by the Executive Directors in accordance with August 31, 1948 Section 19 of the By-Laws of the Bank. The budget as presented represents the best Additional Reports to Board of Governors estimate of the management and Executive Directors of the minimum cost of effective In addition to this Annual Report, the fol- administration for the current fiscal year. It is lowing repom are being subnitted for con- not possible, however, to foresee all contin- sideration of the Board of Governors at the gencies which may arise. If, therefore, unan- Third Annual Meeting: ticipated conditions develop wvhich necessitate changes in programs, appropriate adjustments (1) Report on the Allocation of Net In- in the budget will be required. come; dppendices (2) Report on Loan Regulations No. 2; In addition to the appendices containing the financial statements and reports and the ad- (3) Report on Draft Resolution proposed ministrative budget of the Bank, to which ref- by the Governor of the Bank for erence has already been made, there are included Poland; in this report for the information of the Board (4) Report on the Second Regular Election of Governors the following appendices: of Executive Directors; Appendix I-Governors and Alternates as of Auggust 31, 1948 (5) Report on Convention on the Privileges Appendix J-Voting Power and Subscrip- and Immunities of the Specialized tions of Member Countries as of August Agencies; 31, 1948 Appendix K-Exectisve Directors and Al- (6) Report on Decisions of Executive Di- ternates and Their Voting Power as of rectors Interpreting Artidcles of Agree- August 31, 1948 ment. ( 33 ] APPENDIX A Balance Sheet-June 30, 1948 EXPRESSED IN UNTrED STATES CURRENCY (See Notes to PitsancW Statemets) ASSETS Gold (Valued at $35.00 per fine troy ounce) 8............................... 183,869 Due from Banks and Other Depositories Member currency-United States ................................................$ 36,154,429 Member currency-other than United States--Note A 114,793,349 150,947,778 Investment Securities United States Government obligations ($418,508,000 face amount at cost) $........................................ 417,964,779 Accrued interest and discount . .1,442,999 419,407,778 Receivable from Members Non-negotiable, non-interest-bearing, demand notes-Note B Payable in member currency-United States ............................ $ 65,785,000 Payable in member currency-other than United States- Note A ........................ ........................ 802,961,483 $ 868,746,483 Calls on subscriptions to capital stock Payment deferred-Note C . .4,915,000 873,661,483 Loans Outstanding Total loans-Note D ................................................$ 497,000,000 Less-Unused portion of commitment. .26,944,249 Principal outstanding-Note E ................................................$ 470,055,751 Accrued interest and commitment charges-Note E 3,272,214 473,327,965 Miscellaneous Receivables and Other Assets ................................. 198,187 Special Reserve Fund Assets-Note F Due from Banks-member currency-United States .................... 409 Investment securities-United States Government obligations ($2,184,000 face amount at cost) ............................................ 2,178,496 Accrued loan commissions-Note E ............................................ 906,025 3,084,930 Staff Retirement Plan Assets-Note G ........................................ 312,919 Total Assets $................................................ $1,921,124,909 LIABILITIES, RESERVES AND CAPITAL Liabilities Accounts payable and accrued expenses, including $3,132,199 bond interest ................................................ $ 3,540,425 Bonds outstanding Payable in United States Dollars-Note H Ten Year 2¼0% Bonds, due July 15, 1957 ........................ S 100,000,000 Twenty-Five Year 3% Bonds, due July 15, 1972 150,000,000 Payable in Swiss Francs 2½ 2%o Swiss Franc Serial Bonds of 1948, due 1953-54 (Swiss Francs 17,000,000) .3,955,788 253,955,788 $ 257,496,213 Special Reserve-Note F ................................................ 3,084,930 Staff Retirement Plan Reserve-Note G ..................................... 312,919 Capital Capital stock Authorized 100,000 shares of $100,000 par value each Subscribed 82,860 shares ................................................ $8,286,000,000 Less-Uncalled portion of subscriptions-Note I . .......... 6,628,800,000 $1,657,200,000 Excess of income over expenses for twelve months ended June 30, 1948 ................................................ $ 4,094,652 Less-Excess of expenses over income at June 30, 1947 ........ 1,063,805 3,030,847 1,660,230,847 Total Liabilities, Reserves and Capital $................ 1,921,124,909 [34 ] APPENDIX B Statement of Income and Expenses For the Twelve Months Ended June 30,1948 EXPRESSED IN UNITED STATES CURRENCY (See Notes to Pinafau Staements) Income Interest earned on investment securities ....................................................... $ 3,593,623 Income from loans: Interest ........... 9,917,304 Commitment charges ....................................................... 2,136,027 Commissions ....................................................... 3,051,478 Other Income ....................................................... 5,546 $18,703,978 Deduct-Amount equivalent to commission appropriated to Special Reserve (Note F) ....................................................... 3,051,478 $15,652,500 Expenses Operating Expenses: Salaries and wages ........................................................ $ 2,238,580 Provision for taxes on salaries ........................................................ 253,540 Travel ........................................................ 447,981 Rents and utility services ........................................................ 377,046 Communication services ......................................................... 88,956 Furniture and equipment ........................................................ 89,365 Publications, printing and binding ......................................................... 87,641 Supplies ........................................................ 65,233 Contributions to staff benefits: Staff Retirement Plan ........................................................ 301,516 Other ........................................................ 10,471 Handling and storage of gold ........................................................ 25,662 Miscellaneous expenses ........................................................ 62,891 Total Operating Expenses ........................................................ $ 4,048,882 Interest on bonds ........................................................ 6,232,963 Bond registration and issuance expenses ........................................................ 1,276,003 11,557,848 Excess of Income Over Expenses .$ 4,094,652 [ 35 APPENDIX C Statement of Loans-June 30, 1948 EXPRESSED IN UNITED STATES CURRPNCY (See Notes to Financial Steaaments) Serial Date of Maturities Interest Total Disburse- Unused Loan (Semi- Rate Loans ments Balance of Agreement Annually) (Note F) (Note D) (Note E) Commitmzent Credit NMWon (Guaranteed by Republic of France) May 9,1947 1952-1977 3V4'9% $250,000,000 $250,000,000 Kingdom of tbe Netherlafis August 7, 1947 1954-1972 3-¼4Yo 191,044,212 191,044,212 May 25, 1948 1953-1954 3-V4¼% 3,953,788 3,955,788 Kingdom of Dentmrb August 22, 1947 1953-1972 3-¼4%9 40,000,000 16,448,259 $23,551,741 Gernd-Duchy of L9xembourg August 28, 1947 1949-1972 3-Y4 e 12,000,000 8,607,492 3,392,508 $497,000,000 $470,055,751 $26944,249 [36] APPENDIX