IWO e U] tTI "_~~~~~~~~~ - tTi ~~~~H0 _ ~ ~~~~~~~~~~~~m M. I Development Issues Presentations to the 43rd Meeting of the Development Committee Washington, D.C.-April 28,1992 Joint Ministerial Committee of the Boards of Govemors of the World Bank and the Intemational Monetary Fund on the Transfer of Real Resources to Developing Countries (Development Committee) Washington, D.C. Copyright © 1992 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 1992 Established in October 1974, the Development Committee is known formally as the Joint Ministerial Committee of the Boards of Governors of the World Bank and the International Monetary Fund on the Transfer of Real Resources to Developing Countries. The Committee's members, usually Ministers of Finance, are appointed in turn for successive periods of two years by one of the countries or groups of countries represented on the Bank's or the Fund's Board of Executive Directors. The Committee is required to advise and report to the Boards of Governors of the Bank and the Fund on all aspects of the broad questions of the transfer of real resources to developing countries, and to make suggestions for consideration by those concerned regarding the implementation of its conclusions. The International Bank for Reconstruction and Development (IBRD) and its affiliate, the International Development Association (IBA), together constitute the World Bank. The International Finance Corporation (iFc) and the Multilateral Investment Guarantee Agency (MIGA) are other affliates of the IBRD. ISBN 0-8213-2133-1 ISSN 0255-8807 TABLE OF CONTENTS Page 1. Opening Statement by Alejandro Foxley, Chairman of the 1 Development Committee 2. Report by Lewis T. Preston, President of the World Bank 5 3. Statement by Michel Camdessus, Managing Director of the 14 International Monetary Fund 4. Statement by Alhaji Abubakar Alhaji, Chairman of the 21 Group of Twenty-Four 5. Statement by Arthur Dunkel, Director-General, General 23 Agreement on Tariffs and Trade 6. Statement by Maurice Strong, Secretary-General of the United 25 Nations Conference on Environment and Development (UNCED) 7. Interlinkages Between the Policies of the Industrial 30 and D-"eloping Countries, Emphasizing Trade Aspects 8. The Interaction of Environment and Development Policies 46 (in preparation for the UNCED to be held in June 1992) 9. The Implementation of the Debt Strategy and Its Impact 58 on the Development Prospects of All Severely Indebted Countri s (including developments in the area of banking superviP ion) 10. Implem nting the World Bank's Assistance Strategies to Reduce Poverty 72 11. Legal h amework for the Treatment of Foreign Investment 96 12. DevelopTent Committee Communique - April 28, 1992 103 Appendix A. Agenda for the 43rd Meeting of the Development 108 Co nnittee, Washington, D.C., April 28, 1992 Appendix B. 4 ,mbers of the Development Committee 109 Appendix C. t )I servers to the Development Committee 113 iii FOREWORD The Development Committee considered a number of key development issues at its 43rd meeting, held in Washington, D. C., on April 28, 1992. The Committee concentrated its discussion on two issues papers prepared by the World Bank and the International Monetary Fund. Ministers conducted the first of their annual reviews of the "Interlinkages Between the Policies of the Industrial and Developing Countries ". This time they focussed mainly on trade questions with a particular reference to the Uruguay Round of multilateral negotiations. Ministers reviewed "The Interaction of Environment and Development Policies " before the UN Conference on Environment and Development to be held in June 1992 in Rio de Janeiro, Brazil. Ministers also considered progress reports on the implementation of the debt strategy, covering both official and commercial bank creditors, including developments in the area of banking supervision; the World Bank's assistance strategies to reduce poverty; and a legal framework (prepared by the Worl4 Bank Group) for the treatment offoreign direct investment. The Report by the President of the World Bank dealt, among other things, with trends in resource transfers to the developing countries and the status of the IDA negotiations on the tenth replenishment. The Committee no longer publishes an Annual Report. So, in order to stimulate further debate on these subjects, the papers prepared for this meeting are now published in this pamphlet, which is available in English, French and Spanish, for the benefit of a wider audience. PETER MOUNIFIELD Executive Secretary May 1992 iv CHAIRMAN'S STATEMENT TO THE DEVELOPMENT COMMffTEE By Alejandro Foxley, Chairman of the Development Committee April 28, 1992 As the President's Report makes clear, our meeting this April takes place at an exciting time. But there are many other international meetings which will discuss the consequences of the end of the Cold War. Our specific task in the Development Committee is to consider the implications for the developing countries--remembering that many of the former Soviet Republics are themselves in that category. Fortunately, our agenda for this and the following meeting allow us to cover a wide area. We have some excellent issues papers and progress reports from the two institutions. We should be able to use these to have a constructive debate and to end with a communique which will send clear guidance to the various actors in the related fields of development, finance, trade and environment. First let me look back to our discussions in Bangkok. Many Members felt that the time had come for a fresh look at the prospects for the transfer of resources to developing countries--which is our principal mandate--and in particular at the implications of continued aggregate net negative transfers to the Bank itself. The Bank is preparing an important paper on this for our September meeting. Meanwhile it is useful to look at the figures in the Annex to Mr. Preston's Report, which set out the net resource flows to developing countries. These provide the overall context, which remains disappointing. Within this context, the important part played by continued IBRD lending was brought out in the recent budget papers considered by the Executive Board. At our Bangkok meeting, several members were undcerstandably concerned about the danger that lending to the new Republics might displace lending to traditional borrowers. As Mr. Preston's paper says, there is room for annual IBRD lending to rise by about $9 or 10 billion, including $4-5 billion to the former Soviet Union, before reaching the constraints set by the Bank's present capital base. Indeed commitments in the current fiscal year are now forecast to lbe rather higher than the projections we received a year ago. Although projections of commitments to existing borrowers in future years now run a litfle lower than was forecast a year ago, it is clear that this is not because of a diversion of lending to the former USSR. Chart 1 below, which is derived from recent Bank projections, illustrates these trends clearly. Note that these figures do not include IDA, where the effective constraint will be the size of the next replenishment. In Bangkok, we also discussed the Development Priorities for the Nineties, and concluded that we were generally content with the way in which these have been translated into Bank operations. About 15% of IBRD and IDA lending is now being directed to the social sectors (health, education and nutrition) wihich correspond broadly to Human Resource Development; as we agreed then, this is about the right proportion for the present time. However, it may be necessary that this share increase in the future. Since the Bank's advisory work is as important as its lending, it is encouraging to find in the latest budget projections that a similar proportion of staff effort is now being devoted to these subjects, which is a small increase over recent years and is therefore consistent with the Committee's views. Chart 2 also demonstrates the increasing amount of staff effort being put into environmental issues. It is less easy to project the proportion of Bank lending which goes directly into environmental projects. It is more important, to my mind, to ensure that environmental considerations inform all Bank lending operations, and the paper on the environtment assures us this is the case. (There is more detail in the 1 Chairman Foxley's Statement Bank's excellent Annual Report on the Environment.) The paper goes wider than the Bank's own operations or those of the GEF, and covers the issues which will be discussed at the Earth Summit in Rio later this year. Members may find it useful to ask national delegations for their latest information on the preparations for the Conference. I do not believe that the objectives of development and of environmental protection are mutually exclusive. The concrete problem for all of us is how best to arrange the necessary short-term trade-offs to ensure that development continues strongly, but in ways which do not add to the damage we have already done to our enviromnent. The paper before us poses four specific questions. We are invited to agree on a list of the most pressing priorities; we should be careful not to expand this list to the point where it becomes all-embracing and therefore meaningless. We should consider carefully the future role of the GEF; my own view is that it is unwise to create more international organizations and we should therefore concentrate on existing instruments. Finally I am sure we should endorse the environmental case for an enlarged IDA-lO. The important paper on trade looks at the relationship between the policies of the industrial and developing countries. As Mr. Preston makes clear in his report, the results of the Round are critically important for the developing countries. The implicit conclusion of the issues paper, which I strongly support, is that the process of trade liberalization must continue, whatever the outcome of the Round. Trade liberalization can contribute to the welfare of the developing world and to that of the world economy as a whole. Therefore, we should view liberalization as an end in itself. This also means that we should not use trade sanctions in order to promote environmental goals. I agree with the authors that "trade measures [to support environmental objectives] are likely to prove ineffectual in environmental terms and unnecessarily costly in economic terms". Members will find a useful analysis of these issues in the Bank's Global Economic Prospecs to be published shortly before our meeting. Tmhe progress reports on d&ei, on the Bank's povert Strategy, and on the legal framework for the promotion of foreign direct investment, are also on our agenda and deserve careful study, although there will not be time to discuss them in detail at our meeting. We should not treat these three in isolation; they are all inter-related. The link between the three is essential. Removing the debt constraint and encouraging direct investment are two of the most important routes towards the alleviation of poverty. The work being done by the Bank itself is immensely valuable. But as the President's report reminds us, the high hopes of actually reducing poverty in the nineties have now faded, largely because the external economic environment is so unfavorable. This puts a heavy load of responsibility on all Members of the Committee: on the industrial countries, to create the right sort of external climate; and on the developing countries, to pursue growth-oriented strategies to promote investment and ensure fiscal discipline, and to continue with the poverty-reducing policies discussed in the progress report. For developing countries, this can be difficult and sometimes discouraging. But I urge you not to get too discouraged. We must not lose sight of our long-term goals, no matter how many short-term obstacles appear to block the road to development. All countries should work to liberalize trade, both multilaterally and unilaterally. This would improve the economic environment, thereby laying a foundation for growth and poverty reduction. While free trade is not a cure-all, it can help developing countries move toward their long-term goals. I hope that this meeting will help us take at least a few steps toward sustainable development and poverty reduction. 2 CHART l: IBRD COMMITMENTS, GROSS DISBURSEMENTS AND NET DISBURSEMENTS (FY 1985 - 95) (PLANNING FRAMEWORK - MID RANGE) 28 - 27- 26 - SUSTAINABLE LENDING 25 - PROGRAM' Projected Commitments 24- Includh n 23- 22 - : 21 - . ' Last year's proJeclon 20- 19 PM 18 - ~~~~~~~~~COMMITMENTS '92 ;i 16-.' 138 * N4 P,ojected (FY93-95) 17 - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 10 -,'iGOSDSUSEET i 0 Pmgram14 - '92 - 73 - 6 - NET DISBURSEMENTS 5 - * " * " * * * * ' * * < .. +*'. ,:Estmate 4 - 3 .. * aammuO 2 ProJected (FY93-95) ACTUAL *4ES1UATW PROJECIED 0O I I I I I I I 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1. Gross Disbursements are Drawings on Loan CommIments during a Year. 2. Net Dsbursements - Gross Disbursements minus Principal repayments. CHART 2: STAFF YEARS BY PROGRAM OBJECTIVE CATEGORY AVERAGE AVERAGE FY 90 - 92 FY 93 - 95 100- Human Resource Huma'n Sesource Development Develo ment 90 X _H _ R a n Poverty Reduction 80 & Food Security Poverty Reduction 13.2% & Food Security 13.8% 70 - D Debt & Adjustment 12.t°Xe ~~~~~Debt & Adjustment 60 ___ _. 12.7%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Infrastructure & Urban Infrastructure & Urban 50- - ~~~~~~~Development Development Economic Management Economic Management 10.2% 10.2% /_ 40. Public Sector Reform. Public Sector Reform 30 - ~~~~~~~~~11.7% 9.7%_________ 30 ~ ~ .. - D 20 Environment & Forestry | Environment & Forestry 20 -9.3%109 Private Sector Development Private Sector Development 10 - __________________ _6.9% 8.8% Financial .ntermedation 4 Financial Intermedation 3.2% Natural Resources Natural Resources 4.5% O 5 .6 % N atural R eso urces 4.5 % TOTAL TOTAL PERCENT: 100 PERCENT: 100 1. STAFF YEARS FOR FY 90 - 92 IS SHOWN AS 1,758.4 2. STAFF YEARS FOR FY 93 - 95 IS PROJECTED AS 1.935.7 PRESIDENT'S REPORT TO THE DEVELOPMENT COMMflTEE by Lewis T. Preston, President of the World Bank April 28, 1992 I. INTRODUCTION The end of the Cold War presents enormous opportunities for collective international efforts to address a range of urgent global issues---including the challenges posed by poverty and human misery in large parts of the developing world, the continuing environmental degradation of the planet, the debt burdens that still constrain growth and development in many low- and middle-income countries, and the necessity of reducing military expenditures in both industrial and developing countries. The collapse of the centrally planned economy in the Soviet Union and the pursuit of market-oriented reforms in the former republics as well as in the countries of Eastern and Central Europe also pose a huge challenge. Failure to respond adequately and promptly to the current economic crisis in these nations could seriously jeopardize the reforms underway and entail dangerous political implications as well. Such a response, however, must not be at the expense of on-going work to help developing countries attain their development objectives, including those of sustained economic expansion, adjustment to market-oriented econiomies, poverty reduction, and environmental protection. This meeting of the Development Committee provides a welcome opportunity for Ministers to address the major issues on the post--Cold War international agenda and their implications for the World Bank Group. Issues papers and progress reports on the various topics to be considered by the Committee have been prepared by Bank and Fund staffs and no attempt is made to summarize them here. Rather, this Report highlights several key issues on the Committee's agenda of particular relevance to the Bank, and documents for the information of Committee members the Bank's response to the current situation in the new nations of the former Soviet Union. H. THE GLOBAL ECONOMY AND ITS MPLICATIONS FOR DEVELOPING COUNTRIES These issues must be tackled within the context of a global economy that presents a mixed picture for the future prospects of developing countries. A recent assessment by World Bank staff concludes that the aggregate GDP of all developing countries is likely to grow at a significantly higher rate during the current decade than in the 1980s, chiefly because of the policy reform efforts of these countries themselves. Growth rates will continue to show marked regional differences, however, with most countries of Sub-Saharan Africa likely to experience slower growth than other regions of the developing world. Moreover, the prospects for growth are diminished by a number of factors. While real interest rates are expected to be lower than the record levels of the past decade, they are still likely to remain high by historical standards and hamper the growth prospects of countries with substantial external indebtedness. Commodity prices are expected to remain weak for at least the next few years, sharply limiting the export earnings of those countries, mainly in Sub-Saharan Africa, that rely heavily on exports 5 President's Report to the Development Committee of primary goods. External finance is likely to remain scarce. Unless strong efforts are made to reverse recent trends, official development assistance (ODA) is unlikely to grow by much in real terms. Access to private capital markets will remain limited to the relatively few countries which are creditworthy. Many developing countries have undertaken substantial adjustment reforms over the past decade, and the number of reform programs is increasing. Results---in terms of resumed economic growth, lower inflation, and greater exports---have been impressive in many countries. However, continued success depends greatly on a more supportive international environment for their adjustment efforts. Vigorous initiatives are needed on the part of developed countries---in correcting their own fiscal imbalances, reducing trade barriers, and expanding financial transfers---if successful adjustment is to continue. International Trade and the Uruguay Round Two external factors often considered by the Development Committee will greatly affect the prospects of developing countries. One is international trade. A successful outcome in the Uruguay Round of trade negotiations is not yet in sight. The major disagreements that have plagued the negotiations remain unresolved. While the latest proposals currently being considered by the participants do not achieve gains for the developing countries of the kind envisioned when the Round began, they would yield a distinct improvement over current trading arraigements. The Bank's consistent and strong support for a real breakthrough in the Uruguay Round is well known. Once again the Bank seeks the support of members of the Development Committee in urging their ministerial colleagues to work relentlessly for a successful outcome to the negotiations, particularly one that would reach an agreement of demonstrable benefit to developing countries. While the benefits to developing countries will be larger if the Uruguay Round is successful, the Bank will continue to encourage them to pursue their own trade liberalization efforts regardless of the outcome of the Roundc---because experience and research demonstrate that such efforts will contribute to higher growth. However, there is little doubt that a failure of the Uruguay Round will strengthen political opposition to more market-oriented, open economies. Appropriately designed, regional trading arrangements can support the liberalization of multilateral trade. The Bank encourages the efforts in progress to work for trade creation among potential members of such arrangements and for the maintenance of an outward orientation vis-a-vis nonmembers. Resource Transfers to Developing Countries A second external factor of vital importance to the economic prospects of developing countries is the adequacy of finance in support of their growth and adjustment programs. This topic will be taken up in more detail by the Committee at its September meeting. The annex to this Report presents the latest data available on trends in the transfer of resources. Several factors require emphasis, including the prospects for concessional flows and the funding of the International Development Association (IDA), progress in the implementation of the debt strategy, and the recent emergence of new financing mecha.iisms. 6 President's Report to the Development Committee While a number of donors have significantly increased the volume of their official development assistamce in recent years and others have maintained high ODA/GNP ratios, the virtual stagnation in the volume of total concessional assistance continues to be a source of major concern. Although the financial stringencies in a number of major donors are readily acknowledged, the demands on scarce concessional resources continue to grow from a variety of sources, including some countries with declining per capita incomes, an increasing number of low-income countries implementing adjustment programs, and- possibly--some former republics of the Soviet Union. Moreover, key development priorities in the poorest countries---including strong economic growth, poverty reduction, and environmental protection-cannot be successfully addressed without the provision of adequate amounts of concessional resources from abroad. The forthcoming World Development Report estimates that even under fairly hopeful assumptions about economic recovery, there would be over 50 million more poor people in the developing world at the turn of the next century than in 1985. Thus, many low-income countries implementing policy reforms will continue to require concessional assistance for their poverty-reduction efforts for a great many years to come. The Tenth Replenishment of IIDA Tfhe future of IDA bears special mention in this regard. Negotiations have begun for its Tenth Replenishment. This will fund IDA's operations for the three years beginning in July 1993, only fifteen months from now. The negotiations have gotten off to a solid start. The first meeting of IDA Deputies from 34 countries was held in Paris in January. They reviewed the effectiveness of IDA's programs and the progress made in achieving development objectives. They also began to consider the criteria for allocating IDA resources in a changing global environment. The meeting of the Deputies in Washington on April 24--25 will examine issues related to the volume of concessional resources and IDA's role in overall development assistance. This Replenishment looks to be an especially critical but also difficult one from the standpoint of the resources IDA will have available to meet the responsibilities it has been given. Since the Ninth Replenishment went into effect in FY91, for example, eight additional countries have joined the list of IDA recipients with every likelihood that more are on the way. There are also new claims on IDA resources if it is to expand its support for poverty reduction and environmentally responsible development. (See below.) A real increase in IDA's resources is vital if it is to continue its role in assisting current recipients, meet the requirements of the new entrants, and step up its poverty reduction and environmental efforts. Balancing the expanding requirements for IDA resources with resource availability will doubtlessly preoccupy the discussions in the Deputies' meetings over the coming months. An agreement on the Tenth Replenishment will need to be reached before the end of this calendar year, if the resources are to be in place when they are needed by mid-1993. Our strong hope is that donors, despite the difficulties they confront, will be able to increase their contribution in real terms significantly. A progress report will be presented to the Committee at its September meeting. 