------------------------------------------------ 1 : .. f .,, •' •'' .· .. 97374 -~ EMBARGO: . HOLD FOR RELEASE UNTIL DELIVERY. · EXPECTED AT 5:3Q P.M~, · EASTERN DAYLIGHT SAVING TIME, · THURSDAY, SEPTEMBER 23, 1982. ~ Remarks · Prep.ared for Delivery by·. A. W. Clausen· . President· The World Bank · before the .Council on For~ign Relations· ·... New York · Septemb~r 23, 1982 ;• .. . • . Thankyou,· Mr. Peterson. 2./ Good evening, ladies and · gentl'emen. ' '' /: ' It is indeed an honor to appear before the CounCil on Foreign Relat h)ns. · Over the years, this group has repeatedly helped ~o encour~ge the United States. to provide positive leadership. in·. international affairs. Right now, the world economy very much needs positive leadership from the United States •. This is a time for vision. We must 'all rise/ above. t·he immediate short-term pressures we confront, and 1oak: ahead to th~ 1on.ger-:-term effects' of aCt i Qns we take in respqnse to. pressing problems. · America~s ... d.estiny . '.: is deeply -entwined in the broad - .. · ' political.and .ec~na·mjc trends of our planet, and 01,1r world. is bound . to become.yet more inextricably interdependeo~ in the years ahead. So I am troubled that many Affieri cans do not yet sufficiently . . . appreciate ttow. much their own interests are served when the U.s. pr6vides strong, generou~ lead~rship in internatiQnal economic . . affairs.• · 2../ Mr. Peter G. Peterson., Cha.irman, Lehman Brothers Kuhn .Loeb, is to introduce Mr~ Clausen. - 2 - We've just come back from the Annual Meetings of the Governors of The World Bank and the International Monetary Fund in Toronto. Although we've seen some encouraging economic signs lately, those meetings were sobered by Mexico's financial troubles, and. by the frustrations which finance ministers from all around the world expressed. In these introductory remarks, let me report to you that we reached a convergence of views at Toronto. We found general international agreement on three broad lines of action to help us recover non-inflationary growth. These are: disciplined economic management by national governments, libera.l international trade, and reliable flows of financing to the developing countries. Now, over the next few months, is the time for follow-up action! And successful international action toward economic recovery will depend, more than anything else, on positive ·leadership by this country. *** The current situation clearly calls, first of all, for disciplined economic policy management by governments. ' ' ·; 3 - . .. : The: industrial countries . still . . •account. -for . . two.;;,thirds . .. . . Qf - .. _ . . . ,.: global production. The u.s. alone accounts for ~oughly ,a quarter . . bf everything produced in the world. So global ·levels of inflation . and growth depend mainly on the policies ofthe U.S. arid other . industrial . :countrie~. . ' The industrial countries have relied heavily on monetary ' ' . policy ·to fight infTation, wliile their fis<;al deficits have remained-quite high. And this has made the stru-ggle to recover · • . r •. • . non-inflationary gro~th unnecessarily long and painful-• . We ··an hope for a new sur:ge of inVe!?tnient, which is;_ after all, the main engine· of growth. -But privat'e investment has· been· stalled by high interest rates, and securing sta.ble, low ra,tes of interest d~mands a better balance between fi seal and monetary ..··. policies. Disciplined . economic rilan'agement is no less essential for . ' . . .. . th~- deve.lop1ng c()untrtes duringth~se difficult tiijles~ a_nd The . . . .• World Bank is incre_asingly stressing sound economic pol~icies .in its> .. ,dialogue with our borrowing'countrfes. we·aimto helpJhem: reduce their balance...,of-payments deficits with~Lit unnec~s-sarfly'> · _restraining growth.; - 4 - This often calls for fiscal discipline to control inflation. As a group, the developing countries are putting more of their income into investment than the industrial countries are, but we often suggest how they can make more efficient use of their investment -- by giving better incentives for efficiency in agriculture and industry, for example, or by channelling more inve~tment into the conservation and domestic production of energy. Sound economic policies are always good tonic, but during these years of adjustment, they have become essential medicine. That's the message we•re giving our borrowing countries, and the he a1th of the gl oba 1 economy depe~.ds even more on disci p1i ned economic management in the U.S. and the other industrial countries. *** At the same time, we need to recreate dynamic conditions at the global level to support the efforts national governments make toward economic recovery. So let me turn next, then, to the issue of liberal international trade. On the.trade front, we've got a big opportunity coming up this November-.