D Statement of Members' Currencies Held by the Bank June 30, 1948 (See Notes to Financial Ssaemews) Amount Expressed Total Unit of In Member Currency Rate of Exchange Expressed in Nmm of member Currency (Restricted) (Note A) U. S. Dollars Australia Pound 111,693 $ = 0.310174 S 360,098 Belgium Franc 14,741,644 5 = 43.8275 336,356 Bolivia Boliviano 516,200 $ = 42.00 12,290 Brazil Cruzeiro 349,588,083 $ = 18.50 18,896,653 Canada Dollar 583,612 $ 1.00 583,612 Chile Peso 195,160,700 $ = 31.00 6,295,506 China Yuan 12,948,953,640 $ 12,000.00 1,079,079 Colombia Peso 11,020,972 $ 1.74999 6,297,734 Costa Rica Colon 2,021,338 $ = 5.615 359,989 Cuba Peso 63,000 $ = 1.00 63,000 Czechoslovakia Koruna 11,079,502 $ = 50.00 221,590 Denmark Krone 529,957 $ 4.799007 110,431 Dominican Republic Peso 3,466 $ = 1.00 3,466 Ecuador Sucre 7,776,000 $ 13.50 576,000 Egypt Pound 774,256 $ 0.241955 3,200,000 El Salvador Colon 449,529 S = 2.50 179,812 Ethiopia Dollar 1,340,403 $ 2.484472 539,512 Finland Markka 930,240,000 $ = 136.00 6,840,000 France Franc 202,515,821 $ = 214.392 944,605 Greece Drachma 22,500,000,000 $ = 5,000.00 4,500,000 Guatemala Quetzal 357,351 $ = 1.00 357,351 Honduras Lempira 3,600 $ = 2.00 1,800 Iceland Krona 1,166,251 $ = 6.48885 179,732 India Rupee 2,376,332 $ = 3.308519 718,246 Iran Rial 57,121,200 $ = 32.25 1,771,200 Iraq Dinar 2,680 $ = 0.248139 10,800 Italy Lira 7.287,494,669 $ = 225.00 32,388,865 Lebanon Pound 1,775,075 $ = 2.19148 809,989 Luxembourg Franc 693,437 5 = 43.8275 15,822 Mexico Peso 56,796,422 5 = 4.855 11,698,542 Netherlands Guilder 1,265,477 $ = 2.65285 477,025 Nicaragua Cordoba 720,000 $ = 5.00 144,000 Norway Krone 438,845 $ = 4.96278 88,427 Panama Balboa 36,000 $ = 1.00 36,000 Paraguay Guarani 775,268 $ = 3.09 250,896 Peru Sol 197,516 S = 6.50 30,387 Philippines Peso 2,392,051 $ = 2.00 1,196,026 Poland Zloty 22,092,852 $ = 100.00 220,928 Syria Pound 25,622 $ = 2.19148 11,692 Turkey Lira 213,753 $ = 2.799999 76,340 Union of South Afria Pound 44,403 S = 0.248139 178,944 United Kingdom Pound 565,256 $ = 0.248139 2,277,981 United States Dollar 36,009,408 $ = 36,009,408 Uruguay Peso 2,868,471 $ = 1.519049 1,888,333 Venezuela Bolivar 4,571,686 $ = 3.35 1,364,682 Yugoslavia Dinar 360,172,397 $ = 50.026668 7,199,608 Restricted Currency (Note K) . ........ $150,802,757 Unrestricted Currency (All held in United States Dollars) . ...... -... 145,021 Total (Note J) .............................................$ . 150,947,778 [ 37 ] APPENDIX E Statement of Subscriptions to Capital Stock (See Notes to Pinancidal Statements) Amounts Paid In (Note A) In Currency of Number Subscfipptio Member Otheor of Shares Price United States Than United Member SsBbscribed (Note L) Dollars Stases Dollars 1 Australia 2,000 5 200,000,000 S 4,000,000 5 360,131 2 Belgium 2,250 225,000,000 4,500,000 2,344,422 3 Bolivia 70 7,000,000 140,000 12,600 4 Brazil 1,050 105,000,000 2,100,000 18,900,000 5 Canada 3,250 325,000,000 6,500,000 585,000 6 Chile 350 35,000,000 700,000 6,300,000 7 China 6,000 600,000,000 9,000,000 1,080,000 8 Colombia 350 35,000,000 700,000 6,300,000 9 Costa Rica 20 2,000,000 40,000 360,000 10 Cuba 350 35,000,000 700,000 63,000 11 Czechoslovakia 1,250 125,000,000 1,875,000 225,000 12 Denroark 680 68,000,000 1,020,000 122,400 13 Dominican Republic 20 2,000,000 40,000 3,600 14 Ecuador 32 3,200,000 64,000 576,000 15 Egypt 533 53,300,000 1,066,000 3,200,000 16 El Salvador 10 1,000,000 20,000 180,000 17 Ethiopia 30 3,000,000 60,000 540,000 18 Finland 380 38,000,000 760,000 6,840,000 19 France 5,250 525,000,000 10,500,000 979,719 20 Greece 250 25,000,000 375,000 4,500,000 21 Guatemala 20 2,000,000 40,000 360,000 22 Honduras 10 1,000,000 20,000 1,800 23 Iceland 10 1,000,000 20,000 180,000 24 India 4,000 400,000,000 8,000,000 720,383 25 Iran 336 33,600,000 672,000 