7 President's Report to the Development Committee Implementation of the Debt Strategy An additional aspect of resource transfers requiring attention by the Committee concerns the implementation of debt- and debt-service reduction initiatives. (See the accompanying progress report on this topic.) Burdensome debt-servicing requirements with their accompanying impact on already over- strained domestic budgets continue to be a serious concern in many indebted countries. A significant development in the debt strategy for low-income countries has occurred in recent months with the agreement by Paris Club creditors to provide enhanced debt relief going beyond the Toronto terms. The new restructuring terms ("enhanced Toronto terms") include an option to grant debt reduction of 50 percent (on a present value basis) on debt service payments falling due during the consolidation period. Additionally, creditors indicated that they would be willing to consider restructuring of the remaining stock of pre-cutoff-date debt after a period of three to four years. The recent actions taken by the Paris Club represent a welcome advance on Toronto terms and are to be applauded. These enhanced terms, however, fall short in two respects of the "Trinidad terms" proposed in September 1990. First, the enhanced Toronto terms do not deal with the whole debt stock at one time; instead, there is a three- or four-year wait before a full resolution would be considered. Thus, the uncertainty surrounding expected future restructurings is not fully removed. Second, the enhanced Toronto terms permit any creditor desiring to do so to retain the nonconcessional option under the old Toronto terms which provided for rescheduling at market-related interest rates and thus did not reduce the size of the debt stock (on a present value basis). Progress has been slow in the implementation of the debt strategy with respect to debt owed largely to private creditors. In 1991, commercial bank packages were completed only for Nigeria (without official financing support), and for Niger and Mozambique (supported by the IDA debt reduction facility). Agreement on one further package, for the Philippines, was reached in February, 1992. Negotiations continue between commercial banks and a number of debtor countries, however. While some of these countries are facing difficult financing situations, a number are also characterized by a weak track record of policy implementation that makes the conclusion of mutually satisfactory negotiations difficult. Creditors an(d debtors need to strengthen their efforts aimed at resolving outstanding differences as rapidly as possible. Another significant development in 1991 was the decision by the Paris Club to offer exceptional debt relief, of up to 50 percent in present value terms, to Egypt and Poland. Growing official recognition of the need for additional debt relief for lower-middle-income countries on a case-by-case basis came at the London G-7 summit in July 1991, which signaled its desire for further progress by noting the Paris Club's continued examination of the special situation of some lower-middle-income countries. However, it is equally important to monitor closely and respond to the external financial requirements of those countries that have maintained sound policies and avoided debt rescheduling or restructuring. While access to spontaneous commercial bank lending remains extremely limited, it is encouraging to see the continued strong flows of foreign direct investment to the developing world (albeit to a relatively small number of countries). The progress report on the legal framework for foreign investment summarizes important work on this topic within the Bank Group, and a full report will be 8 President's Report to the Development Committee presented to members of the Committee at their September meeting. Other diversified financial instnmments have multiplied in recent years as alternative ways of accessing external markets by countries largely deprived of more traditional commercial bank lending. These include debt-equity swaps, bonds with special features, commodity-linked finance, and others. In a number of countries these newer financial instruments account for a significant proportion of external resource receipts. M. ENVIRONMENTAL ISSUES ON THE INTERNATIONAL AGENDA Resource transfer issues constitute one important aspect of the increasing international concern for the world's environment. This meeting of the Development Committee takes place just six weeks before the historic United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro. It therefore provides an opportunity for ministers to consider the major issues, especially (but not limited to) financial issues, likely to arise at the conference. The preparatory work for the Rio conference has not been easy. It has been marked occasionally by severe differences between many developed and developing countries, and within groups of each. One highly contentious issue concerns the volume of resources likely to be required to promote envir onmentally sustainable development. Estimates of the costs of implementing the required policies vary widely. They are unlikely to be as high as a number of the estimates made in the preparatory work for IJNCED because the adoption of an appropriate range of domestic policies by developing countries should help to mitigate costs; the policies and programs that are good for the environment and those that are required to meet other development objectives are broadly congruent, so that the costs of environmental protection are not simply above and beyond those entailed in meeting other goals; and the need for capacity-building and institutional development in the environmental field in many developing counitries will unfortunately limit their capacity to utilize financial resources effectively over the short term. Even taking these factors into account, however, it is clear that the costs associated with enviromnental protection initiatives at both the national and global levels will be substantial. While some of the additional costs should and will be borne by the private sector, many will have to be shouldered by governments. In the poorest countries, the necessary additional financial resources for implementing national environmental initiatives will have to be supplied on concessional terms. In this connection IDA's role is particularly important. There are close links between IDA's efforts to assist low-income countries reduce poverty and its environmental protection activities. IDA supports the preparation of Environmental Action Plans for all IDA recipients to ensure that environmental objectives are integrated into development programs. The design of IDA's projects reflects the costs of pollution and environmental degradation as well as the benefits of environmental clean-up and protection. IDA financing specifically targeted to support environmental objectives has grown substantially in recent years. Other donors are increasingly looking to IDA to provide the country-level coordination and leadership in dtis field in a similar fashion to the role it has played in mobilizing adjustment support. For these 9 President's Report to the Development Committee reasons, a decision at UNCED to provide additional concessional financing in support of environmentally sustainable development should be a decision to provide a special increase in real terms to IDA. IDA supports recipients in their programs for environmentally sustainable development at the national level. There are, however, numerous environmental problems that transcend national boundaries and take on global characteristics. This is where the Global Environment Facility (GEF) plays a key role. Various proposals for the future of the GEF, including the scope of its future activities, the potential volume of its future resources, and its financing modalities, have been the subject of an on-going dialogue among the facility's members in recent months and will be considered again at a meeting of participants in the days immediately following this meeting of the Development Committee. There is broad agreement on the importance of the facility's work and consideration is being given to the option of using the GEF as the funding mechanism for the proposed conventions on climate change and biodiversity preservation. Whatever the outcome of these discussions, it is important to stress that funding for global environmental initiatives should be genuinely additional to that provided for the pursuit of national environmental objectives. IV. DEVELOPMENTS IN THE FORMER SOVIET UNION AND THEIR IMPLICATIONS FOR THIE WORLD BANK GROUP The Committee meets at a time of great concern for the future of reform efforts in the new nations emerging from the dissolution of the former Soviet Union. The economies of these new nations are in disarray and require mammoth efforts at reconstruction and rehabilitation. The Bank has sizeable efforts underway to assist them with their programs of macroeconomic stabilization, systemic change, and social safety nets. A strong Bank effort in this regard is in the interest of every member of the Bank, because there can be no truly prosperous global economy in the post-Cold War era without the effective participation of the nations of the former Soviet Union. As of this meeting of the Development Committee, membership applications from the former republics are in an advanced stage of processing. The assumption is that virtually all of the fifteen republics of the former Soviet Union will be new members of the Bank this fiscal year. All will require assistance. The Bank's strategy following membership is to establish lending programs, supported by policy advice and technical assistance, to help address these countries' critical development problems. Particular attention will be given to reversing the declines in production and stimulating a supply response, strengthening the administrative capacity of their governments, training, establishing a proper framework for the operation of markets and thereby promoting viable longer-term growth, and establishing appropriate social safety nets. A rapid build-up of the lending program is planned in support of these objectives. Assuming conditions warrant, Bank lending could reach an annual level of commitments of $4-5 billion by FY95. The Bank's lending capacity (its "headroom") is ample at present and can readily accommodate this volume of lending to the new members without jeopardy to the borrowing requirements of the Bank's developing country shareholders. Moreover, the shares to be subscribed by the new members will 10 President's Report to the Development Committee increase the Bank's lending capacity. The sectoral composition and timing of lending to the new nations remain unclear at this stage. However, there is a need to ensure the availability of critical imports and for this purpose loans aimed at reconstruction and rehabilitation utilizing such imports will be considered. Support for sectoral adjustment programs and, subsequently, structural adjustment loans will also be considered. As sector work proceeds, investment projects will become increasingly important, and their share in lending will rise. Following an initial concentration on republics where structural reform is more advanced, the portfolio build-up will become more diversified. A strong program of economic and sector work: will focus on policy reforms, particularly at the sectoral level. Institutional development and training programs will be given special attention. An introductory economic report on each republic will be circulated to the Bank's Board, either before or simultaneously with the submission to the Board of the first Bank lending operation in the respective country. In all these efforts, care will be exercised to ensure that the quality of the Bank's portfolio remains strong. The Bank will need to make substantial investments in new staff and will need to redeploy some of its existing staff to support lending programs in the new nations. In this connection, the Bank's Board recejtly approved an increment of 130 Bank professional staff to work on the economies of these countries. The staff redeployment is of course being carried out in a manner that will not disrupt the Bank's lending and associated activities in its other borrowers. In short, the Bank is poised to play a substantial role in assisting the historic transformations now underway throughout the former Soviet Union. On the part of the new nations themselves, political will and commitment to sustain market-oriented reforms will be crucial. The financial, human and institutional requirements of the new nations are very large, and we therefore intend to work closely with the other organizations involved, as well as the bilateral donors, to ensure effective coordination in support of the reform programs. With the encouragement of the members of the Development Committee and that of other interested parties, and if the new nations themselves rigorously sustain their reform processes, the Bank's new members will have a strong opportunity to become active and thriving participants in the global economy. V. CONCLUSION: THE CHALLENGES AHIEAD In sum, the challenges confronting the international community in the post--Cold War era are numerous and difficult. A great opportunity exists to accelerate growth and reduce poverty in the developing world, but these aims will not be realized unless trade liberalization by industrial countries and the volume of resource flows from them are more conducive to developing countries' own efforts. Hence the stress placed on the fundamental necessity of facilitating these resource mobilization efforts-- thrciugh the liberalization of trade that can help boost developing countries' export earnings, the provision of adequate volumes of external finance, and the further reduction of debt and debt-servicing burdens on a case-by-case basis. Sharply increased attention to the environmental protection of the planet also is essential and this will require additional resources, effective technical collaboration, and agreement on cormmon objectives. Finally, there exists the historic opportunity to ensure the success of the remarkable changes underway in the former centrally planned economies---but this will only be possible through 11 President's Report to the Development Committee herculean efforts on their part accompanied by vigorous and substantial support from abroad. In short, enormous-indeed, unprecedented-strides have been made toward a world in which poverty can be reduced, the quality of life improved, and opportunity for the full use of individual creative talents expanded substantially. Its full realization will require time and great efforts by all nations and institutions. With a now virtually universal membership, the World Bank is committed to use its financial capacity and its experience to help make these efforts successful. 12 Annex Table 1. Long-Term Aggregate Not Flows of Resources to Devoloping Countries /1 (S billion, 1990 prices and exchange rates) -------------------------------------------------------------__--------------__------------------------------------------------------------__ Type of Flow 1982 1983 1984 1986 1988 1987 1988 1989 1990 1991 /2 Official Development Finance 59.8 57.9 58.3 59.2 49.8 42.8 41.2 44.7 49.3 50.2 ODA 38.0 368. 35.6 42.0 36.8 38.3 34.9 38.0 41.4 41.3 Official Grants /3/4 17.8 18.9 20.0 22.9 19.4 17.7 20.0 21.1 26.5 24.7 Official Conc-ssional Loans 20.3 19.8 15.4 19.1 18.4 18.8 14.9 16.9 14.9 168. Official Nonconcessional Loans 21.9 21.5 22.8 17.2 13.8 8.3 8.3 6.7 7.9 8.9 Private Flows 98.3 68.5 58.9 49.8 30.4 23.3 38.8 39.4 38.8 37.5 Private Loans 76.4 49.9 37.7 28.4 12.7 2.5 10.5 8.3 7.1 8.8 Foreign Direct Investment /S 19.0 14.7 14.7 18.4 13.2 16.0 21.7 28.4 25.2 24.2 Private Grants /3 3.9 3.9 4.6 5.0 4.5 4.7 4.8 4.7 4.3 4.5 AGGREGATE NET FLOWS 158.1 128.4 115.2 109.0 80.0 65.8 78.0 84.1 85.9 87.7 Memorandum Items: Interest Payments, Loan Charges, Reinvested and Remitted Profits 104.7 99.3 111.0 112.0 85,5 76.8 79.8 74.9 85.8 72.0 Related Data: IMF - Net Flows /8 11.2 18.9 7.7 -0.2 -3.3 -8.8 -8.1 -2.8 0.1 1.9 Technical Cooperation Grants /3 11.2 11.8 12.4 18.5 12.0 12.8 13.0 10.5 12.0 9.9 Memorandum Items: /7 World Bank - Net Flows 8.3 9.7 10.5 8.9 7.3 5.1 3.0 3.2 5.3 2.5 IDA - Net Flows 4.2 3.9 4.4 4.5 4.3 4.2 4.2 3.8 4.0 4.2 1. One hundred and fourteen (114) developing countries for which data are reported In the 1991-92 edition of the World Debt Tables. 2. International Economics Department, Debt and International Finance Division (IECDI) estimate, except the World Bank and IDA net flows, which are actual net flows. 3. OECD data (through 1990). 4. Excludes technical cooperation grants. S. IMF balance of payments data, which include reinvested profits. 6. Includes IMF Trust Fund, SAF and ESAF. 7. The World Bank and IDA net flows data are on a calendar year basis. The historical data differ from more widely reported fiscal year data only because of the different aggregation period. Note: The net flows reported in this table differ from the comparable figures on net flows to developing countries reported by the IMF in the World Economic Outlook (WEO). The difference is largely because of differences in country coverage: the Bank currently covers the 114 countries that report *xternal iebt data published in the World Debt Tables, whereas the Fund compile d6ata lor 138 countries, incudi ng several oil exporting countries that are not developing countries under the Bank's country classification. A detailed description of the differences between these two series and a similar time series published by the OECD is provided in the May 1991 issue of WEO (pp. 80-61). It should also be noted that the net flows in the table above are at 1990 prices and exchange rates. EXTERNAL ECONOMIC ENVIRONMENT AFFECTING DEVELOPING COUNTRIES Statement by Michel Camdessus, Managing Director of the International Monetary Fund April 28, 1992 The external economic environment for most developing countries is expected to improve in 1992 and 1993. In addition to a rebound in industrial country growth and stronger growth of world trade, non- oil commodity prices are likely to show some recovery and international interest rates are expected to remain significantly lower than in 1990-91. Oil prices are also expected to remain at their current relatively low levels; while having an adverse effect on the export earnings of fuel exporting countries, this would reduce import costs for the majority of developing countries. The cautiously optimistic assessment of the outlook for world trade and growth presented in this note presupposes that developing countries will persist with sound financial and structural reform policies and that there will be a pickup in the growth rates of industrial countries. It also assumes that increased protection through managed trade arrangements and other barriers to trade can be avoided while the multilateral trade negotiations under the Uruguay Round are continuing. World output is estimated to have declined marginally in 1991, following a rise of 2 1/4 percent in 1990. However, world growth is expected to recover gradually to 1 1/2 percent in 1992 and 3 1/2 percent in 1993 (Table 1). The global slowdown in 1991 reflected weaker growth in the industrial countries as a group-including the continuation of recession in the United States, the United Kingdom, and Canada--stagnation in the Middle East, and a sharp contraction of output in Eastern Europe and the former U.S.S.R. (Table 2). Growth in the industrial countries is projected to increase from less than i percent in 1991 to almost 2 percent in 1992, with the recovery expected to gather strength during the course of the year. In 1993, industrial country growth is projected at 3 1/4 percent. The developing countries have been relatively resilient to the slowdown in the industrial countries, partly as a result of improved performance in many economies following the adoption of structural reform programs. 