- the GATT Ministerial meeting. - 5 - The upcoming GATT Ministerial will be the first such high-level conference organized by the General Agreement on Tariffs and Trade since the Tokyo Round began in 1973. The U.S. was imaginative and forceful in bringing the Tokyo Round negotiations to a successful conclusion. But noisy disputes just now among the u.s., Europe, and Japan threaten to divert attention away from the common business of preparing for a new round of negotiations. , Nowadays, near 1y a fourth of everything produced in the world is traded internationally. That proportion doubled during the Seventies. And because of the increased integration of the world economy, bowing to protectionist pressures now is even more dange~oUs and disruptive than in the past. The GATT meeting in November could be a historic event! If the ministers can get beyond a general reaffirmation of the pri nci pl e of 1i beral trade to specific progress on trade issues which still need to be resolved, this meeting could -- together with falling price levels and interest rates --help to mark the end of our economic disarray. - 6 - · One of the most important breakthroughs the ministers might achieve would be defining a process toward free trade with the developing countries. More than any other factor, trade has contributed to the economic dynamism of many developing countries. And, as a result of such dynamism, the United States, for example, now exports 60 percent more to the developing countries than to Western Europe. On the other hand, many of the developing countries still retain high barriers to trade, and both we and they have lost tremendous potential benefits because of it. So the Ministerial should start discussions about how to focus more attention on trade items that are important to the developing countries. The GATT Ministerial could also plow new ground on the possibility of agreed rules for private international investment. Such rules would stimulate more foreign direct investment, especially in the developing countries. *** This brings me to the third and final broad line of action -- in addition to disciplined economic management and liberal trade -- on which we discovered general agreement in Toronto: reliable flows of financing to the developing countries. - 7 - The net flow of capital to the developing countries has more than tripled -- in real terms -- over the last two decades. In the early Sixties, about a third of this financing was from private sources, and considerably more than half was development assistance. Primarily because of the dramatic growth of commercial bank lending, those proportions have just about been reversed. More than half the new financing developing countries now receive comes from private sources, and only a third is development assistance. It is essential, both for the developing countries and for the stability of the international financial system, that net levels of financing, both commercial and official, be-- at the very least -- maintained in real terms. It is, therefore, imperative that the commercial banks continue to play their crucial role in providing funds to nations with payments deficits. This is a moment for prudence by commercial banks 9 but certainly not for retreat. The World Bank, too, has weighty responsibilities for maintaining capital flows to the developing countries. ,.. 8 - Allow me to explain that The World Bank consists of the· Internafional Bank for Reconst~uction and Development (IBRD)~ the · International Development Association (IDA)~ and the International Finance Corporatio'n (IFC). · IBRD borrows the bulk of its funds in the world's . . . financial markets -- inCluding, starting soon, the u.s. short-term. . ' ' ' markets. IBRD bonds are full,y backed by' the guarantees of its member governments; -it lends no more than the equivalent of its capital plus reser~es. IBRD makes a profit. And IBRD lends only to creditworthy countries; it has never faced a default, despite . . . the fact' that it has a firmly aPPlied policy a·gairist rescheduling 1oans. IDA 1s our concessional finance affiliate. Its approach ' . to proje'ct appraisal and supervision is just as tough as that of . ,. .. . . the 'IBRD. . But -IDA extends credit to the poorest of the poor . . . 50 years countries of our planet (for . ' at zero percent interest), ' ' and. IDA is funded mainly by contributions from donor goverments. IFC. is an affiliate of The World Bank that deals primarily with the private sector. IFC can make loans without any government guarantee~ and it also takes equity positions in ·commercial corporations in the developing countries. - 9 - The World Bank, together with other official financial institutions ~nd aid programs, provides an essential complement to commercial investment in the developing countries. Our lending is long-term, and we advise borrowing governments in ways that private 1enders cannot. On the whole, the credit record of the developing countries is a sound one. But the swiftness with which Mexico recently fell into financial difficulties again demonstrates how essential it is that we strengthen the short-term and long-term support which the Internationa.l Monetary Fund and official development agencies like The World Bank provide. I . When The World Bank was founded, back in the Forties, its architects expected that its main activity would be supporting private investment, not lending its own funds. It seems the time is now ripe to expand the B~nk's collaboration with private investors. - 10 - We are doing this in a variety of ways. We . bu tl t $1. 