1,771,200 26 Iraq 60 6,000,000 120,000 10,800 27 Italy 1,800 180,000,000 3,600,000 32,400,000 28 Lebanon 45 4,500,000 90,000 810,000 29 Luxembourg 100 10,000,000 200,000 18,014 30 Mexico 650 65,000,000 1,300,000 11,700,000 31 Netherlands 2,750 275,000,000 5,500,000 496,098 32 Nicaragua 8 800,000 16,000 144,000 33 Norway 500 50,000,000 1,000,000 90,000 34 Panama 2 200,000 4,000 36,000 35 Paraguay 14 1,400,000 28,000 252,000 36 Peru 175 17,500,000 350,000 31,500 37 Philippines 150 15,000,000 300,000 1,200,000 38 Poland 1,250 125,000,000 1,875,000 225,000 39 Syria 65 6,500,000 130,000 11,700 40 Turkey 430 43,000,000 860,000 77,400 41 Union of South Africa 1,000 100,000,000 2,000,000 180,000 42 United Kingdom 13,000 1,300,000,000 26,000,000 2,375,750 43 United States 31,750 3,175,000,000 569,215,000 44 Uruguay 105 10,500,000 210,000 1,890,000 45 Venezuela 105 10,500,000 210,000 1,365,000 46 Yugoslavia 400 40,000,000 600,000 7,200,000 82,860 $8,286,000,000 $666,520,000 $117,018,517 [ 38 ] APPENDIX E and Voting Power of Members-June 30,1948 (See Notes to Fsnancid Satements) Amounts Paid In (Note A) Non-lnterest-Bearing, Amounts Pay- Subject to Call Non-Negotiable ment of Whch to Meet Obliga- Number Demand Notes is Postponed tions of Bank of (Notes B and D) (Note C) (Note I) Votes S 35,639,869 $ - $ 160,000,000 2,250 1 38,155,578 - 180,000,000 2,500 2 1,247,400 - 5,600,000 320 3 _ _ 84,000,000 1,300 4 57,915,000 - 260,000,000 3,500 5 _ _ 28,000,000 600 6 106,920,000 3,000,000 480,000,000 6,250 7 _ - 28,000,000 600 8 _ - 1,600,000 270 9 6,237,000 - 28,000,000 600 10 22,275,000 625,000 100,000,000 1,500 11 12,117,600 340,000 54,400,000 930 12 356,400 - 1,600,000 270 13 _ _ 2,560,000 282 14 6,394,000 _ 42,640,000 783 15 - - 800,000 260 16 - - 2,400,000 280 17 - - 30,400,000 630 18 93,520,281 - 420,000,000 5,500 19 - 125,000 20,000,000 500 20 - - 1,600,000 270 21 178,200 800,000 260 22 - - ~~~~~~~~~~~800,000 260 2 3 71,279,617 - 320,000,000 4,250 24 4,276,800 - 26,880,000 586 25 1,069,200 - 4,800,000 310 26 _ - 144,000,000 2,050 27 - - 3,600,000 295 28 1,781,986 - 8,000,000 350 29 - ~~~~~~~~~~~52,000,000 900 3 0 49,003,902 - 220,000,000 3,000 31 _ - 640,000 258 32 8,910,000 _ 40,000,000 750 33 - - 160,000 252 34 - - 1,120,000 264 35 3,118,500 - 14,000,000 425 36 1,500,000 - 12,04000 400 37 22,275,000 625,000 100,000,000 1,500 38 1,158,300 - 5,200,000 315 39 7,662,600 - 34,400,000 680 40 17,820,000 - 80,000,000 1,250 41 231,624,250 - 1,040,000,000 13,250 42 65,785,000 - 2,540,000,000 32,000 43 t - - 8,400,000 355 44 525,000 - 8,400,000 355 45 - 200,000 32,000,000 650 46 $868,746,483 $4,915,000 $6,628,800,000 94,360 [ 39 ] APPENDIX P Notes to Financial Statements NOTE A return to such member within a reasonable Amounts in currencies other than United time an amount of that member's currency States dollars have been translated into United equal to the increase in the value of the States dollars at the rates recognized in mak- amount of such currency described in (a) ing capital payments by member countries. In above. the cases of 37 members these rates are the "(c) The provisions of the preceding para- established par values under the International graphs may be waived by the Bank when Monetary Fund Agreement. In the cases of nine a uniform proportionate change in the par members (Brazil,* China, Finland, France, values of the currencies of all its members Greece, Italy, Poland, Uruguay and Yugo- is made by the International Monetary Fund." slavia), the par values of their currencies had not been so established at June 30, 1948. NOTE B No representation is made that any of such Demand notes delivered to the Bank in sub- currencies is convertible into any other of such stitution for currency of member, in accord- currencies at any rate or rates. ance with Article V, Section 