1/ The average growth rate for the developing countries would increase from 3 1/4 percent in 1991 to 6 3/4 percent in 1992, reflecting mainly a sharp upturn in activity in the Middle East. Excluding the countries in this region, growth is projected to remain unchanged from the 4 1/4 percent attained in 1991. The moderation in global economic activity led to a slowdown in the expansion of world trade from 4 percent in 1990 to 3 1/4 percent in 1991. The volume of imports by the industrial countries rose by only 2 1/2 percent in 1991, the smallest increase since the early 1980s. However, imports by the developing countries increased by over 11 percent in 1991, due largely to a sharp rise in imports of intermediate and capital goods in the Western Hemnisphere and Asia. This increase was associated in part with strong foreign direct investment, but also mirrored significant trade liberalization in several countries in these regions. With growth expected to pick up in 1992 in the developing countries, import demand is likely to remain robust, while the gradual recovery of economic activity in the industrial countries is 1/ In thefollowing discussion, unless otherwise stated, developing countries exclude Eastern Europe and theformer U.S.S.R. 14 Table 1. Industrial and Developing Countries: Major Econonic Indicators, 1989-92 (Annual changes in percent, except where noted) 1989 1990 1991 1992 Wor ld Real GDP growth 3.3 2.2 -0.3 1.4 1rade VoLume 6.7 4.1 3.3 5.0 1rade Prices FueL 21.5 28.2 -17.0 -8.9 Non-fuel primary commodities -0.5 -7.9 -4.7 1.2 Manufactures -0.9 9.3 2.0 2.5 Six-month doLlar LIBOR (percent) 9.3 8.4 6.1 4.5 Industrial countries Real GNP growth 3.4 2.5 0.8 1.8 inflation 4.4 4.9 4.4 3.3 Import volume growth 7.3 4.5 2.4 3.6 Developing countries incLuding Eastern Europe and the former USSR Real. GDP growth 3.2 1.3 -3.4 0.4 Gross capital formation (percent of GOP) 26.4 25.8 26.2 26.2 InfLation 50.6 57.8 56.7 133.5 InfLation (median) 9.6 10.0 8.8 7.9 Current account (percent of exports) -2.1 -2.5 -7.7 -7.2 Export volume growth 5.1 -0.2 3.6 6.4 Terms of trade 1.7 3.3 0.0 -1.4 Countries with recent debt-servicing difficulties Real GOP growth 1.9 -1.8 -2.3 6.2 Gross capital formation (percent of GDP) 20.3 19.8 19.8 20.5 InfLation 233.8 307.5 114.1 98.2 iCurrent account (percent of exports) -7.8 -5.2 -12.3 -11.6 lExport volune growth 5.6 0.3 -3.1 6.4 Terms of trade 0.6 0.4 -4.9 -0.7 Coiuntries without recent debt-servicing difficuLties Real GDP growth 3.6 1.5 -6.1 -5.0 Gross capital formation (percent of GDP) 29.9 29.2 29.5 29.4 Inflation 7.2 8.2 46.0 213.7 Current account (percent of exports) -1.9 -5.1 -3.1 -5.9 Export voLume growth 4.3 -2.5 5.7 6.2 Terms of trade 0.8 3.2 3.7 Fuel exporters Real GDP growth 3.9 4.3 1.7 12.3 Gross capitaL formation (percent of GDP) 22.4 22.5 24.9 24.7 InfLation 19.5 14.6 16.8 13.7 Current account (percent of exports) -4.8 1.7 -22.5 -13.9 Export volume growth 10.2 3.1 0.8 10.3 Terms of trade 11.5 15.8 -10.8 -7.8 Exporters of non-fuel primary products Real GDP growth -- 1.4 3.0 4.0 Gross capital formnation (percent of GDP) 15.2 14.6 14.7 14.8 Inflation 293.3 267.5 84.1 37.1 Current account (percent of exports) -16.0 -12.6 -19.2 -19.5 Export volume growth 9.4 10.5 4.1 5.9 Terms of trade -3.9 -6.9 -6.4 -0.7 Exporters of manufactures Real GDP growth 3.7 2.0 1.6 3.6 Gross capital formation (percent of GDP) 28.4 27.8 27.0 27.5 Inflation 103.2 132.7 68.5 69.3 Current account (percent of exports) 2.9 0.9 -1.6 -2.0 Export volume growth 3.5 3.1 6.8 8.3 Terms of trade 0.7 -2.8 2.2 0.9 15 Table 2. Developing Countries: Major Economic Indicators, 1989-92 (Annual changes in percent, except where noted) 1989 1990 1991 1992 Developing Countries Excluding Eastern Europe and the former USSR Real GDP growth 3.7 3.5 3.3 6.7 Gross capitaL formation (percent of GOP) 24.5 24.3 24.8 25.0 Inflation 71.1 80.0 41.4 :37.6 Inflation (median) 9.7 10.0 8.1 7.3 Current account (percent of exports) -2.0 -0.8 -7.9 6.1 Export voLume growth 7.0 5.5 7.4 9.0 Terms of trade 1.8 2.1 -2.8 -1.9 Africa ReaL GDP growth 2.7 0.9 1.4 2.7 Gross capital formation (percent of GDP) 21.3 21.2 20.8 20.9 Inflation 18.7 15.8 22.5 25.8 Current account (percent of exports) -8.2 2.2 -5.8 7.3 Export volume growth 7.3 5.0 3.6 2.7 Terms of trade -0.8 3.7 -6.3 -3.0 Asia Real GDP growth 5.3 5.6 5.8 5.5 Gross capital formation (percent of GDP) 29.9 29.2 29.0 29.3 InfLation 13.3 8.9 9.4 8.6 Current account (percent of exports) 0.2 -0.2 -2.2 -2.6 Export volume growth 6.7 8.0 12.6 10.0 Terms of trade 0.7 -1.3 0.6 -0.4 Middle East Real GDP growth 4.7 4.2 0.4 15.0 Gross capital formation (percent of GDP) 21.8 21.5 23.9 23.8 Inflation 16.6 12.7 16.0 14.8 Current account (percent of exports) -4.5 1.1 -26.0 -12.0 Export volume growth 8.5 -0.5 -3.8 13.6 Terms of trade 10.8 16.3 -10.0 -9.2 Western Hemisphere Real GDP growth 1.0 -0.1 2.8 2.7 Gross capital formation (percent of GDP) 19.7 19.7 20.8 21.2 Inftation 434.5 648.3 162.5 140.0 Current account (percent of exports) -4.0 -2.5 -11.8 -12.7 Export volume growth 7.4 4.6 3.2 5.0 Terms of trade -0.4 -1.2 -5.2 -0.6 Eastern Europe Real GOP growth -0.8 -7.1 -16.6 -1.0 Gross capital formation (percent of GDP) 26.3 26.3 22.4 23.2 Inflation 130.6 149.1 134.7 95.0 Current account (percent of exports) 3.1 -1.9 -10.5 -9.9 Export volume growth -4.7 -11.7 -21.2 0.1 Terms of trade 2.0 -7.3 7.4 5.6 The former USSR Real GDP growth 3.0 -2.0 -17.0 -17.5 Gross capital formation (percent of GDOP) 30.5 29.1 30.1 Inflation 2.0 5.6 86.0 1000.0 Current account (percent of exports) -5.7 -18.3 -3.1 ... Export volume growth -0.4 -25.3 -12.1 ... Terms of trade 1.2 17.0 16.5 ... indicates data are not availabLe 16 Managing Director's Statement expected to lead to an increase in demand for developing countries' exports. The growth of total world trade is thus likely to increase significantly to about 5 percent in 1992 and 6 1/4 percent in 1993. The aggregate terms of trade of developing countries declined by 2 3/4 percent in 1991, due maiinly to a 17 percent fall in oil prices and a 4 3/4 percent decline in non-fuel commodity prices. In 1992, the terms of trade of these countries are expected to deteriorate further by 2 percent on account of a continuing weakness in oil prices and an increase in import unit values; this will offset a small projected increase in world non-fuel commodity prices. The expected movements in fuel and non-fuel commodity prices in 1992 imply divergent movements in the terms of trade for different groups of countries. For those countries that export non-fuel primary commodities, the terms of trade would drop for the fourth successive year, with the cumulative loss amounting to 18 percent. For oil exporting countries, the terms of trade would also continue to decline (by a further 8 percent), reversing much of the sharp increase that occurred in 1989-90. By contrast, the terms of trade of the countries that export manufactures are projected to continue to improve slightly. Interest rates in most international capital markets have fallen significantly over the last year. The average six-month dollar LIBOR declined from 8-1/2 percent in 1990 to 6 percent in 1991, and stood at 4-1/2 percent in the first quarter of 1992, a level that is expected to change little during the year. The declines in interest rates reflect generally weak economic conditions in industrial countries and a more favorable inflation performance. Short-term interest rates fell significantly in 1991 in the United States andi Canada, as well as in Japan and the United Kingdom; in contrast, they continued to firm in Germany. Long-term rates in the major industrial countries generally declined, albeit by significantly less than short- tenn rates. The net flow of external resources (official transfers, foreign direct investment, and net external borTowing) to the developing countries increased from $105 billion in 1990 to $113 billion in 1991. A sharp increase in external borrowing in Asia was largely offset by official transfers from the Middle East to industrial countries. The aggregate net flow of financial resources is projected to rise to an annual average of $133 billion during 1992-93; this is larger than during most of the 1980s mainly reflecting increased borrowing from private sources in Asia and the Middle East and a resurgence of private capital flows, especially higher foreign direct investment in the Western Hemisphere. Economic trends in the developing countries As noted above, despite the recession in much of the industrial world in 1991 output growth in the developing countries averaged 3 1/4 percent last year, about the same as in 1990, while inflation was hallved to a little over 40 percent. Excluding the Middle East region, however, growth in the developing countries increased from 3 1/4 percent in 1990 to 4 1/4 percent in 1991. The resilience in developing country growth can be attributed to recent reductions in macroeconomic imbalances and the adoption of structural reforms in many countries, particularly in the Western Hemisphere but also in a growing number of African and Asian countries. In 1991, output increased by 5 3/4 percent in Asia, reflecting strong domestic demand and rapid growth of regional trade that helped to offset a number of adverse developments, including the effects of the Middle East crisis and the weakness of export markets in industrial countries. Output increased 17 Managing Director's Statement by almost 3 percent in the Western Hemisphere, following stagnation in 1990, and per capita output increased for the first time since 1988. The improved performance in this region partly reflects strong growth of consumption and investment owing to improved confidence and the liberalization of external trade. In Africa, growth increased somewhat in 1991 but remained generally weak, partly as a result of a decline in the terms of trade by over 6 percent. However, structural reforms and sustained implementation of prudent macroeconomic policies supported growth in a number of countries, with growth accelerating by 2 percentage points to 3 1/2 percent in countries with arrangements under the Fund's structural adjustment facilities (SAF/ESAF). The crisis in the Middle East reduced growth in that region to virtually zero in 1991, primarily as a result of large output losses in the countries directly affected. In 1992, output in the developing countries is expected to increase by 6 3/4 percent; this would mainly reflect recovery in the Middle East region, in addition to improvements in underlying performance and in creditworthiness. The outlook for many developing countries is also expected to be favorably affected by an improvement in export markets as some industrial countries come out of recession and others expand more robustly. Rapid growth is projected to continue in many countries in Asia, and performance is expected to improve somewhat in Africa, although the severity of the drought in the southern part of Africa is likely to have a marked adverse effect in that region. Growth in the Western Hemisphere is projected to be maintained at around 2 3/4 percent. For the group of least developed countries, comprising most of sub-Saharan Africa and a few other small, low-income economies, growth is projected to increase slightly from 2 1/2 percent in 1991 to 3 percent in 1992. The average inflation rate for the developing countries declined from 80 percent in 1990 to 40 percent in 1991; the more representative median inflation rate fell by 2 percentage points to 8 percent in 1991. Improved policies resulted in a sharp decline in the average rate of inflation in the Western Hemisphere from over 600 percent in 1990 to about 160 percent in 1991. Inflation in Asia was roughly unchanged at 9 1/2 percent in 1991, while in the Middle East it increased in the wake of the hostilities. Inflation also increased somewhat in Africa in 1991 due in part to an increase in administered prices and exchange rate depreciations. Assuming current policies continue, inflation is expected to moderate further in 1992. After rising at an average annual rate of 6 1/4 percent in 1989-90, the volume of exports by the developing countries increased by 7 1/2 percent in 1991. A sharp increase in exports by the Asian countries, reflecting an increase in intraregional trade, more than offset the contraction of exports in the Middle East and a slowdown in export growth elsewhere. The growth in the volume of developing countries' exports is expected to rise further to 9 percent in 1992 as the pace of activity strengthens in the industrial countries. Export growth in countries that export mainly manufactures recovered in 1991 and a further improvement is expected in 1992, although it may not reach the high rates experienced in 1987-88. For the fuel exporting developing countries, the volume of exports is projected to increase sharply this year on account of a rebound in oil exports from the Middle Eastern countries, and the producers of other primary products are expected to see export growth of nearly 6 percent. The aggregate current account deficit of the developing countries rose from $8 billion in 1990 to $85 billion in 1991. War-related transfers and reduced trade surpluses in the Middle East, financed by the drawdown of assets and large external borrowings, accounted for about half the increase. The other half reflected rapid growth of imports in Asia and the Western Hemisphere, due to strong demand 18 Managing Director's Statement for capital goods, the effects of trade liberalization, and improved creditworthiness. The additional financing needs were met largely by borrowing from commercial sources in Asia, and also by foreign direct investment in the Western Hemisphere. The aggregate current account deficit is projected to fall to $71 billion in 1992, partly due to the impact of lower debt-servicing costs and the phasing out of transfers from the Middle East. Aggregate measures of the developing countries' debt burden have declined substantially since 1986 due to reduced borrowing, improved economic performance, and the impact of debt-reduction operations. The debt to GDP ratio for the developing countries declined from 39 percent in 1986 to 32 percent in 1991, and is projected to decline further to 29 percent in 1992. However, the improvement in debt-GDP ratios has been only marginal in sub-Saharan Africa and some other small low-income countries. Reductions in the debt-service ratio for the developing countries has been even more pronounced, declining from 23 percent in 1986 to 14 percent in 1991. The decline has been particularly sharp for the group of fifteen heavily indebted countries, several of which have benefitted from the Brady initiative; their debt-service ratio has fallen from 45 percent in 1986 to 31 percent in 1991. In contrast, the debt- service ratio has declined only slightly over the period 1986-91 for small low-income couwatries, including those in sub-Saharan Africa, partly reflecting the accumulation of arrears and relatively low growth of export earnings in a number of countries due to lagging reform efforts and weak terms of trade. Moreover, for these countries relief on concessional debt does not have a large immediate impact on debt burden indicators. Progress toward the restoration of debtor countries' access to spontaneous external capital flows has continued. A major step forward has been the implementation by Paris Club creditors of enhanced concessions in reschedulings for low-income countries. In addition, commercial bank debt reduction packages have been completed by Mozambique and Nigeria, and some of the largest debtors have conducted substantive negotiations with banks on debt packages. Against this background, the process of market re-entry by countries pursuing sound economic policies has gathered pace. This experience has further confirmed that the key ingredient for the achievement of external viability is the sustained implementation of strong macroeconomic and structural reform programs. Nevertheless, overall progress has continued to be slow and many countries have yet to deal comprehensively with bank debt or regain access to spontaneous capital flows. Economic Trends in Eastern Europe and the Former U.S.S.R. Output is estimated to have declined in Eastern Europe by nearly 17 percent in 1991, following a decline of 7 percent in 1990, although the official output statistics may not fully capture the growth in private sector activity in some countries. Inflation in 1991 remained high. The decline in output reflected many factors, including a deterioration in the region's terms of trade in 1990, the collapse of trade among the former members of the Council for Mutual Economic assistance (CMEA), the breakdown of the command system, and the lack of progress in important areas of structural reform. While the decline in output is expected to bottom out during 1992 in several of the Eastern European countries, the recovery could well be delayed if the reforms fail to stimulate supply. 19 Managing Director's Statement The entire region felt the impact of the decline in intra-regional trade that resulted from political upheaval and payments difficulties in the former U.S.S.R. and the breakdown of CMEA trading arrangements. In several countries the collapse of trade also stemmed from the lack of foreign exchange. The current account deficit of the region widened from $1 1/2 billion in 1990 to about $7 billion in 1991 due to a sharper decline in export volumes relative to import volumes. Despite the widening current account deficit, the total external debt of the region declined by about 4 percent during 1991 to $105 billion, largely reflecting the impact of the debt restructuring agreement between Poland and the Paris Club of official creditors. Following a moderate drop in 1990, output in Russia and the other republics of the former U.S.S.R. declined markedly in 1991 as a result of widespread disruptions in supply associated with the breakdown of the command system and a sharp drop in inter-republic trade. Lower oil production and generally weak agricultural output contributed to the decline. A further drop in output is likely in 1992. Open inflation increased substantially during 1991, especially early in the year and in the final months. Consumer prices in Russia surged further with the liberalization of prices in early January 1992. Exports from the republics of the former U.S.S.R. declined sharply in 1991 due to severe domestic supply disruptions. The drop in exports and substantial debt service payments resulted in large cutbacks in imports. As a result, the combined current account deficit of the former U.S.S.R. narrowed from about $21 billion in 1990 to an estimated $2 1/2 billion in 1991. The maintenance of trade among the republics will require stabilizing the internal and external value of the ruble, thereby restoring its function as a useful medium of exchange. In this context, the Russian Federation and other republics would need to agree on appropriate financial policies and pursue increased cooperation, especially in the monetary area. 20 STATEMENT BY THE CIAIRMAN OF THE GROUP OF TWENTY-FOUR, Alhaji Abubakar Aihaji, Federal Minister of Finance and Economy, Nigeria On behalf of Ministers of the Group of Twenty-Four, I would like to draw the attention of members of the Development Committee to the communique issued by the G-24 Ministers at the end of their deliberations and to present to you the main points in that communique, as they relate to issues before your Committee. Ministers of the Group of Twenty-Four were deeply concerned that despite far-reaching trade liberalization programs undertaken by many developing countries, high levels of protection have continued to be maintained by countries in sectors which are of vital interest to developing countries. In the same vein, they expressed concern that failure to reach a successful conclusion of the Uruguay Round would, among other things, weaken the efforts to reduce protectionism. They noted the increasing dependency of Eastern and Central European countries on the multilateral trading system and stressed the critical importance of early completion of the Uruguay Round. They, therefore, urged the industrial countries to break the dead-lock in the areas of contention. The Ministers noted the increase in the formation of regional economic and trade blocs but urged that these should not entail higher trade barriers against non-members and should not divert efforts from multilateral trade negotiations. On the interaction of environment and development policies, the Ministers welcomed renewed emphasis by the Bank, as well as the forthcoming World Development Report detailed focus, on environmental issues. They acknowledged the global concern on environmental issues and the need for cooperative effort of developed and developing countries for their solutions. Furthermore, while asserting the prime responsibility of the developed countries over environmental pollution, they expressed grave concern over the migration of "dirty" industries to developing countries as well as the dumping of pollutants and toxic wastes in these countries. They strongly urged the industrial countries to refrain from such practices. The Ministers noted the World Bank estimate of $75 billion - $100 billion per year by the end of the 1990s for incremental environmental expenditure in the developing countries, and emphasized the developing countries' financial and technical inadequacy in coping effectively with the environmental challenges. They called on multilateral development institutions to provide developing countries with technical and concessional financial assistance needed to meet these challenges. The Ministers drew attention to the environmental problems of desertification and deforestation in a large number of developing countries and recommended that resources to deal with these phenomena should be provided from the Global Environment Facility (GEF). They also recommended that particular attention should be given to programs to deal with these problems at the United Nations Conference on Environment and Development (UNCED) to be held in Rio de Janeiro, Brazil, in June 1992. They stressed that the existing development institutions, including relevant United Nations agencies, should handle environmental activities in developing countries, and urged full and active co-operation of all parties involved in the UNCED to ensure a successful outcome. 21 Abubakar Alhaji's Statement to the Group of TWenty-Four On trends in the transfer of resources, the Ministers called attention to the modest rise, in nominal terms, but decline, in real terms, of aggregate net flows to developing countries and urged intensified efforts by the international community to provide substantial development finance to complement domestic resources for sustaining growth-oriented adjustment and poverty alleviation. They welcomed the special assistance to Russia as well as to the former centrally planned economies and urged the extension of such resources to other developing countries. Ministers noted that some countries have exceeded the 0.7 percent ODA/GNP target and called on those who have not done so to take concrete measures to reach the target. They noted with satisfaction the reversal of aggregate negative net resource flows from the developing countries to the Bank and the Fund and urged that this trend be maintained. With regard to the debt strategy, the Ministers were gravely concerned about the still very burdensome debt overhang in the developing countries which seriously undermine their structural adjustment programs. They, therefore, called for a further strengthening of the debt strategy and the provision of technical assistance by the Bretton Woods institutions to iimprove debt management. They urged the Paris Club to extend the enhanced Toronto terms for greater debt relief to the lower middle-income countries and to adopt in full the Trinidad and Tobago terms for the low-income countries. As regards heavily indebted countries that have not rescheduled but have regularly serviced their debt, Ministers urged official creditors and the Bretton Woods institutions to appropriately support the efforts of these countries to have adequate access to official credits and international financial markets. Ministers took note of commercial bank debt restructuring by a few indebted countries as well as the limited revival of spontaneous capital flows to these countries. They urged for a re-examination of the issue of Cooke ratio and other bank practices, regretting the reluctance by the market to undertake sovereign risk lending, and called for improvement in those practices and regulations. With regard to the status of the International Development Association (IDA) negotiations on the Tenth Replenishment, the Ministers underscored the need for an early conclusion of the IDA-10 replenishment. They requested for positive response of donor countries before the end of the year through substantial contributions to IDA-10 replenishment, which should be higher in real terms than IDA-9. They expressed concern that IDA commitments to Africa witnessed a declining trend in recent years and again requested that Africa's share should at least be maintained at FY1990 level. On the implementation of the World Bank Assistance Strategies to reduce poverty, the Ministers noted the Bank's progress report on its plan of activities for a reduction of poverty and expressed concern at the slow and uneven progress in reducing poverty since the 1980s. They, therefore, called for more concessional funds for poverty reduction in poor countries, urging the developing countries themselves to show more commitment to poverty reduction. The Ministers welcomed the Bank's progress report on the legal framework for foreign investment and urged that the proposed guidelines referred to in the report should not constitute an additional lending conditionality of the Bank. The Ministers re-emphasized, in the light of the growing membership of the Fund and the Bank, the need to preserve the true multilateral character of the Bretton Woods institutions and restated their call that both the geographical representation and voting power of the present developing member countries in the Fund and the Bank should at least be preserved, if not increased. 