8 billion worth of private co-financing into projects approved by the Bank in fiscal year 1981, we raised that to $3.3 billion i~ pr.ivate co-financing in fiscal year 1982, and in the next few mdnths we will be introducing newco-financing techniques. we•realso examining the possibility of a multilateral insurance scheme for private investment. Meanwhile, IFC completed more project agreements .last fistal. year than ever before, and it has a record number of projects under preparation. concentrated in j1,.1st 13. C()Untries. Most developing . countri~s . aren•t able to meet their legitimate needs for foreign exchange in the capital markets. - 11 - Roughly half the world's population lives in countries which are too poor to qualify for IBRD lending, let alone commercial lending. IDA is the major source of concessional finance for these poorest of the poor countries. So it is distressing that we had to amputate 35 percent of our fiscal year . . 1982 IDA program, primarily because the U.S. failed to nieet its previously agreed IDA commitments. The decision of the u.s. administration to fund. the u.s. commitment to IDA's sixth replenishment in four years instead of three, as originally planned, provoked a crisis in IDA funding. At . the Toronto meetings, most of the donor nations except the u.s. agreed to pay in their commitments to IDA6 in three years, despite the U.S. ·Shortfall. And they agreed to· provide an additional $2 billion in fiscal year 1984, while the u.s. is finishing up its· commitment to IDA6. ·The world recession has hit. many of the low-income IDA countries hardest, and the other donor nations are coping with difficult budget· problems in these years, too. · The generosity of the other donors is a triumph for international understcmding. It ·is based, however, on the c 1ear commitment of the U.s. administration to work to complete its IDA6 contributions within about the next 18 months. - 12 - The donor nations also agreed in Toronto that they will begin negotiations for the seventh replenishment of IDA this November. If these negotiations are to be creative and successful, we will need leadership -- not indifference -- from the United States. Finally, in this connection allow me to comment briefly on the acceleration of military spending that is currently underway. in this country. I appreciate the arguments that are made for substantial defense budgets, but the very rapid rise in military spending has crowded out deve 1opment assistance programs such as IDA. And is it unreasonable to assert that an increase of a few hundred million dollars in U.S. contributions to IDA would do more for international security than a similar amount added to the U.S. military budget, which already runs into the hundreds of billions of dollars? The World Bank is innovating in a number of ways to make maximum use of the resourc·es entrusted .to us in maintaining the flow of financing, both commercial and official, to the developing countries. But we need support from the major economic powers.to do our job. · *** - 13 - . . To sum up graphically, the· nations of the world find . ' ' . themselves together in something of. an economic swamp. ·We know, in . '• . . . . . . general,.some directions we should bE!. moving to get out. i•-, • • • ' • • But we· need strong, generous leadership to get the nations of the world moving together toward economic recovery. It is .clear that disciplined economic management, liberal . . . tra~e, an~ ad~quate fin~ncing for the developing countries will h.e l p us toward ecoriomi c recovery. And we can take giant steps 1n those directions, in the next few months, at the GATT Ministerial and the IDA7 negotiatio~s. Pete Peterson wrote in. a recent art i c 1e that peop 1e in. 11 this country need to come to grips wi.th our ignorance, apathy; . . . despair, and cynicism toward the Third World." Well, we•ve got to find ways to help peop 1e bust out of these negative attitudes, and to wake up to the possibilities of positive U.S. leadership within the world economy. With these generai remarks as background, then, let me welcome sp_ecific questions or comments. In part1cular, I 1 m expecting to get some good advice for our work at The World Bank from our discussion together. END