12. Article II, Section 9, of the Bank's Articles NOTE C of Agreement contains the following provi- sions with regard to the maintenance of the Payments postponed until June 25, 1951, value of certain currency holdings of the Bank: in accordance with the provisions of Article II, Section 8(a) (i). These amounts are pay- "(a) Whenever (i) the par value of a able in gold or United States dollars. member's currency is reduced, or (0i) the foreign exchange value of a member's cur- NOTE D rency has, in the opinion of the Bank, In addition to the $497,000,000 of loans depreciated to a significant extent within effective as of June 30, 1948, the Bank on the member's territories, the member shall March 25, 1948 entered into a loan agreement pay to the Bank within a reasonable time with Corporaci6n de Fomento de la Producci6n an additional amount of its own currency and Empresa Nacional de Electricidad, S.A., pro- sufficient to maintain the value, as of the viding for a loan in the amount of $13,500,000, time of initial subscription, of the amount or the equivalent thereof in other currencies. Al- of the currency of such member which is so on March 25, 1948 the Bank entered into a held by the Bank and derived from cur- loan agreement with Corporaci6n de Fomento rency originally paid in to the Bank by the de la Producci6n, providing for a loan in the member under Article II, Section 7(i), from amount of $2,500,000, or the equivalent dtere- currency referred to in Article IV, Section of in other currencies. These agreements will 2(b), or from any additional currency fur- become effective after the Bank has received nished under the provisions of the present evidence that the Government of Chile has paragraph, and which has not been repur- guaranteed these loans, together with certain chased by the member for gold or for the other certificates and documents, and the Bank currency of any member which is acceptable has notified the borrower and the guarantor of to the Bany. its acceptance of such evidence. "(b) Whenever the par value of a mem- NOTE E ber's currency is increased, the Bank shall The principal outstanding, accrued interest 'The parity rate of Brazil has since been approved, o and commitment charges, and accrued loan July 14, 1948, by the International Monetary Fund. commissions are payable in Uaited States dol- [ 40 ] lars except the following amounts for which Currency Payable the dollar equivalent is shown: Swiss Francs Belgian Francs Total Principal Outstanding .............................. $3,955,788 $2,005,835 $5,961,623 Accrued Interest and Commitment Charges .......... 10,567 21,764 32,331 Accrued Loan Commissions .............................. 3,251 6,697 9,948 Totals ..............................$ 3,969,606 $2,034,296 $6,003,902 NOTE F NOTE J The amount of commissions received by the The currencies of the several members and Bank on loans made or guaranteed by it is the notes substituted for any part of such cur- required under Article IV, Section 6, to be set rencies are ihed on depart of signated aside as a special reserve to be kept available rencies are held on deposit with designated for meeting obligations of the Bank created by depositories in the territories of the respective borrowing or guaranteeing loans. On all loans members. outstanding at June 30, 1948, the rate of com- NOTE K mission is 1 % per annum. NOTE G These currencies are derived from the 18% Assets segregated and held in trust for the of the subscriptions to the capital stock of the Staff Retirement Plan which became effective Bank which is payable in the currencies of the on May 31, 1948. The Plan provides for re- respective members. Such 18% may be loaned tirement, total disability and death benefits to by the Bank, and funds received by the Bank participating members of