22 STATEMENT TO THE INTERIM AND DEVELOPMENT COMM¶ITEE by Arthur Dunkel, Director-General General Agreement on Tariffs and Trade World trade last year registered its smallest volume gain - 3% - since 1983. Growth in value was even lower, and the smallest since 1985. Although the volume increase in trade was somewhat above that in world output, and there is some prospect of recovery this year, the overall performance of international trade has been unimpressive. Traditionally an engine of economic growth, trade is providing only modest assistance in bringing the world out of recession and in easing the problems of debt, development and market-opening reforms. A resumption of strong growth in international trade is linked to the confidence of economic operators. A key element in that confidence is the predictability and security that a properly functioning multilateral trading system can offer both for present flows of trade and for planning and investing for trade in the future. In this respect, successful conclusion of the Uruguay Round has a clear role to play in promoting a rapid recovery of world economic growth. As regards the present, the multilateral trading system continues to operate reasonably well, although not without strains. On the plus side, a further 16 countries announced autonomous trade liberalization during 1991, bringing to 63 the number of countries which have liberalized since the uruguay Round was launched in 1986. 51 of the 63 are developing or former centrally-planned econkomies. GATT membership expanded further, to 103, and many other countries are currently negotiating for, or showing interest in membership. A record number of disputes have been brought to GA'IT for settlement, a development which can be read both as a vote of confidence in multilateral dispute settlement procedures and as a gauge of tension in trade relations. A definitely worrisome trend is, however, the demonstrated unwillingness of some major trading countries to respond fully to the findings of dispute settlement rulings which have gone against them. For the longer term, the outlook is less clear. For instance, the implications of the present, much-discussed, surge in interest in establishing or expanding regional trading arrangements are hard to assess. Whether they undermine or supplement the open and liberal trading system will depend in turn on whether they conform to the multilaterally agreed rules of competition of the GAIT, and whether their memabers continue to support global trade liberalization. Similarly, the worldwide demand for better protection of the environment, which was already in the consciousness of governments when the Uruguay Round began more than five years ago, calls increasingly for a carefully thought out and constructive response to avoid new distortions in world trade and new obstacles to economic development. Issues like these are central to the future agenda of multilateral co-operation in trade policy. But first, and as an essential launching pad for intergovernmental co-operation, the Uruguay Round of multilateral trade negotiations must be brought to a successful conclusion. As long ago as the meetings of the Interim and Development Committees in Bangkok, last October, I was able to report that all the elements necessary for successful completion of the negotiations were in the hands of the participants. In the weeks immediately following, furtier intensive efforts made it possible to bring together, in one comprehensive and consolidated document, a global package of 23 Statement by A. Dunkel results from all sectors of the Uruguay Round negotiations. This draft Final Act offers, for the first time, a concrete idea of the scope and scale of the benefits of broad-based liberalization and strenigthened multilateral rules which are within the grasp of participating governments. I shall not attempt to summarize the contents of the draft Final Act, since the staffs of the Fund and Bank have already done so in a succinct annex to their paper for the Development Committee on interlinkages between the policies of the industrial and developing countries. The challenge to governments now is to bridge the gap between their general policy statements calling for a successful conclusion of the Uruguay Round negotiations and their national positions which continue to defeat this objective. This calls for political breakthroughs on a limited number of very specific issues, breakthroughs whiclh can occur only if there are changes in long-held positions of participants. Governments must overcome the temptation to delay these decisions in the hope that waiting may lead to better results. Dragging out the Round further is an approach of diminishing returns - for governments, for the international trading community and, most importantly, for the credibility of the multilateral trading system. Since December, work in Geneva has been concentrated on making progress on three parallel tracks, each essential to completion of the Round. The first track consists of intensive bilateral, plurilateral and multilateral negations to reach concrete commitments on market access for goods, including agriculture. The second consists of similar negotiations on initial commitments to liberalize trade in services. The third includes completion of work on agreements to establish a new Multilateral Trade Organization and an integrated system for the settlement of trade disputes. After a promising start, work on all three tracks has lost momentum. The reasons are clear. In part, progress has slowed because of linkages between one area of the negotiations and another. For example, because some governments have not been ready to put forward offers on agricultural trade on the basis of fundamental concepts contained in the draft Final Act, others heavily dependent on agriculture exports have been unwilling to show their negotiating cards. Negotiations in the goods sector have been held back by the failure of some participants to come forward with concrete offers in accordance with the agreed timetable. Similarly, the services negotiations have been hampered by an apparent trade-off between the liberalization offers put forward by some participants and the insistence of others on exempting particular sectors or particiipants from their offers. The differences in positions cai, in my judgement, be bridged. Courage, and political vision are needed now to overcome the hurdles and bring the Round to a successful conclusion. 24 STATEMENT ON ENVIRONMENT AND DEVELOPMENT by Maurice Strong, Secretary-General of the United Nations April 28, 1992 As you meet here the Earth Summit in Rio is only five weeks away. There have been two years of preparatory negotiations, operating on several tracks: Agenda 21, the Rio Declaration and related docurments have been under negotiation in the UNCED Preparatory Committee while separate negotiations have been dealing with the proposed conventions on climate change and biological diversity. While on each track UN members have come a great distance towards consensus, there remain a number of issues to be resolved before or at Rio. The most important unresolved issue after the New York fourth and final UNCED Preparatory Committee meeting is the question of financial resources for implementing Agenda 21. The greater part of Agenda 21---some 115 action programmes---has already been negotiated and agreed to by all countries. The programmes included in this Agenda cover developmental issues directly linked to sustainability such as poverty alleviation, adjustment in consumption patterns, measures to address demographic pressures, basic health care and environment-related health programmes, education and training and human settlements. They also address critical environmental issues through integrative programmes which have both developmental and environmental objectives. The areas covered by such sustainable development programmes include atmosphere and energy, land use and sustainable agriculture, special measures for fragile ecosystems (deserts, drylands, mountains, coastal areas), measures to address the problems of deforestation and biodiversity conservation, programmes dealing with marine pollution and the sustainable use of marine living resources, the management of scarce freshwater resources to meet essential human needs, and measures which focus on cleaner production technologies, particularly with regard to waste management. Agenda 21 also deals with the important means required for the effective implementation of these programmes, means such as science cooperation, technology development, cooperation and transfer, strengthening of data and information systems, capacity building in developing countries, strengthening of legal systems and institutional development at the international level. This complex of programmes offers the broadest negotiated basis for development and environment cooperation that we have had so far. It is a programme to which all countries of the world will be comnnitted. I would like to thank the World Bank staff for the important contributions they have made from the beginning to the formulation of the draft Agenda 21 programmes. The partnership among agencies working with UNCED in the preparations for UNCED has established an excellent basis for collaboration in the followup and monitoring in the years ahead. The world community now knows it is on an unsustainable path and that in the decades ahead major changes in individual, community, corporate and governmental behaviour will be required. The first change, of course, will be in the industrial countries, where production and consumption patterns will undergo continuing transformations. For them, the key will be to achieve energy and materials efficiencies which will drastically reduce human damage to basic ecological processes and resources fundamental to human life. 25 Maurice Strong's Statement For developing countries, accelerated but efficient and sustainable development will be essential. The Development Committee has for many years considered how resources can be marshalled to support developing country development programmes. The Committee in 1985 supported the conclusions of its Task Force on Concessional Flows which had as its central conclusion that concessional flows to low- income countries should be increased. Today the sense of urgency can only be heightened by the realization that accelerated development is needed to cope effectively with sustainability issues. Environmental security is at stake. People in poverty despoil the environment and the resources on which their future depends. Yet people in pursuit of prosperity will also damage the natural resource basis unless developing countries and industrial countries both adopt unprecedented standards of efficiency in production and consumption standards. Our task today is manifestly more urgent and more difficult than we perceived it to be in 1985. This distinguished group does not need to be convinced of the importance of development to sustainability. But perhaps it is worth underlining that the global issues of earth warming, ozone layer depletion, loss of biological diversity and pollution of the ocean commons---to name the most important--- must be dealt with both in terms of the symptoms and in terms of the causes. T'he global issues have caused us to look at development from new perspectives. First, we are now becoming accustomed to consider issues in longer time frames. The transitions which lie ahead in the fields of energy, agriculture, industry and demography will occur over decades. Second, in the debate on UNCED's Agenda 21, we have recognized more clearly than ever before how issues interrelate. Issues of development cannot be separated from issues of the environment and population. Twenty years ago Mrs. Gandhi at Stockholm made the point that poverty is the greatest polluter. Nothing has happened in the last twenty years to belie this truth. However, I think it fair to say that our understanding of the relationship between poverty and sustainability has deepened considerably over these two decades. That a billion people still live in absolute poverty is of course a moral outrage. That alone is enough reason for developing countries to give the problems which cause persistent poverty the top priority in their national agendas, and to cause industrial countries to make decisions on trade, aid, debt and other issues which will encourage success in those efforts. It is people in poverty who cut trees for fuel and fodder, whose animals overgraze and who till marginal soils in dry areas and on mountain sides. It is people in poverty in cities whose waste provides untenable environmental conditions for themselves and their neighbours. The lack of economic capacity to support adequate municipal services leads to pollution of regional seas and the ocean commons. Jobs, health, education and environment are interrelated issues, and only accelerated and sustainable development will enable developing country peoples to overcome their own environmental challenges and contribute to the solution of global environmental problems which must be resolved, not only for our present global population, but also for future generations. It is in this context that the World Bank and the IMF are considering the implications for their work of what we have learned over the past few years about earth processes. Member governments of both organizations must consider these issues as they relate not only to their actions at home, but also to the mandates they give to international organizations. 26 Maurice Strong's Statment With the urgent need to get at the causes and not just the symptoms, it is right that the World Bank has been applying environmental tests to its programming in all of its portfolio. It would also be right to continue the growth of IDA as a critical component of funding for development. I hope members will seek an Earth Increment for IDA---more funds to support accelerated and sustainable development-- to tac]kle issues such as urban development, education, health, population and women-related issues, often relativfely neglected in the past. New priorities must be undertaken without in any way diminishing attention to the rural infrastructure needed to support continuing growth in agricultural production and the bases for growth in industrial production. The IMF has historically dealt with shorter-term adjustment programmes needed to support policy reforms. It is encouraging that the IMF is now taking account of the environmental dimension in its analyises and programmes. Increasingly the time frame and funding availabilities have looked to a longer term adjustment process aimed at underlying issues. As we increase our understanding of short and longer term linkages, it will be important for the IMF to consider these as well. A beginning has been the recent sensibility to the linkages between essential reform programmes and programmes affecting social sectors such as education and health. A further consideration of links to environmental issues at both the causal and symptomatic levels is the logical next step. Together the IMF and World Bank, in concert with other international and bilateral programmes, must simultaneously support needed reforms and help developing countries undertake accelerated and environmentally sensitive development programmes. Even as we speed up the development process and add to our sense of urgency in tackling the issues of rural and urban poverty, we must deal with immediate global environmental issues. Thus we appreciate the pilot Global Environment Facility in which the World Bank plays a critical role along with UNDP and UNEP. This partnership has made a constructive start. It is reviewing its operations and its systeims of governance to assure that developing countries are adequately represented in policy formulation. It is also reviewing its mandate to consider to what extent it would be wise for it to take on a broader range of issues. When these matters are resolved, the GEF will be poised to play an even more important role in supporting efforts related to global issues. In this context, I hope the GEF will receive full support for its replenishment, enabling it to play significant leadership roles on global issues as well as whatever special roles may be assigned to the partnership by the climate and bio-diversity conventions. As you know, the UNCED Secretariat was asked by the UNCED Preparatory Committee to estimiate the cost of Agenda 21 programmes for sustainable development. When we added up these estimiates they came to more than twice today's levels of ODA, in round numbers to about $125 billion. They also called for four or five times these levels to come from the developing countries themselves. The World Development Report has made estimates in several sectors and we note that our estimates broadly match. We in the Secretariat do not pretend that these figures are more than broad indicators of the effort required. But when looked at in terms of the tasks to be accomplished, they seem reasonable---even modest. Consider the implications for the coming half century of population growing at least half again as much as it did in the past half century---by at least 4.5 billion compared with 3 billion---to around 10 27 Maurice Strong's Statement billion at the low range of population projections and to a much higher level under what the World Development Report suggests would be more likely assumptions. Developing countries will have to triple agricultural production almost entirely on their high potential lands. These lands are already under environmental pressure from waterlogging, salination and in some cases from chemical overload. Developing countries will have to increase school places fior the 100 million primary school children nc.t now going to school, while meeting the needs of billions still to be born. They must support services f:r urban areas which will triple or quadruple in population during this period. Only accelerated developmnent will meet these needs. While most of the efforts will be by developing countries themselves, ar adequate response by the donors will be critical. As we have considered the isLLe of financing we have recognized that while the financing needs for full implementation of Agenda 21 are very large in terms of funds to be raised by both developing countries and industrial countries, in fact there are constraints on both sides. Developing countries often lack adequate capacity to absorb quick increases in aid efficiently and quickly and donors are generally under important budgetary constraints. Yet we must make a beginning. With this in mind perhaps it will be possible to reach general agreement at Rio whereby developing countries would be encouraged to lay out, as a first stage in longer term sustainable development strategies, practical programmes which could be put on the table for immediate implementation. These would include the most urgent programmes which are ready to go as well as stepped up capacity and institution building programmes to increase medium term absorptive capacity. Meanwhile, the donor commuriity could start to build up its assistance levels, exercising choice on which channels and means they wish to pursue. The list of options includes, in addition to adequate funding of the GEF and IDA, adequate funding of regional development banks, funding for UNDP to increase its leadership on capacity bui ding, funding for UNEP, funding for other UN agencies which have increased roles under Agenda 21, a new look at the potential for debt relief, increased bilateral assistance, encouragement to more voluntary funding, measures to increase investments and other private capital flows and possible unilateral measures in such areas as technology transfer. There are at least three questicns the Development Committee may wish to consider: First, can you and the UNDP Cvolve your consultative group and round table processes so that you can look at the requirements of accelerated and sustainable development over a longer time frame? The goal would be partnerships for accelerated and sustainable development. Could we encourage developing countries to come forward w itfl more comprehensive programmes which articulate decade-long investment and policy efforts, seeking longer term and reasonably predictable indications of supporl from donor institutions? Strategies suppoIted should give full attention to sustainable developmert and enviromnental issues, utilizing country e: viron mental strategies as appropriate. Second, can we form more effective partnierships among UN and other organizations, and among bilateral donor institutions, for suppornng sucl. longer term efforts? Of course such longer tern and more predictable support would needtO be buttressed by more adequate concessional funding. Third, how can the World Bank a-id the UNDP, along with the rest of the bilateral and multilateral aid community, join toget1er to SUDport a more efficient and productive technical assistance 28 Maurice Strong's Statment and capacity building process? Such a process can build on the excellent recent work of the OECD's Development Assistance Committee on Principles for New Orientations in Technical Cooperation, on UNDP and World Bank work in this area, and on the work recently commissioned by UNCED itself. It is true, of course, that if developing countries were to face a more positive international climate for trade and investment, the whole process of accelerated development could be forwarded and reinfbrced. You have the question of international trade on your agenda today. I would certainly agree with Mr. Dunkel that a successful outcome of the Uruguay Round is fundamental in helping achieve in developing countries accelerated and sustainable development. So would continued positive movement on debt alleviation. I will not go into these subjects but want to underline their importance. The Earth Summit in Rio in June provides a unique opportunity to take stock and set a new direction. I hope the Development Committee will join in this reflection and consider how the cons iderable strengths of the World Bank and the IMF can best be used to support the changes in course we agree upon in Rio. Thank you very much for giving me this opportunity to share in your timely debate on these issues. 