the Bank's staff. Par- on account of principal of loans made by the ticipants are required to contribute to the Plan Bank out of such currencies may be exchanged amounts equal to 6 percent of their regular for other currencies or reloaned, only with net remuneration; the remainder of the cost the approval in each case of the member whose of operating the Plan is to be borne by the currency is involved; provided, however, that, Bank. According to actuarial computations, the if necessary, after the Bank's subscribed capital Bank's share will be approximately two-thirds is entirely called, such currencies may, without of the cost of operation of the Plan, exclusive restriction by the members whose currencies of administrative expenses which are also to reofred, be use or wh ose cur- be borne by the Bank. The amount of $301,516 are offered, be used or exchanged for the cur- contributed by the Bank up to June 30, 1948, rences required to meet contractual payments consisted of $21,610 current service contribu- of interest, other charges or amortization on tions for the month of June 1948, and $279,- the Bank's own borrowings or to meet the 906 being the estimated amount of the Bank's Bank's liabilities with respect to contractual contribution with respect to services prior to payments on loans guaranteed by it. The United the inception of the Plan. States has approved the use by the Bank in NOTE H the making of loans of such 18% of the sub- As a sinking fund for the Twenty-Five Year scription of the United States to the capital Bonds, the Bank has agreed to purchase and stock of the Bank, and Belgium similarly has retire or redeem bonds of said issue commenc- approved the use of the Belgian Franc equiva- ing July 15, 1958, in varying amounts cal- lent of $2,000,000, which amount has already culated to retire 50% of the total issue by been disbursed. (Article IV, Section 2(a) and maturity. (b).) NOTE I Subject to call by the Bank only when re- quired to meet the obligations of the Bank In terms of United States dollars of the created by borrowing or guaranteeing loans. weight and fineness in effect on July 1, 1944. [ 41 ] APPENDIX G Opinion of Independent Auditor PRICE, WATERHOUSE & CO. AMERICAN SECURITY BUILDING WASHINGTON 5, D. C. July 27, 1948 To INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT, Washington, D. C. We have examined the financial statements listed below of Inter- national Bank for Reconstruction and Development as of June 30, 1948. Our examination was made in accordance with generally accepted auditing standards and included such tests of the accounting records and other supporting evidence and such other procedures as we con- sidered necessary in the circumstances. In our opinion, such financial statements, with the notes thereto, present fairly the position of the Bank at June 30, 1948, expressed in United States currency, and the results of its operations for the twelve months then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. PRICE, WATERHOUSE & CO. Financial Statements Covered by the Foregoing Opinion Balance Sheet-June 30, 1948 APPENDIX A Statement of Income and Expenses for the twelve months ended June 30, 1948 APPENDIX B Statement of Loans-June 30, 1948 APPENDIX C Statement of Members' Currencies held by the Bank-June 30, 1948 APPENDIX D Statement of Subscriptions to Capital Stock and Voting Power of Members-June 30, 1948 APPENDIX E Notes to Financial Statements APPENDIX F [ 42 ] APPENDIX H Administrative Budget FOR THE FISCAL YEAR ENDING JUNE 30, 1949 There is outlined below the Administrative Budget for the Fiscal Year ending June 30, 1949, as prepared by the President and approved by the Executive Directors in accordance with Section 19 of the By-Laws. For purposes of comparison there is also outlined below the expenses incurred during the Fiscal Year ending June 30, 1948. 