29 INTERLINKAGES BETWEEN THE POLICIES OF THE INDUSTRIAL AND DEVELOPING COUNTRIES, EMPHASIZING TRADE ASPECTS (Prepared jointly by the staffs of the International Monetary Fund and the World Bank) Summary and Issues for Discussion (i) The paper finds that the economic prospects facing most developing countries will remain difficult in the immediate future, as a result of slow growth in the industrial countries and depressed commodity prices. However, the situation is expected to improve in the medium term, in part because of the policy performance of the developing countries themselves. An open trading system can play a crucial role in stimulating growth and investment, but continued trade liberalization requires a strong commitment from governments. (ii) The Uruguay Round could make a most important contribution to more open trade, but the outlook for the negotiations remains clouded as governments continue to disagree on the elements of the final package. A failed Uruguay Round will send a negative signal to world markets and increase protectionist pressures faced by governments. Even with a successful Uruguay Round, much would remain to be done to extend the scope and benefits of trade liberalization. (iii) Governments have looked increasingly to regional relationships as an element of their trade policies, and these arrangements embody both opportunities and risks. They offer the possibility of eliminating trade barriers and increasing trade in a mutually beneficial manner. But they can also reduce profitable trading opportunities for countries outside the arrangements as well as the priority that governments attach to multilateral liberalization. (iv) Governments are responding more and more to popular demands to address problems of environmental degradation. The source of these problems is the underpricing of environmental resources. Trade restrictions rarely offer a satisfactory means of dealing with the basic problem of socially underpriced resources. At the same time, trade restrictions will threaten growth and the capacity of governments to mobilize the resources necessary to address environmental degradation. Thus, other, more appropriate means need to be identified to deal with environmental problems. (v) Ministers may wish to consider: * what steps should be taken to promote further trade liberalization, including through the timely completion of a successful Uruguay Round and early implementation of its results; 30 Trade Aspects * the factors that are supportive of trade liberalization as opposed to those that threaten third country outsiders with discriminatory exclusion and reduced market opportunities, and what steps might be taken to ensure maximum benefits for all countries, both within and outside regional groupings; * the proposition that trade measures are generally unnecessarily costly or uncertain in terms of their beneficial effects on environmental quality, and the criteria that should be employed to identify appropriate measures to deal with environmental problems; and * the contribution that the World Bank and the International Monetary Fund should make to assist developing countries as they continue to liberalize their economies in the context of programs of macroeconomic adjustment and structural reform, including ways to encourage industrial countries to further liberalize their trade regimes. e the need for the Bank and the Fund to continue to press for multilateral liberalization, and for unilateral liberalization with or without success at the Uruguay Round; and the need to continue their technical assistance to countries designing and implementing trade reform. 31 Trade Aspects INTRODUCTION1/ This paper discusses the linkages between the policies of industrial and developing countries against the background of recent and possible future developments in the external environment facing developing countries, with particular emphasis on trade. The Development Committee, at its spring 1991 meeting, reviewed in some detail the impact on the developing world of trade, agricultural and industrial policies of the industrial countries. This paper will look at recent developments in and prospects for the international economy as background to a review of the status (at the time of writing) of the Uruguay Round negotiations and regional trading arrangements. A discussion of a new trade issue--the relationship between trade and the environment---is followed by a review of the implications of trade liberalization for the work of the Bank and the Fund. World economic growth in the decade of the eighties averaged 2.9 percent or about 1 point below that of the previous decade. This slowing was even more pronounced for the developing countries where growth of 3.4 percent was 2 points lower than in the earlier period. Growth for the world slowed to 2.2 percent in 1990 and even further to -0.3 percent in 1991; for the developing world growth was even weaker, at 1.3 and -3.4 percent, respectively. This reflected economic and political difficulties in Eastern Europe, and the former U.S.S.R., the impact of the Middle East war, and recession in some major industrial countries. Excluding Eastern Europe and the former U.S.S.R., developing country growth was 3.3 percent in 1991, about the same as in the preceding year; and there were some bright spots: the newly industrializing Asian economies continued to grow rapidly, averaging growth of 7 percent annually in 1990-91, while growth in Latin America recovered to 2.8 percent in 1991 as the momentum of policy reform increased in that region. In the industrial countries, economic growth slowed to an annual rate of three-quarters of one percent, about one fourth of that between 1983 and 1990. With weaker domestic demand in industrial countries--growing at one sixth the 1983-90 pace--and average inflation lower than in 1990, nominal and real interest rates generally fell in these countries, and international rates followed suit, easing debt service payments on variable interest rate loans. Slower growth in the industrial countries, together with lower fuel and other commodity prices, were reflected in the external positions of developing countries. Between 1990 and 1991, the current account deficit of the developing countries increased from $33 billion to $97 billion. This deterioration was entirely accounted for by the group of fuel exporting countries. While the terms of trade for fuel exporters deteriorated by over 10 percent, for non-fuel exporting countries it improved by 3 percent, more than offsetting a decline in this group's real trade balance and helping to sustain imports and growth. Within the group of non-fuel exporters, producers of primary products suffered a substantial 1/ Nde: oThpper we prepard by Pa&" Low of .e Iitenao Ecmm_sucs Depanqa_, Wnd Bank ad by Anne Kenny McGvirk and Josul M. IAndei4E of the Exchange dd Trd ReatroS D Carfent, Iatuaon Moeeky Phx& 32 Trade Aspects terms of trade loss for the third consecutive year, and their external current account deficit, which had been declining since 1987, widened by $5 billion to $15 billion. Capital flows to all developing countries, which include direct investment and net external borrowing, rose from $95 billion in 1990 to $125 billion in 1991 (estimated by the Fund's World Economic Outlook). This increase reflected improved investment prospects and a large increase in external borrowing in the Middle East. Some countries (Mexico, Chile, and Venezuela) regained limited voluntary access to international credit markets in conjunction with their stabilization programs. These countries were able to borrow on increasingly favorable terms, and successfully issued convertible bonds and attracted inflows of equity investment. Commercial borrowing by countries in the Middle East and Asia was particularly strong. Historically high in 1990, net official financing fell somewhat in 1991, partly because of a decline in exceptional financing to countries in the Western Hemisphere and partly because some countries cleared arrears. Some improvement is expected in the external environment over the medium term, which would restore export markets for developing countries. Growth in industrial countries can be expected to recover fully to its 1989 pace of 3.3 percent by 1993 and to average 3 percent annually in 1994-97, with inflation below the 1983-90 average.2/ Reversing an average annual decline of about 6.4 percent in 1990-91, world prices for exporters of non-fuel primary commodities are expected to improve by an annual average of 4.3 percent in 1992-97, although terms of trade gains for developing countries are likely to be small. Export volumes of developing countries are projected to grow strongly, by 8 percent per year in 1992-97, allowing a recovery in import volumes consistent with real GDP growth of 4.2 percent per year over the same period. One important condition for the improved outlook for developing countries is the sustained implementation of appropriate macroeconomic policies by both industrial and developing countries. Restrained financial policies are needed to support noninflationary growth over the medium term and recovery from recession in some major countries. Structural measures, especially in labor and goods markets, are also required to facilitate adjustment, particularly in those sectors that have lost international competitiveness. Net capital flows to developing countries are likely to be constrained in the medium term. Savings performance in the major industrial countries has been sluggish for some time, and only a small improvement is expected, while demand for investment is likely to remain strong. There will continue to be reconstruction needs in the Middle East and needs to finance reform programs in Eastern Europe and the former U.S.S.R. At the same time, there will be continued needs for capital to finance growth and adjustment in developing countries, particularly the poorest and those emerging from debt difficulties. In these circumstances, interest rates are expected to rise in nominal and real terms from their current low levels as activity in industrial countries recovers. While the overall prospects for the developing countries are expected to improve over the medium term, these prospects will be influenced by trade policies. Open trade regimes in both industrial and developing countries could make an important contribution to the growth and development prospects of developing countries. During the 1980s, many developing countries undertook far-reaching trade and 2/ On the basis of staff estimates, a one percentage point annual increase of industrial country GDP could increase developing country exports by a little over one percentage point a year. 33 Trade Aspects liberalization programs. These efforts should be extended and consolidated. Industrial countries have maintained high levels of protection in a number of sectors that are important to developing countries, most notably in textiles and clothing and in agriculture. Failure to remove these barriers will have a negative impact on developing country growth. URUGUAY ROUND Current efforts to liberalize trade are focused on the Uruguay Round (See Annex for a summary of the major elements of the negotiations). As agreement on key elements of the Uruguay Round package continues to elude negotiators (particularly from the major countries), the outcome remains in doubt. The issue of agricultural subsidies is currently a major hindrance to the successful conclusion of the Uruguay Round. Not all aspects of the Draft Final Act satisfy all the objectives of the participants, nor the ambitions of the Punta del Este Declaration. Even with agreement along these lines, much would remain to be done to secure open markets that offer countries the full benefits of specialization through trade. What would happen if the Uruguay Round is not brought to successful completion? First, there would be losses from foregone opportunities to liberalize trade. There are commitments in prospect to reduce tariffs on goods by at least 30 percent, to lower export subsidies and domestic support levels in agriculture, to eliminate quantitative restrictions on textiles and clothing, to eliminate voluntary export restraints, and to open up access to markets for services. The precise economic impact of trade liberalization is difficult to gauge, although a number of studies have estimated gains from trade liberalization. 3/ Even the most modest estimates of the gains that developing countries would enjoy from industrial country trade liberalization are at least equivalent to the US$50 billion or so that industrial countries transfer to developing countries annually as official development assistance. Not all developing countries will benefit to the same degree from multilateral trade liberalization. Some food importing countries are concerned that trade liberalization in agriculture will increase prices and lead to a deterioration in their terms of trade. To the extent that this occurs, net food importing countries may require financial or other support while they adjust to new relative prices. Some countries, especially in Africa and the Caribbean, fear that multilateral trade liberalization will narrow or eliminate their preferential trade margins, leading to reduced exports. Again, some countries may require transitional support for adjustment. 3/ The estimated gains from trade liberalization under various scenarios range from 0.5 percent to 5 percent of w"rld GDP. For a discussion of different trade liberalization scenarios and estimates, see LIF, 1992, The World Trade System - Developments and Issues (forthcoming), and World Bank, 1992, Global Economic Prospects and the Developlna Countries. Estimates of the effects of trade liberalization are subject to well-known measurement difficulties, and differences in the results reported in these documents are accountedfor by model assumptions, choice of data sources, and variations in the liberalization scenarios that are being simulated. 34 Trade Aspects Second, domestic pressures on governments to impose trade restrictions may be harder to resist if the Uruguay Round fails. These pressures may lead to postponement of adjustment to changing competitive realities. The policy signal from a successfully completed Uruguay Round is likely to be as important as the trade benefits. In the background, there looms the fear that if the momentum of trade liberalization is lost, as a result of failure to complete the Uruguay Round, countries will regress into protectionism. Efforts made in the Uruguay Round to strengthen GATT rules in such areas as safeguards, subsidies and antidumping would be dissipated. This could lead to intensified use of "self- help" trade actions that rely on unilateral interpretations of international rights and obligations, and unil,aterally defined remedial measures. Trade relations would likely tend to be increasingly characterized by managed trade and market sharing, based on ad hoc, intrinsically discriminatory arrangements. Small countries that cannot offer reciprocal deals to their larger trading partners, nor influence the policy behavior of these countries, may be the ones that would suffer most from an erosion of the multilateral trading system. This would be particularly harmful in a situation where so many countries in the developing world, including in Eastern Europe and in the former USSR, are moving towards liberal, market-oriented economic policies and more open trade regimes, which increase their dependency on international markets. Moreover, as more developing countries join the GAIT, and many have become staunch supporters of the Uruguay Round, it is clear that these countries value the benefits conveyed by a multilateral system of rules. Third, if the Uruguay Round is not brought to a successful conclusion, the capacity of the multilateral trading system to deal with new challenges will be weakened. One of the most pressing of these new challenges will be the mediation of trade relations among emerging regional trading groups. The next section of this paper addresses the relationship between regional trading arrangements and the multilateral trading system. Another issue that will be prominent on the trade agenda is the relationship betlveen trade and the environment. As concern has grown about the preservation of the global environment, the question has arisen as to what effect international trade has on the environment. This, too,, is examined in a separate section of this paper. A third issue, not discussed here, relates to the growing perception that competition policies need to be developed internationally, as markets become more integrated globally. Proposals have been made for the development of international competition rules covering subsidies, cartels, mergers and public monopolies. Fourth, there is likely to be increasing interest in developing international rules on investment, an issue that is closely related to competition policy. These new issues can be best addressed in a multilateral context. REGIONAL TRADING ARRANGEMENTS 4/ Regional trade arrangements have been part of the international scene since World War Il, but there has been a resurgence of interest in these schemes since the mid-1980s. Existing schemes are being revived and extended (in membership and coverage) and new groupings are being formed and proposed. Part of the reason for this trend is that countries want to reduce the risk of being excluded from free trade 4/ This section draws on Augusto de la Torre and Margaret Kelly, Reegonal Tradine Arraneements (International Monetary Fund, Occasional Paper No. 94, April 1992), which analyses issues and developments in regional trade arrangements. The discussionfocuses on arrangements involving two-way trade preferences. 35 Trade Aspects areas. With the slow pace of negotiations under the Uruguay Round and the perception that GATT is unable either to curb protectionist pressures or to handle new and important trade issues, the imminence of economically powerful arrangements centered on Europe and North America has led to a fear on the part of other countries of at best being excluded from the benefits of membership and at worst being harmed by nonmembership. This fear has been compounded by protectionist pressures due to the recent slackening of economic growth. A belief that regional arrangements will strengthen multilateral negotiations-by building a momentum for more open markets--underlies some of these efforts. Some initiatives, particularly in Latin America, have arisen from the failure of inward-looking protective policies to produce higher economic growth; many countries believe that linking to a strong trade partner in a more open trading arrangement should, by introducing and locking in greater competition, act as a spur to domestic production and a more efficient allocation of resources. Whatever their justification, regional trade arrangements are an important part of the international trading environment. Most GATT members belong to some form of preferential trading scheme, with Japan being an important exception. One study estimates that over half of global exports in 1988 were covered by existing and proposed preferential arrangements.5/ The two largest proposed free trade areas--the European Economic Area and the North American Free Trade Area---would together account for 65 percent of global imports and 47 percent of developing country exports. In Europe, the European Single Market Program (EC 1992) introduced in 1985 is to be completed this year with the removal of internal trade barriers and the elimination of national trade restrictions; by 1993, a European Economic Area incorporating the EC and EFTA countries could be in place. Beyond that, the European Community (EC) is likely to be expanded over time by including other countries in Western Europe and eventually Eastern Europe and the Baltics. The Czech and Slovak Republic, Hungary, and Poland have already concluded Association Agreements with the EC, and other East European countries and the Baltic states have expressed interest in similar agreements. The most prominent area of new activity toward freer regional trade is in the Western Hemisphere, where almost all countries either belong or aim to belong to some bilateral or regional trade area. The U.S.-Canada Free Trade Agreement went into effect on January 1, 1989, and in June 1990 The Enterprise for the Americas Initiative, which aims to create a free trade area throughout the hemisphere, was announced. Tripartite negotiations for a North American Free Trade Area began in April 1991 between the United States, Canada, and Mexico. Are regional trading arrangements likely to support the liberalization of multilateral trade? By definition, regional arrangements are discriminatory, and only nondiscriminatory trade fully ensures the maximum benefits from trade for all parties. Regional schemes have dynamic and static effects on existing trade patterns that are either trade-creating or trade-diverting. Whether an arrangement will on balance be trade-creating is an empirical question, and the outcome will reflect both the economic conditions and initial situation of the countries involved as well as the type and membership of the scheme and the policies pursued. Developing countries, for example, are more likely to increase trade according to comparative advantage in the contexit of multilateral liberalization which allows them to exploit gains 5/ Carlos Primo Braga and Alexander Yeats, "The Simple Arithimetic of Existing Minilateral Trading Arrangements and Impcations for a Post-Uruguay Round World, ' World Bank Policy Research Working Paper in preparation. 36 Trade Aspects from trade based on differences in resource endowments and prospective productive structures. While efficiency gains can be realized through any trade arrangement that reduces distortions and strengthens the foundations for efficient production, in free trade arrangements among countries with complementary, rather than competing, structures of production, there is a greater risk that trade diversion could outweigh trade creation. Some argue that regional arrangements may contribute to more open trade if they can settle difficult trade issues on which it is hard to get universal consensus. The GATT negotiations have been hampered both by lack of agreement on issues of vital political interest to many participants--such as agriculture---and on the treatment of new types of trade issues--such as trade in services and investment rules. The argument is that more progress on these issues may be possible at a regional level where countries share economic philosophies and are already fairly integrated. Despite these claims, however, many sensitive sectors such as agriculture have often been excluded from liberalization in regional arrangements. GA'TT--in a pragmatic manner--permits regional arrangements under certain conditions. Broadly, these conditions are that they do not, on the whole, raise trade barriers against other GATT members and that they entail the elimination of intra-regional trade barriers across the board, according to an established timetable. In practice, these conditions have not been strictly enforced: of the approximately 50 arrangements reported to GAIT during 1948-91 only one was deemed to be fully compatible with GATT provisions, although no arrangement was formally declared incompatible. Regional arrangements among industrial countries have generally not, until now, hindered multilateral liberalization. Most of these countries had substantial trade with each other before integration, and trade barriers against nonmembers were generally reduced as a result of multilateral and unilateral liberalization or were already low, thus minimizing the potential for trade diversion. Under these conditions, member countries have gained from greater competition from within the preferential area as well as from outside, and discrimination against nonmembers was generally not a major issue. Although multilateralism may not yet have been threatened by regional groupings, there is heightened awareness of the risks of the new initiatives. The main concern is that the trading blocs of the major players will develop a "fortress" mentality detrimental to nonmembers. In addition to trade diversion, inward-looking arrangements could divert investment and technology transfers that might otherwise have gone to nonmembers. Nonmembers could be marginalized and lose their bargaining power and security of access if trade agreements between the blocs exclude their legitimate interests. A second concern is that an expansion of the membership in arrangements with protective features may intensify rather than attenuate restrictions. This could happen, for example, if a country with relatively liberal agricultural policies joins a regional arrangement with more restrictive agricultural policies. Experience shows there are clear limits to the progress that regional arrangements can make in liberalizing the most difficult and most heavily protected areas. Also, arrangements with overlapping mernbership could lead to multi-layered and inconsistent rules and practices and unstable trading patterns. Another important concern is that the diversion of effort from multilateral trade negotiations could weaken prospects for success even if the political will to reach agreements exists. While the gains from multilateralism compared with regionalism are widely recognized, and the increasing globalization of investment and production imposes external constraints on regional arrangements, serious questions have been raised about the commitment to the multilateral effort. 