1947-1948 1948-1949 Expenses Budget Personal Services ........................... $2,200,050 $2,804,424 Travel .256,690 284,600 Rent, Utility Service, and Building Alterations .368,932................... . 368,932 314,800 Supplies and Equipment .167,778 119,500 Books and Printing .87,555 95,800 Communication Service ...........................84,197 105,000 Contribution to Staff Benefits .311,988 297,500 Other Expenses .66,876.................... . 66,876 17,100 Contingencies ............... ............ 100,000 Total Administrative Expenses .........$ 3,544,066 $4,138,724 Office of Executive Directors .................. 328,814 449,800 Annual Meeting, Board of Governors and Advisory Council .................... 176,002 88,000 Total Expenses .........................$ $4,048,882 $4,676,524 In submitting the 1947-1948 Administrative Budget it was estimated that expenditures, excluding bond registration and issuance expense, would aggregate $4,361,000. Expenses for this period as shown above amounted to $4,048,882. Bond registration and issuance costs estimated at $3,987,000, amounted to $1,276,003. No estimate has been made of bond registration and issuance expenditures for the Fiscal Year ending June 30, 1949, since the amount of bonds which may be issued by the Bank during such year is not known. It has been estimated, however, that such expenditures will amount to $725,000 for each $100 million of bonds which the Bank may issue. F 43 ] APPENDIX I Governors and Alternates As of August 31, 1948 COUNTRY GOVERNOR ALTERNATE AUSTRALIA J. B. Chifley N. J. 0. Makin AUSTRIA (became member on Auguat 27, 1948) BELGIUM Gaston Eyskens Maurice Frere BOLIVIA Rene Ballivian Calderon Jaime Gutierrez Guerra BRAZIL Francisco Alves dos Santos-Filho Edgard de Mello CANADA D. C. Abbott R. B. Bryce CHILE Arturo Maschke Fernando Illanes CHINA Wang Yun-Wu T. L. Soong COLOMBIA Emilio Toro Diego Mejia COSTA RICA Julio Pena Angel Coronas-Guardia CUBA Guillermo Belt Miguel A. Riva CZECHOSLOVAKIA Leopold Chmela Bohumil Sucharda DENMARK Carl Valdemar Bramsnaes Hakon Jespersen DOMINICAN REPUBLIC Jesus Maria Troncoso Luis Julian Perez ECUADOR Augusto Dillon Pedro L. Nunez EGYPT Ahmed Zaki Bey Saad EL SALVADOR Catalino Herrera Manuel Melendez-Valle ETHIOPIA George A. Blowers FINLAND Sakari Tuomioja Ralf Torngren FRANCE Rene Mayer Pierre Mendes-France GREECE Athanase Sbarounis Grigorios Zarifopoulos GUATEMALA Manuel Noriega Morales Leonidas Acevedo HONDURAS Julian R. Caceres Jorge Fidel Duron ICELAND Jon Arnason Thor Thors INDIA Sir Chintaman Deshmukh N. Sundaresan IRAN A. H. Ebtehaj Mocharraf Naficy IRAQ Saifullah Khandan Munim Gailani ITALY Donato Menichella Giorgio Cigliana-Piazza LEBANON Charles Malik George Hakim LUXEMBOURG Pierre Dupong Hugues Le Gallais MEXICO Antonio Espinosa de los Monteros Luciano Wiechers NETHERLANDS P. Lieftinck M. W. Holtrop NICARAGUA J. Jesus Sanchez Roiz Alejandro Montiel Arguello NORWAY Gunnar Jahn Ole Colbjoernsen PANAMA Octavio Vallarino Roberto Heurtematte PARAGUAY Juan Plate Ruben Benitez PERU Carlos Montero Bernales Jose Barreda Moller PHILIPPINE REPUBLIC Joaquin M. Elizalde Narciso Ramos POLAND Konstanty Dabrowski Janusz Zoltowski SYRIA Faiz El-Khouri Hunsi A. Sawwaf TURKEY Nurullah Esat Sumer Nahit Alpar UNION OF SOUTH AFRICA M. H. de Kock J. E. Holloway UNITED KINGDOM Sir Stafford Cripps Sir Gordon Munro UNITED STATES John W. Snyder William L. Clayton URUGUAY Carlos Quijano Nilo Berchesi VENEZUELA Carlos A. DAscoli Hector Santaella YUGOSLAVIA Stane Krasovec Radomir Arandjelovic [ 44 ] £ st' ] 1ua:) lad o00o uEuI ssa-j ,a xlpuaddV ul tloT4S 'St'61 o0C aunf Jo se asolp Ttosj 'aaopnipa 'Taglp Xlpuaddv SIMI U! UMOTjS SaJOA JO jloi pue suo!nd!usqns 3o Irloi aRj *diUlsa9Waw o3 ppa33iup seMA tplsfny 'St61 'Z IsnnV uO0 ,0 001 09fSf'8 00001 011 56 .. I. 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OPECAIES la 59' ZS' CSL.... 10' 07Z 5Z' OLZE..........................iTJqtid2d UEDU !WTT O0j IS' 0,89 86' 0£6.[lffQ ZO' 07z sr OLZ.D~ ~O 01£ 0009 £99 00E9......................................-!w loJ OZ' 0'009 L9'9 00Z9........................................v lqD 06£ O'Q£ 89¸ 009 ....................................... lT: 09' 0'09 6L' 0~ ...................I..................e!PsnlV O5"Z 0'00E L£7Z 0E'E Jo sao!y Jo JO est!snXOj so qwaw $UOZSB9d Si) 1USOWa U:49 qtn suoplgdpsqng .SbdtOd 25!$OA E8P6 'If $Sfl?JV f o SV sapsunoojiaqwiaja fo suoydzntjsqng puv natojT OuYoA £ xiciNaaav APPENDIX K Executive Directors and Alternates and their Voting Power as of August 31, 1948 DIRECTORS ALTERNATES CASTING VOTES OF VOTES BY TOTAL APPOINTED COUNTRY VOTES Eugene R. Black John S. Hooker United States 32,000 32,000 Sir Gordon Munro United Kingdom 13,250 13,250 Yuen-Ting Shen Kuo-Hwa Yu China 6,250 6,250 Roger Hoppenot Emmanuel Lamy France 5,500 5,500 N. Sundaresan B. K Madan India 4,250 4,250 ELECTED J. W. Beyen W. Koster Netherlands 3,000 4,250 (Netherlands) (Netherlands) Union of South Africa 1,250 J Belgium 2,500 Franz De Voghel Thomas Basyn Norway 750 l3860 (Belgium) (Belgium) Luxembourg 350 3 Iceland 260j Brazil 1,300 Chile 600 Philippine Republic 400 Victor Moller Fernando Illanes Bolivia 320 3670 (Chile) (Chile) Costa Rica 270 Guatemala 270 Paraguay 258 Panama 252 Czechoslovakia 1,500 Leon Baranski Mihailo Kolovic Poland 1,500 3,650 (Poland) (Yugoslavia) Yugoslavia 650J Mexico 900 Cuba 600 Peru 425 Luis Machado Joaquin Meyer Uruguay 355 (Cuba) (Cuba) Ecuador 282 3,610 Dominican Republic 270 El Salvador 260 Honduras 260 Nicaragua 258 Graham F. Towers J. F Parkinson Canada 3,500 3,500 (Canada) (Canada) Egypt 6501 K Varvaressos F. Noury-Esfandiary Greece 500. (Greece) (Iran) Iran 490 2,230 Iraq 310l Ethiopia 280) Giorda- i Italy 2,0501 Costantino Bresciani- Francesco Giordani Denmark 930 Turroni (Italy) Turkey 680 4,615 (Italy) Colombia 600 Venezuela 355 - S. G. McFarlane Roland Wilson Australia 2,250 (Australia) (Australia) Syria 315 2,860 Lebanon 295 J [ 46 ] APPENDIX K Since the date of the Second Annual Report, the following changes have taken place in the membership of the Executive Directors and Alternates: Executive Directors Resigned Appointed or Elected Date of Appointment or Election Costantino Bresciani-Turroni August 23, 1947 (Italy) Pierre Mendes-France (France) Roger Hoppenot (France) October 28, 1947 S. G. McFarlane (Australia) January 30, 1948 Alternates Resigned Appointed Date of Appointment Francesco Giordani (Italy) September 9, 1947 Y. L. Chang (China)* Kuo-Hwa Yu (China) December 1, 1947 Stefan Michalski (Poland)* Mihailo Kolovic (Yugoslaavia) February 11, 1948 Maurice H. Parsons (U. K.) Frank Figgures (U. K.) February 11, 1948 Roland Wilson (Australia) February 27, 1948 Frank Figgures (U. K.) Guy de Carmoy (France) Emmanuel Lamy (France) July 6, 1948 Temporary. There has been no change in the composition of Standing Committees of the Executive Directors during the year. [ 47 ] APPENDIX L Officers of the Bank As of August 31, 1948 President ..................... John J. McCloy Vice President ..................... Robert L. Garner General Counsel ..................... Chester A. McLain Secretary ..................... M. M. Mendels Treasurer ..................... D. Crena de Iongh Loan Director ..................... William A. B. Iliff Economic Director ..................... Leonard B. Rist Director of Marketing ..................... E. F. Dunstan Director of Public Relations ..................... Drew Dudley Director of Administration ..................... Chauncey G. Parker Assistant to the Vice President ..................... Richard H. Demuth [48]