37 Trade Aspects All countries as a group would benefit from multilateral trade liberalization, although individual benefits may not be equally shared. All countries, however, would be harmed by the emergence of regional trading blocs that lead to more distorted and less (and perhaps less predictable) trade. The countries that are especially vulnerable to the weakening of the multilateral trading system are smaller industrial countries and developing countries that have export markets concentrated in the emerging blocs with little political power to affect the trading arrangements that emerge. To avoid increasing the risks associated with regional trading arrangements, it is essential that they maintain an outward orientation. Ideally, trade arrangements should lower trade barriers on average against nonmembers and eliminate all internal trade barriers as quickly as possible; the Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) is an example of one free trade agreement that included these desirable elements (Box 1). Where members of regional arrangements have BOX I ANZCERTA Success in regional trade arrangements depends on individuaL conditions and poLicies. One success---The Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA)---iLLustrates one combination of measures in a developed country arrangement that was trade creating. ANZCERTA, which came into effect in 1983 and was modified in 1988 initially provided for the elimination of: * all tariffs by January 1, 1988; + all quantitative restrictions by JuLy 1, 1995; and * all direct export subsidies and export incentives for intra-area trade by 1987. A few agricultural and industrial support measures remained. In addition, standards, domestic Labelling, technical requirements and testing procedures were to be harmonized. Other important provisions concerned rules of origin, antidumping and countervailing procedures, and a commitment to end government purchasing preference systems. The 1988 review acceLerated and extended the liberalization covered in the 1983 agreement: the elimination of quantitative restrictions was advanced by 5 years to July 1, 1990; the coverage of the agreement was extended to include a Large number of goods previously treated as exceptions (e.g., dairy products) and to incLude trade in services; antidumping procedures against goods from within the free trade area were abolished, and mutual access was provided to competition laws in both countries. The agreement also caLled for harmonization of the competition and business laws and regulatory practices of the two countries, for the elimination of export incentives and production bounties for goods traded inside the free trade area, as well as export prohibitions maintained to ensure domestic avaiLabiLity. A number of factors contributed to its success. First, the liberaLization was broad in scope, covering tariffs, quantitative restrictions (including those in sensitive sectors), and export incentives, as well as ruLes and reguLations that could distort trade. Second, it covered new and important non-merchandise sources of trade, such as services. Third, it was pursued consistently, in clear phases, and implementation was even advanced for the eLimination of quantitative restrictions. Fourth, after the creation of ANZCERTA, both Australia (in 1988) and New Zealand (in 1984) embarked on trade reform programs to reduce their reLatively high levels of external protection. Fifth, the structure of ANZCERTA was favorabLe to success. There was a relatively high Level of trade between Australia and New Zealand prior to integration, suggesting they were natural trading partners, and high per capita incomes offered the potential for product differentiation and economies of scale. At the same time, developed capital markets and common elements in laws and regulations faciLitated the reallocation of resources as production adjusted to liberalization. 38 Trade Aspects high barriers to trade vis-a-vis nonmembers, it is especially important to reduce these barriers in order to minimize the potential for trade diversion and resource misallocation. In this connection, a successful conclusion of the Uruguay Round that would liberalize trade multilaterally would help to reduce the potential adverse effects of preferential trade arrangements. The strengthening of GATT rules and their enforcement would also provide the multilateral framework within which regional trade arrangements could work as a force for liberalization. The potential for regional blocs to undermine the multilateral trade system could increase if the Round fails. In these circumstances, the major industrial countries would bear greater responsibility to ensure that regional blocs are GAIT-consistent, outward-oriented, and open to new members. TRADE AND ENVIRONMENT A particular feature of many of today's environmental concerns is their international character, involving the global commons (the ozone layer and the greenhouse effect), transfrontier pollution spillovers, and perceptions of shared patrimony over scarce resources. Not all environmental problems necessarily have an international character, however, and when they do not, their solution is a matter for individual governments. An obvious difficulty in an interrelated ecological system is drawing a distinction between purely local and global environmental problems, and it is the actual or perceived international dimension of many environmental issues that has led to a link being made between trade and the environment, and to pressures on governments to use trade measures to pursue environmental objectives. Environmental degradation is likely to occur when envirornental resources are underpriced and overused in terms of the full social costs of particular patterns or rates of resource use. In this situation, action by governments is required to ensure that market prices better reflect long-term costs. An important issue for policy is to identify the most efficient, least-cost manner in which to achieve this objective. One question that has emerged is whether trade liberalization harms the environment by encouraging the exploitation of environmental resources at an unsustainable rate. Trade liberalization could, for example, harm the environment by encouraging intensified use of socially underpriced resources. In this case, the desirable policy for a government to follow would be to increase the price of the resource in question, perhaps through taxation, the assignment or clarification of property rights, or en appropriate resource management program. To address such a problem through trade restrictions would be an indirect and relatively costly (and probably temporary) remedy. Choking off trade would not only slow growth, but it would also fail to resolve the underlying problem of mis-pricing the use of the resource. Preliminary evidence suggests that more open trade regimes are associated with lower levels of pollution intensity in production because they encourage investment in more modern, less polluting 39 Trade Aspects technology.6/ Moreover, trade liberalization is generally associated with increased growth and income, and it has been widely observed that improvements in environmental quality, tend to be associated with higher incomes. As societies become richer, they are able and willing to do more to protect the environment. Part of the policy debate on trade and the environment concerns competitiveness issues. The argument has been made that countries with lower environmental standards enjoy an illegitimate advantage in trade because their inclustries pay lower pollution abatement and control costs or have access to natural resources at prices that do not cover their social costs. A related argument is that countries with lower environmental standards will attract industries away from those with more stringent standards. These concerns often lead to demands for action aimed at harmonizing environmental standards and policies across countries or limiting trade with those countries with the lowest standards. There are good reasons why environmental standards might differ among countries, or even within countries. Particular localities may be able to absorb greater levels of pollution as a result, for example, of differing climatic or topographical conditions. In addition, the greater the prevailing level of pollution or environmental degradation that has already occurred in a given locality, the more rigorous the standards need to be. This is partly why developing countries may be reluctant to embrace the same environmental or pollution control standards as industrial countries. The case against harmonizing environmental standards is particularly strong where local rather than international environmental issues are concerned, and demands for harmonization in these circumstances are often a subterfuge for protection and a denial of opportunities for countries to specialize on the basis of comparative advantage. In those situations where there are international or global ramifications, however, the actions of one country affect other countries, and international action may be called for to protect the environment. It is in these circumstances that governments may be tempted to use trade measures as a means of addressing environmental problems or of forcing behavioral changes on others. There are few circumstances in which it makes sense to apply trade measures in pursuit of environmental objectives. Since trade itself is infrequently the source of environmental problems, trade measures are likely to prove ineffectual in environmental terms and unnecessarily costly in economic terms. Even where trade measures are legitimately used to enforce domestic product standards, or to enforce international agreements under which countries have made prior commitments to particular environmental objectives, it may often be less costly and more effective to use other measures. As a means of trying to change environmental policies in other countries, the confrontational and unilateral character of trade measures means that their effect on the environment will be uncertain. Where joint action among governments is required because environmental problems have international 6/ Some of this evidence is reported in Patik Low (Ed.) International Trade and the Environment International Trade Division, World Bank (forthcoming). 40 Trade Aspects spillover effects, cooperation will achieve more than confrontation and coercion because it will permit more appropriate and effective measures to be adopted and defended. Where industrial and developing counktries are concerned, different perceptions about the nature or extent of an environmental problem, combined with equity considerations, may make a case for considering financing arrangements in favor of developing countries. The relationship between GATT and the environment has become a source of contention in recent months, as environmental groups have asserted that GATT rules are hostile to sound environmental policy. The basic rules on non-discrimination, national treatment and the prohibition of quantitative trade restrictions are, however, modified in certain ways by exceptions relating to human, animal or plant life or health, and to exhaustible natural resources. 7/ In general, the GATr rules are against extraterritorial applications of trade policy involving production processes and tech:niques, but they will not obstruct measures necessary to enforce product standards in the domestic market. In sum, as the GATT rules stand, they tend not to interfere with good environmental policy, but may be in conflict with some of the less direct and less effective trade measures that are sometimes adopted on environmental grounds. The GATT has recently reactivated a Working Group on Environmental Measures and International Trade to examine these issues. ROLE OF THE FUND AND THE BANK Trade liberalization is a feature of many, if not most, recent adjustment programs supported by the Fund and the Bank; since the mid-1980s it has become increasingly important. Fostering competitiveness in tradeable goods sectors is a crucial complement to macroeconomic policies aiming to restore internal and external balance and create a foundation for sustainable growth based on comparative advantage. Countries embarking on reform programs generally have balance of payments and fiscal imbalances combined with domestic distortions and trade policies that shelter import- competing sectors that discourage agriculture and exports. While the scope and sequence of trade reforms has varied, many countries have substantially eliminated quantitative restrictions on trade; some progress has also been made in reducing the level and dispersion of tariffs, although in many countries tariff rates remain high and widely dispersed. The economic effects of such trade reform are often hard to disentangle, but the evidence indicates beneficial long-run effects on output and employment growth. Important elements in most successful reform programs have been completeness and credibility; balanced and credible fiscal, monetary, and exchange rate policies seem to be essential if trade reform is to stimulate productivity in sectors in which a country has comparative advantage. The Fund and the Bank have supported trade reform with financial and technical assistance and policy advice and have consistently advocated liberalization on a multilateral basis. Because they act as catalysts for other funding, assistance to countries the Bank and Fund support is generally higher than without their presence. The question has arisen whether the two institutions should continue to support unilateral liberalization in developing countries should agreement at the Uruguay Round either Z/ For a full discussion of these issues, see GATT, International Trade Report (3 February, 1992). 41 Trade Aspects fail, or continue to be postponed. The main concerns seem to be economic, political, and strategic. The economic concern is that without reciprocal market access in industrial countries, a country's trading sector will be harmed if it unilaterally opens its own markets. At the political level, there is concern that it will be harder to develop domestic support for trade reform if voters see no move to liberalization in their major markets. Finally, unilateral reform before any multilateral agreement is seen as needlessly giving away a bargaining chip. The answer to the economic concern is clear--experience shows that reform benefits growth by fostering efficiency and better resource allocation. However, it is also clear that the gains from reform will be higher if market access increases. Both institutions urge industrial as well as developing countries to open their markets. In its surveillance work and policy advice to industrial countries, the Fund lays great stress on removing trade barriers and supporting multilateral liberalization to facilitate both domestic and global growth. It also emphasizes the reduction of direct and indirect subsidies to agriculture and industry. The World Bank undertakes research on the effects of industrial country protectionism on developing country exports, the results of which are widely disseminated. The Bank is ready to provide information on trade barriers faced by developing countries in country economic reports and make an assessment of the impact of any changes in these barriers on the country's economic program. The Bank and the Fund also stand ready to provide the necessary technical assistance and to consider financial assistance, where developing countries need to undertake adjustments consequent upon unilateral or multilateral trade liberalization. In this context, changes in support or trade policies in the major countries could have short-term effects on the terms of trade of developing countries or lead to a loss in their preference margins. Once the positive effects of reform are evident, the political concern with liberalization may be moot; as voters see the positive impact of liberalization on output and employment and on the shelves of their shops, support should grow. As to the strategic concern, it would be ill-advised to withhold liberalization for negotiating purposes at the cost of foregone growth. Moreover, if a country's tariffs are not yet bound, which is the case in many developing countries, they will still have their main negotiating chips, which they can use to persuade other countries to make concessions. On balance, therefore, the slower pace of the Uruguay Round does not provide a case for the two institutions to change their assessment of the importance of trade reform in promoting sustainable long-run growth. Trade liberalization is an integral part of structural reform, contributing to increased competitiveness of output and more rapid technological progress than would otherwise occur. If the Uruguay Round fails, these benefits will be reduced for liberalizing countries, but not eliminated. However, if several countries are engaged in unilateral trade liberalization at the same time, they will all benefit from each other's actions. 42 Trade Aspects ANNEX: STATUS OF THtE URUGUAY ROUND The Draft Final Act (DFA) was tabled by Mr. Dunkel, the Chairman of the Trade Negotiations Comamittee, in December 1991. Negotiators agreed in January 1992, to press on with the market access negotiations in parallel to negotiations on outstanding points of difference in the DFA. A four- track approach was proposed to carry the work forward. Track one was to deal with market access negotiations in goods, track two with initial commitments in services, track three with legal conformity and internal consistency of the DFA text, and track four with the question whether the overall package should be adjusted in certain specific places. The DFA, if complemented satisfactorily on the market access front, would cover a wide ranging set of agreements embodying trade liberalization commitments, revised rules, disciplines in new policy areas, and far-reaching institutional reform. The market access results would include reductions in bound tariff rates, undertakings on the eradication of nontariff barriers to trade, and specific cormmitments in the areas of textiles and clothing, and agriculture. The draft textiles and clothing agreement would eliminate the Multifiber Arrangement (MFA) in three stages over 10 years. The draft stipulates minimum quota growth rates during the phase-out period, but could leave nearly half of the quotas for elimination at the end of the phase-out. The wording also envisages a discriminatory safeguard mechanism during the transition to mainstream GATT discipline. The proposed agreement in agriculture commits governments to specific reductions in levels of barriers to market access (a simple average reduction of 36 percent, with a 15 percent minimum reduction on all tariff lines, from 1993 to 1999), in domestic support measures (a 20 per cent reduction on support measures affecting prices and production decisions, between 1993 and 1999, from a 1986-88 base), and in export subsidies (a reduction of 36 percent on subsidies and 24 percent on subsidized quantities, between 1993 and 1999, from a 1986-90 base). It also commits them to the "tariffication" of all import barriers, but introduces a safeguard mechanism that would adjust for changes in world product prices and exchange rates up to a specified level. The agriculture agreement would be reviewed, and negotiations re-engaged,in 1998 (one year before the expiry of the proposed "implementation period"). The agricultural text does not contemplate "rebalancing", which was an EC demand to increase the level of protection on cereal feed substitutes in return for reducing the level on other products. Special and differential treatment provisions permit developing countries to limit their market access, domestic support and export subsidy commitments to two-thirds of the levels indicated above, and to implement the commitments over a period of 10 years. The agreement contains an annex that notes the possible short-term negative price effects on least developed and net food importing countries arising from trade liberalization, which are to be addressed through adequate food aid, technical support, export credit and financial arrangements. Finally, there is a draft agreement on sanitary and phytosanitary measures. 43 Trade Aspects Proposed texts in the rule-making area include new agreements on rules of origin and preshipment inspection, and revisions of provisions relating to antidumping, technical barriers to trade, import licensing procedures, subsidies and countervailing duties, customs valuation, government procurement, safeguards, and several GATT Articles (including those dealing with trade measures taken on balance-of-payments grounds, state trading, customs unions and free trade areas, waivers, and tariff renegotiations). The three rules-related areas generally considered of most importance, and the most contentious, are antidumping, subsidies and countervailing duties, and safeguards. The antidumping text seeks to impose additional discipline on antidumping procedures in order to make them less susceptible to protectionist abuse, while at the same time it introduces a new remedy against the circumvention of antidumping duties. The subsidy and countervailing duty agreement defines different categories of subsidy as prohibited, actionable and nonactionable, and creates a presumption that subsidies are seriously prejudicial to trade if they exceed a certain limit. The safeguards text attempts to impose additional constraints upon the use of safeguards, while at the same time extracting a commitment from countries to eliminate voluntary export restraint agreements; in return, it would permit selective quantitative restrictions under certain conditions. The new areas where draft texts have been drawn up, cover trade-related investment measures (Th'RIMS), intellectual property rights (TRIPS), and trade in services. In TRIMS, the proposed text does little more than affirm that domestic content requirements and other direct restrictions on the ability of investors to import or export goods are inconsistent with the GATT. The TRIPS draft agreement establishes substantive standards for intellectual property protection with respect to copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout-designs of integrated circuits, the protection of vndisclosed information (trade secrets). Some of the major provisions of the TRIPS draft agreement are: (a) that copyright should be protected under the 1971 version of the Berne Convention, with the exception of the moral rights provision; computer programs are considered literary works under the Convention; (b) the term of patent protection is to be 20 years from filing, and the scope for excluding inventions from patentability has been narrowly defined; conditions are imposed on compulsory licensing; and (c) the TRIPS text is the first multilateral agreement which explicitly requires its signatories to provide protection of undisclosed information. The agreement also establishes norms for the control of uncompetitive behavior, for the enforcement of intellectual property rights and for dispute settlement. The proposed agreement on trade in services establishes a framework for the conduct of such trade, including a number of sector-specific annexes (on the cross-border movement of persons, financial services, telecommunications, and air transport), and- will eventually include national market access commitments. A major point of dispute in the services negotiations has been whether the most- favored-nation (MFN) principle shoulid apply across the board. The current text establishes that MFN should apply in principle, but at the same time allows a more or less open-ended exemption. The services text includes provisions to ensure its consistency with the Fund's jurisdiction over exchange restrictions affecting service transactions. 44 Trade Aspects Finally, the institutional aspects of the Uruguay Round draft agreement are concerned with dispute settlement, various aspects of the functioning of the GATT system, and an agreement on the establishment of a new Multilateral Trade Organization (MTO). The text on dispute settlement contains considerable improvements to the procedures, designed to speed them up, make them more automatic and predictable, and improve the level of compliance with dispute panel findings. The text also states that unilateral determinations of illegitimate trade behavior shall not be made, nor remedial actions taken. Multilateral due process should prevail. A separate dispute settlement text proposes the creation of aL Dispute Settlement Body, under which all disputes in the post-Uruguay Round trading system will be dealt with in a single forum. This arrangement is intended to ensure consistency in dispute settlement procedures and in rulings on substantive provisions. The draft on the Functioning of the GATT system proposes that the Trade Policy Review Mechanism be made permanent. It also deals with notification obligations, and contains a text on the contribution of GATT to achieving greater coherence in global economic policymaking. The MTO is conceived as a formal legal entity that will incorporate all the Uruguay Round agreements---in short, the entire multilateral trading system under a common system of membership (except for agreements on government procurement, trade in civilian aircraft, and arrangements on bovine meat and dairy products). A basic objective of the MTO proposal is to curb the tendency towards the fragmentation of the GATT trading system, under which a multiplicity of agreements and arrangements were subscribed to by different subsets of GATT members. Countries will have to be members of the MTO to benefit from any of the Uruguay Round results. 45 THE INTERACTION OF ENVIRONMENT AND DEVELOPMENT POLICIES (Issues paper prepared by staff of the World Bank in consultation with staff of the International Monetary Fund) Summary and Issues for Discussion This issues note is intended to help focus ministerial discussion of the accompanying paper ("The Interaction of Environment and Development Policies") at the April 28 meeting of the Development Committee. (i) Drawing on the analysis in the forthcoming World Development Report, the paper discusses a number of priority areas of national environmental concern, including those related to clean water and sanitation, air quality, the productivity of soils and water-related problems of agricultural development, and the loss of natural habitats and biodiversity. It also focusses on several global environmental priorities. Do Ministers agree on these priorities, given the demonstrated impact they have on large numbers of people. especially poor people. in the developing world? (ii) The paper argues that there are close links between the programs and policies required for environmental protection at the national level and those required for the pursuit of other key development objectives. Do Ministers agree that the adoption of a range of appropriate policies by developing countries could help to mitigate the costs associated with promoting environmentally sustainable development? Given the close links between development and the environment, do Ministers agree that it is generally preferable to assist developing countries in their environmental protection initiatives primarily through the work of existing development institutions, rather than by setting up separate funding channels earmarked for specific environmental protection purposes? (iii) The paper argues that implementation of appropriate policies by developing countries could substantially mitigate the costs of environmental protection and that, moreover, many of these costs should---and would in any event---be borne by the private sector. However, it points out that incremental costs of promoting sustainable development are still likely to be high and justify additional external finance on concessional terms for low-income countries. In this connection, the paper discusses the important role played by the International Development Association (IDA) in helping the recipients of its resources attain their national environmental objectives as well as other development priorities. Do Ministers agree that IDA's growing enviromnental work justifies a special increase in IDA funding---i.e.. beyond the objective of an increase in real terms to accommodate new and reactivating members? If such a special environmental increment to the volume of IDA resources is warranted, would Ministers agree that making a case for such funding outside the usual allocations for IDA could help augment individual donors' IDA contributions? (iv) The paper also discusses the important role being played by the Global Environment Facility (GEF) in helping developing countries deal with environmental problems that transcend national boundaries. Do Ministers agree that global environmental initiatives require additional concessional funding? 46 Environmental and Development Policies INTRODUCTION' Recent years have seen an intensified awareness of the environmental aspects of development, and of the close linkages between policies for promoting sustainable development and those aimed at attaining other priority development objectives---including accelerated rates of economic expansion and the reduction of global poverty. This awareness has been reflected in the work program of the Development Committee, which has discussed environmental issues and their implications for the World Bank's work in virtually every meeting since September 1986, frequently on the basis of issues papers and progress reports prepared by Bank staff. The Committee's deliberations have made an important contribution to international understanding of environmental priorities and the interactions between grovwth, poverty, and the environment. The April 28 meeting of the Committee takes place on the eve of the Earth Summit (United Nations Conference on Environment and Development, UNCED), to be held in Rio de Janeiro in June. This summit meeting will attempt to build political consensus for concerted global action on behalf of environmentally responsible development. The aim is to agree upon a set of actions which can be taken by national governments, international agencies, and concerned nongovernmental organizations (NGOs) to promote development that fully incorporates environmental concerns. The Committee has an opportunity to make a timely contribution to the UNCED discussions by addressing, from the perspective of its mandate, a number of critical issues: * What are the main environmental priorities at both the national and global levels, and how are they related to other key development objectives? - What policies--of developing countries, industrial countries, and the international community--are necessary to attain these priorities? * What resources will be required, and how might they be mobilized and allocated? * How should the process of promoting sustainable development be managed, nationally and globally? * What roles should the international financial institutions play? 1 Note: This paper was prepared by Robert L. Ayres of the International Economic Relations Division, External Relations Department, in consultations with the staffs of the Environment Department and the 1992 World Development Report, World Bank, and by Michael Edo of the Exchange and Trade Relations Department and Ved P. Gandhi of the Fiscal Affairs Department, International Monetary Fund. 47 Environment and Development Policies This paper is intended to support ministerial discussion of these and related issues. The following sections of the paper discuss (Part II) the principal environmental priorities and their links to other development objectives; (Part III) the policy requirements in developing countries implied by pursuing environmental objectives in tandem with those of growth and poverty reduction, including the links between such policies and domestic resource mobilization; (Part IV) the role of external finance in helping developing countries to attain their environmental goals and to contribute to the resolution of global environmental problems; (Part V) a number of specific issues, largely of a financial nature, likely to occupy a prominent place in the UNCE,D dialogue and their relevance to the World Bank; and (Part VI) the implications of the foregoing for the activities of the Bank and IMF in the environmental field. ENVIRONMENTAL PRIORITIES In considering environmental priorities, it is essential to stress that they should not be viewed as separate from long-standing development objectives. Examples of the synergies between environmental and other development priorities are numerous and varied. The Committee, for example, has long emphasized the many reciprocal relationships between environmental protection and poverty reduction. Efforts to provide agricultural extension and credit to the rural poor, primary education, and the provision of sanitation and water supply to urban squatter settlements and poverty-stricken rural areas are both environment-enhancing and poverty-reducing initiatives. Family planning programs are another example. In the 1990-2030 period, the world's population is likely to grow by some 3.5 billion, with 90 percent of the increase projected to occur in ideveloping countries. Rapid population growth exacerbates the vicious circle of poverty and environmental damage. Human resource programs need to be more adequately provided---for both environmental and poverty-reduction reasons. Improving education for girls, for example, may be the most important long-term "environmental" policy, since recent evidence provides convincing documentation of the strong links between education and reduced fertility. Yet another example of the close ties between environmental and broader development objectives is seen at the macroeconomic level. Research and experience demonstrate the relationships between the efficiency of total resource use and sound environmental management. These and other examples demonstrate the importance of situating any discussion of environmental priorities within the broader context of overall development objectives. (It stands to reason, therefore, that any discussion of the financing requirements for attaining environmental priorities must be similarly situated.) The forthcoming World Development Report discusses a range of environmental priorities in considerable detail. Some of these are essentially domestic concerns, a number are more global in scope, and still others blur the distinction between the two. As a general proposition, it can be argued that inadequate attention is often paid to national environmental problems within developing countries which, from their standpoint, are frequently the most pressing. The magnitude of these local problems is enormous. Some indications of their extent are the following: Clean Water and Sanitation. One billion people in developing countries have no access to clean water and 1.7 billion lack access to sanitation. The effects of unsafe water on health are dramatic: it is a major contributor to the 900 million cases of diarrheal diseases annually, which each year result in the deaths of 5 million children in the developing world. 48 Envronmental and Development Policies Air Ouality. About 1.2 billion people living in urban areas of developing countries are estimated to be breathing air that does not meet the clean-air standards of the World Health Organization (WHO), in large part because of high concentrations of lead from vehicle emissions. If emissions could be reduced so that WHO standards were met everywhere, an estimated 300,000 - 700,000 lives could be saved each year. Moreover, hundreds of millions of poor people, especially women and children, suffer from, indoor pollution as a consequence of using biomass fuel. The effects on their health are equivalent to srnoking several packs of cigarettes per day. Soil. Water and Agricultural Productivity. Continued degradation of productive resources in rural areas is a widespread and growing problem. Soil degradation is resulting in stagnation or decline of crop yields in parts of many countries, often as a result of farming on fragile lands from which the poorest farmrlers attempt to wrest a living. Soil erosion is a rapidly growing problem in many countries. Even where erosion is insignificant, however, agricultural areas are being affected by other problems of nutrient, physical, and biological depletion of soils, as well as irrigation-related problems of salinization and waterlogging. Natural Habitats and Biodiversity Loss. Forests (especially moist tropical forests), coastal and inland wetlands, coral reefs and other ecosystems are being converted or degraded at historically high rates. Tropical deforestation in developing countries during the 1980s occurred at a rate of 0.9 percent per year. The loss of such forests not only can have severe ecological and economic costs--lost watershed protection, local climate change, lost coastal protection and fishing grounds--but can also adversely affect people's lives in a more direct way. African women have to walk farther for fuelwood, indigenous forest dwellers in the Amazon have succumbed to settlers' diseases, and 5,000 villagers in the Philippines were recently killed by flooding caused in part by deforested hillsides. Many animal and plant species are under threat of extinction because of loss of their habitats. The preservation of biodiversity is both a national priority in many countries and a global challenge of increasing proportions, since global climate change and species extinction at the national level are inextricably related. Models that link species extinction to habitat loss suggest that the possibility of rapid rises in the rate of extinction--to levels approaching those of previous mass extinctions--will be difficult to avoid in the next century unless current rates of deforestation and other habitat loss are considerably slowed. Global Atmospheric Issues. A substantial number of environmental issues are global in nature, including ozone depletion, "global warming," and the protection of international waters including both freshwater and marine resources. Increasing emissions of carbon dioxide and other greenhouse gases raise average temperatures on earth. The size of the effect remains unclear, but the best available judgment is that average world temperatures are likely to rise by 1.5 to 4.5 degrees Celsius by the second half of the next century. There is even more uncertainty about the consequences than about the extent of global warming. While recent research has reduced fears that icecaps might melt, or that the sea level would rise precipitously, there are still grounds for concern. Low-lying nations are at risk, and there is a concern that forests and ecosystems may not easily adapt to shifts in climatic zones. Costs will be unevenly distributed because climate changes will not be uniform, and agriculture, the most climate- sensitive part of the economy, differs in importance from country to country. Nonetheless, poorer countries, with many of their people at subsistence level, are likely to find it harder to absorb and adapt to these changes. 49 Environment and Development Policies REQUIRED DOMESTIC POLICIES AND THE IMPLICATIONS FOR DOMESTIC RESOURCE MOBILIZATION The forthcoming 1992 World Development Report examines the opportunities for achieving substantial improvements in priority enviromnental areas at the national level through the adoption and implementation of a range of required policy reforms on the part of developing countries. Currently, inadequate user charges for water and energy, huge subsidies for electricity production and water supply, inappropriate tax policies, and other distortionary policies in many countries are severely impeding the attainment of national environmental objectives. Key environmental problems cannot be addressed without reforms of such policies in many countries. The aim should be to reduce economic inefficiency, to remove the bias against the environment implicit in such policies, and to leave governments financially more capable of meeting the public requirements of good environmental policy. Many policies which are beneficial on macro- or microeconomic efficiency grounds are also beneficial for environmental protection---they produce less waste, use fewer raw materials, and promote resource-saving technological innovations. The set of "market-friendly" policies elaborated upon in last year's World Development Report and subsequently endorsed by the Development Committee at its meeting in Bangkok in October, 1991 will facilitate improved environmental management. Costs can also be reduced by choosing standards appropriately and concentrating on those options with the highest net benefits; choosing instruments that encourage producers and consumers to respond flexibly and cost-effectively; preventing damage from the outset and avoiding heavy clean-up costs later; and building pollution prevention into new instruments rather than fitting it on later. Costs incurred in strengthened efforts at environmental protection should be reflected in the prices of final products and services. Appropriate pricing policies would make environmentally damaging practices and products less profitable to producers and less attractive to consumers, make environmentally desirable ones more profitable and attractive, and thereby bring about a greater convergence of private and social interests. From a financial perspective, the great advantage in applying these principles would be to make environmental policies more affordable, and to attract private investment (and its associated technical and managerial skills) into the resolution of environmental problems. Thus, a major role for the public sector is to provide appropriate policies and incentives to facilitate the private sector's involvement in promoting environmentally responsible development. In addition, public sector investments for infrastructure, including power, will be substantial and will need to be more environmentally responsible. The public sector would remain responsible in most countries for the provision and maintenance of such essential services as potable water and disposal of urban waste. A large public sector role may also be required in efforts to correct for past environmental deficiencies. In addition, governments will have responsibilities in environmental monitoring and research including agricultural research and extension and technological research and development; environmental education and training; the protection of forests, wildlife, and natural habitats; and the establishment and maintenance of national parks. The adoption of a range of appropriate policies by developing countries will mitigate the costs of environmental protection initiatives at the national level. Moreover, where increased investment is necessary, it would be substantially paid for by those investing. Fortunately, many investments would 50 Environmental and Development Policies begin to pay for themselves within a few years either through improved productivity, as with soil conservation, or through improved health and welfare, as with investments in sanitation and water supply and several forms of industrial pollution control. It is not possible to estimate with accuracy the costs of moving toward less damaging patterns of development. Judgments need to be made on the pace of incorporating improved practices and technologies and on the definition of "environmental" expenditure. The iforthcoming World Development Report makes indicative estimates of expenditures required in order first to stabilize and then to reduce pollution and damage. Estimates are incremental over existing trend expenditures. Rough estimates are made for developing countries as a whole for: accelerated coverage of sEnitation and clean water, a phased incorporation of best-practice pollution reduction technologies, raising female school enrollment rates to those of males, doubling expenditure levels on family planning programs, improving coverage of agricultural extension and research, undertaking necessary investment in soil protection, and improved protection of forests and natural habitats. The analysis conducted in the WDR concludes that incremental expenditures on all these initiatives are likely to amount to 1.5-2.5 percent of developing country GDP, an amount likely to range between $75 and $100 billion per year by the end of the 1990s (in 1990 prices and exchange rates). However, annual GDP of developing countries in 2000 is projected to be over 50 percent higher in real terms than in 1990, and the indicative calculations for incremental investment needs given above would be equal to about 4-6 percent of this increased income. THE ROLE OF EXTERNAL FINANCE A substantial proportion of the additional financing requirements of environmental investments to deal with national problems can be met from increased domestic savings-- especially in many middle- income countries. An expansion of private and official capital flows from external sources will also be required, however, the latter primarily for low-income countries with already severe constraints on domestic resources. To these requirements for external finance must be added those stemming from the necessity of dealing with environmental problems of a global nature which are appropriately considered the responsibility of the international community. Again, it is not possible to estimate with precision how much of the required increase in expenditures (i.e., $75-100 billion per year in 1990 prices and exchange rates) by the end of the decade would need to come from foreign savings and, of this amount, how much would need to be supplied on concessional terms. The amount of additional concessional finance required is likely to be large, however, if the full agenda of national and global environmental priorities is to be adequately funded. Even if only one-fourth of the estimated additional expenditures would have to come from external finance on concessional terms, the amount required (approximately $19-25 billion per annum) would represent about 25-33 percent of the projected annual volume of concessional flows to all countries from all sources by the end of the decade (which would be about $76 billion in 1990 prices and exchange rates, assuming 2 percent per annum growth in official development assistance from 1990 to 2000). With these considerations in mind, how might external finance contribute toward meeting the requirements for attaining both national and global environmental objectives? Private Financial Flows. Expanded private investment is needed to facilitate the incorporation of environmentally benign practices into all production and infrastructure services. Access to commercial financial markets coupled with increased foreign investment will be required to enable the technology transfer embodied in capital imports. The additional costs required for sustainable development need not 51 Environment and Development Policies be completely or even preponderantly financed through official support, especially in middle-income countries, because many of the private investments required should be profitable. The encouraging restoration of access to international capital markets on the part of middle-income countries like Chile, Mexico, and Venezuela needs to be replicated in a much wider range of countries. This will, however, require the continued implementation of appropriate adjustment policies on the part of borrowing countries and would be especially facilitated by policies to raise savings rates, especially those in the public sector. Further debt and debt-service reduction initiatives are also still required for many countries, as are innovative financing mechanisms such as debt-equity and debt-for-nature swaps. (See the progress report on implementation of the debt strategy prepared for this meeting of the Development Committee.) Official Assistance. Meeting national environmental challenges in low-income countries will require additional concessional assistance from abroad. The volume of official development assistance (ODA) has been more or less stagnant, however, for the past decade. It is vital that donors, even those experiencing their own financial stringencies, make renewed efforts to enhance overall ODA volume. Announced and projected reductions in military expenditures could free up sizeable resources for this purpose. National targets for the expansion of donors' aid volumes have also proven extremely useful in a number of countries. At the same time, development assistance programs need to be designed to exploit the synergies among growth, poverty reduction, and environmental protection (see. para. 5) to maximize their cost-effectiveness. Enhanced efforts at aid coordination would stretch limited aid resources and ensure their greater effectiveness. By the same token, recipients of concessional resources need to utilize them more effectively in the pursuit of all development objectives, including that of protecting the environment. There is a strong case for providing additional concessional finance in support of global environmental activities, especially if the international conventions on biodiversity and climate change move forward. Additional finance will be required to allow developing countries to meet their obligations under the conventions to fund the incremental costs of achieving the global environmental benefits. In the absence of such funding, developing countries have less incentive to undertake actions in support of the global environment. Nevertheless, there is often a clear link between national and global actions. Global warming is an example. Strategies to reduce greenhouse gases will lie primarily in the energy and transport sectors. These will include a mix of investment and policy reform including pricing policy. Highest priority will need to be given to policies which have a global benefit but are also economically justified on purely national grounds. Examples abound but are particularly relevant in the field of energy efficiency. The need for policy reforms is certainly not limited to developing countries. Per capita consumption of fossil fuels in industrial countries is about ten times greater than in developing countries, and in many countries coal, the fuel with the highest carbon content, is the least taxed. Simply on the grounds of raising tax revenue in the least distortionary manner and improving local air quality, this bias in favor of coal should be removed. Other global environmental initiatives include those required to protect international waters and rivers and critical areas of biodiversity, including habitats of global importance such as wetlands and tropical forests. Strategies involving national, regional and global action will be needed. Understandably, poor countries often do not consider biodiversity protection as a key national priority and, in the absence of additional concessional assistance from abroad, would not place it on their development agenda. 52 Environmental and Development Policies THE WORLD BANK AND THE UNCED DIALOGUE The dialogue among all concerned parties on the interaction of environmental and development policies has been taken up in a number of recent fora, most notably in the Preparatory Committees for UNCED. As the name implies, UNCED is intended to look at the links between environmental and - development programs and will seek to identify the additional needs, financial and otherwise, which are likely to arise out of an agenda for environmentally responsible development. The work of the Preparatory Committees has been marked by considerable debate between industrial and developing countries, and within groups of each, about the volume of additional external funding required for environmental protection purposes, the balance to be struck between meeting global and local needs, the appropriate modalities for channeling assistance to recipient countries, and a range of nonfinancial issues including those related to technology transfer, institutional mechanisms for managing environmental initiatives, and coordination arrangements among the concerned parties. A number of issues likely to be the focal point of discussions are of direct relevance to the World Bank's work. Several of the most important are discussed here. While there is widespread agreement that additional concessional resources are required and could be efficiently used in support of environmentally responsible development programs, donors face difficult choices about the priority associated with this incremental funding relative to many other competing demands on aid budgets. It is highly probable, however, that decisions will be made at UNCED to proceed with some new funding initiatives. It is important that programs for environmental protection and those for meeting other priority development objectives should be operationally linked to ensure that consistent approaches are adopted. This suggests that programs to help developing countries meet their national environmental goals should be implemented primarily by development institutions such as the World Bank Group, the regional development banks, the United Nations Development Programme (UNDP), and bilateral aid agencies. These institutions will, of course, need to collaborate closely with environment-specific agencies such as the United Nations Environment Program (UNEP) and the secretariats of individual environmental conventions in order to ensure effective programs. Unless there is a convincing rationale for their establishment, however, it would generally be preferable to avoid the creation of new special funds earmarked for specific environmental purposes. While earmarking may be superficially attractive as a way of eliciting additional funds for environmental protection purposes, earmnarked funds suffer from numerous practical problems that make them less attractive instruments than existing development institutions. Many industrial countries fear that in the absence of clear linkages to broader development objectives, such earmarked funds would be speedily consumed without sufficiently guaranteed results. On the other hand, many developing countries see such special purpose funds as likely to be controlled by the donors and accordingly tend to regard them as mechanisms for imposing "green conditionality" or forcing them to adopt environmental agendas largely determined by the industrial countries. Given the emphasis that should be placed on existing institutions, and given the priority needs of low-income recipients, continued strong support for the International Development Association (IDA) will be essential. IDA's crucial role in assisting countries to reduce poverty and the close links between poverty reduction and environmental protection (see para. 5) argue for such support. IDA now supports the preparation of Environmental Action Plans (EAPs) for all its recipients to ensure that environmental 53 Environment and Development Policies objectives are integrated into their overall development programs, and strengthens the recipients' national institutions responsible for environmental activities and monitoring. Projects financed by IDA include measures to mitigate environmental damage wherever needed, and in many cases introduce techniques, equipment or systems that enhance environmental benefits. IDA financing targeted to support specific environmental objectives has grown significantly in recent years. In aggregate, IDA's environmental programs represent a major reorientation of its efforts, comparable in scope to IDA's support for adjustment in the early 1980s. Other donors are increasingly looking to IDA to provide the coordination and leadership in this field in a similar fashion to the role it has played in adjustment support. IDA requires a real increase in its resources to meet its development responsibilities in both current recipients of its resources and potential new claimants on them. In addition, a special enviromnental increment to the volume of IDA resources is warranted to enable IDA to expand its environmental assistance to low- income countries. Indeed, a crucial aspect of any decision at UNCED to provide additional concessional financing to support sustainable development should be a decision to provide a special increase in real terms to IDA. IDA supports recipients in their programs for environmentally responsible development at the national level. While there are difficult problems of definition given the frequently close operational links, the distinction in funding between support for national and global environmental initiatives should be maintained. Concern expressed in the Development Committee for the growing problems of environmental degradation at the global level gave rise to the Global Environment Facility (GEF), a collaborative effort involving the World Bank, UNDP and UNEP in a three-year pilot program to help developing countries address such global problems as greenhouse gas emissions, protection of international waters, preservation of biological diversity, and protection of the earth's ozone layer. Commitments over a three-year period are expected to total about $1.3 billion, and are being administered under a trust fund established by the Bank. The GEF is an important instrument for providing assistance to countries dealing with these difficult problems. At the present time, it is the largest financing mechanism that aims to deal with pressing global environmental problems. To date, about 70 investment and technical assistance projects representing commitments of about $600 million have been prepared by the implementing agencies. Of these, 38 projects representing $272 million address biodiversity, 21 aim to reduce global warming ($232 million), and 11 projects ($98 million) are devoted to work on international waterways. Implementation of projects continues to be designed to maximize the comparative advantage of each institution. At the same time, on-going interagency coordination is effectively taking place to review progress in implementation, related scientific and technical support, associated policy actions in participating countries, and the status of international treaties and agreements bearing on GEF work. Various proposals for the future of the GEF (i.e., following the initial three-year pilot phase) have been the subject of a continuing dialogue among the facility's participants in recent months. These discussions will continue in Washington in the days immediately following the April 28 meeting of the Development Committee. Among the topics being considered are the scope of the facility's future activities, its financing modalities, and governance of the GEF. While different participants quite understandably have different views on these and related issues, there is substantial agreement that the GEF should not replace other funds and that there should be complementarity between the GEF and IDA as well as other bilateral and multilateral development assistance institutions. It is the general view of participants that the facility should maintain its focus on its current four areas of global concern. At the 54 Environmental and Development Policies same time, it should explore the extent to which some activities related to cross-cutting issues such as desertification and afforestation could be considered as eligible for funding under the existing GEF focal areas. A key issue under discussion is the link between the GEF and global enviromnental conventions, such as those currently being negotiated on climate change and biodiversity preservation. Various proposals for institutionalizing these linkages have been discussed, including the proposal that the GEF might serve as the financing mechanism for the global conventions. The GEF's independent scientific and technical advisory panel, composed of recognized experts from developed and developing countries, should continue to play a central advisory role in the facility's strategic planning and scientific linkage with the global environmental conventions. In terms of the future governance of the GEF, participants have recently considered several options. There seems thus far to be broad endorsement of an option calling for incremental modifications in the GEF. Financial issues have received primary attention in this paper because they are of particular interest to members of the Development Committee. However, a wide array of other issues are receiving considerable attention in the various fora preparatory to the UNCED discussions. One of special importance concerns mechanisms for managing and coordinating programs for environmentally responsible development in individual developing countries. Numerous alternatives will be considered at UNCED. One approach deserving consideration is the use of the World Bank-led Consultative Group process or UNDP-led Round Table process to assist countries with program planning and implementation. Both bilateral and multilateral donors have successfully used the Consultative Group and Round Table fora to discuss the relationships between country development priorities and their individual assistance programs. In this context, a useful instrument for helping integrate environmental protection into country development strategies is the Environmental Action Plan. Formulated on a country-by-country basis, EAPs identify the country's most urgent environmental needs in order to assist decision-makers in determining priorities, allocating resources, and building institutional capacity to handle complex environmental issues. THE ROLE OF THE WORLD BANK AND THE INTERNATIONAL MONETARY FUND The forthcoming conference in Rio de Janeiro provides an unprecedented opportunity for exarnining and assessing the current activities of all agencies concerned with promoting sustainable development in developing countries. The following is a brief inventory of the range of World Bank and IMF' activities in this regard. The World Bank As a global development institution, the Bank is uniquely situated to integrate the twin objectives of development and environmental protection through an array of appropriate programs. As described most recently in the FY91 Annual Report on the Enviromnent, the Bank continues to make significant progress in integrating environmental concerns into the full range of its lending and research activities, and in its policy dialogue with borrowers. A significant percentage of the 229 Bank/IDA projects 55 Environment and Development Policies approved in FY91 contained environmental components or components aimed at enhancing energy efficiency. Thirteen projects--totaling $1.6 billion (as compared to $404 million in FY90) and representing close to 7 percent of total Bank lending for the fiscal year--were primarily environmental in orientation. As noted earlier, the Bank is also playing a leading role in efforts to address environmental problems of global concern, in particular through its GEF responsibilities. The Environmental Assessment Sourcebook is a three-volume reference manual that brings together all the Bank's environmental policies and guidelines, amplifies the operational directive, outlines "best practice," and provides standard terms of reference and checklists for enviromnental assessments in all sectors. The cornerstone of the Bank's enhanced environmental activities is Environmental Assessment Operational Directive 4.01 (EA OD 4.01). FY91 marked the first full year in which all projects were given an environmental assessment rating, and the assessment policy has had a substantial impact. Nearly half of all approved loans and credits underwent either a full or limited environmental assessment (Category A or B respectively). This year, attention is being focussed on the experience with conducting assessments and developing procedures for improving the process. A number of other directives help staff deal with the environmental aspects of project design, for example, concerning resettlement, dam safety, and the protection of wildlands. In addition, a new forest policy was approved which provides for a shift in the Bank's emphasis from supporting commercial ventures toward more people-oriented and environment-enhancing initiatives. With the new policy, lending for the protection and environmentally sound development of forests is expected to increase substantially to over $400 million in FY92-95. The Bank has systematized the treatment of environmental concerns in its country economic strategies and adjustment operations. Country Environmental Issues Papers aim to ensure a coherent approach to environmental matters by identifying key problems, their underlying causes, intersectoral linkages, as well as links between the environment and overall development policies. These papers set the stage for more in-depth analyses, which include Environmental Action Plans. (See para. 28). Increasingly, environmental concerns are also being addressed in country economic and sector work. Research and policy development on such issues is conducted in all sectors of the Bank's work, but especially in energy, industry, urban infrastructure, and agriculture. Recent work has addressed global environmental issues, environmental aspects of industrial and urban development, land resource management, energy efficiency, and the integration of environment into national income accounting. Research and experience gained from Bank operations is also being used to improve understanding of the environmental consequences of macroeconomic and sector policies. Such understanding is essential if a concern for the environment is to be systematically built into the mainstream of development planning. The International Monetary Fund I. For its part, the Fund continues to advise member countries on macroeconomic policies which, among other things, encourages them to create market-based pricing and open exchange and trade systems. These are inherently conducive to optimal resource use, including a more economic use of depletable natural resources and safeguarding of the environment. In addition, recognizing that there may be other essential linkages between macroeconomic and structural policies aimed at promoting balanced 56 Environmental and Development Policies and sustainable growth in member countries and their environments, the Fund has, since early last year, allocated staff resources to liaise with other organizations (such as the World Bank, UNEP and the OECD and national governments) with environmental competence and responsibilities, and to monitor relevant research. The aim is to ensure that appropriate material produced outside the Fund is gathered, processed and disseminated within the Fund in support of the Fund's operational work. This would contribute to understanding of the impact of macroeconomic policy instruments on the environment, consistent with the Fund's main objective to achieve domestic and external fmancial stability in a sustainable manner. It would help Fund missions to conduct more informed discussions with governments faced with macroeconomic policy choices with major environmental implications, although there would be no environmental conditionality. 57 PROGRESS REPORT ON THE IMPLEMENTATION OF THE DEBT STRATEGY AND ITS IMPACT ON THE DEVELOPMENT PROSPECTS OF ALL SEVERELY-INDEBTED COUNTRIES (Prepared jointly by staffs of the World Bank and the International Monetary Fund) INTRODUCTION1/ This paper provides a brief review of developments relating to debt since the October 1991 meeting of the Development Committee. It updates the more comprehensive progress report prepared as background material for that meeting.2/ The review covers developments concerning both commercial bank and official bilateral creditors. In addition, at the request of the Development Committee, the paper includes a review of developments concerning the supervisory and tax treatment of commercial bank claims on developing countries. PROGRESS CONCERNING FINANCIAL SUPPORT BY OFFICIAL CREDITORS Recent Developments in Reschedulns For the low-income rescheduling countries, the Paris Club agreed in December 1991 to implement a new menu of enhanced concessions. The particularly acute debt service difficulties of many of these countries had led the Paris Club in 1988 to adopt for the first time a menu with concessional options ("Toronto terms"). The grant element of such reschedulings for nonconcessional debt ranged up to 33 percent in present value terms in comparison with the standard reschedulings. However, as the concessions applied only to debt service falling due over a limited consolidation period, a significant reduction of debt service burdens over the medium term could be achieved under this approach only through a series of repeated consolidations. While this measure helped to alleviate debt burdens, official bilateral creditors recognized that more far-reaching relief was necessary in some cases, particularly for low-income countries. Various proposals were made which provided starting points for further Paris Club discussions on enhanced concessions, including the one put forward by the then British Chancellor of the Exchequer at the September 1990 Commonwealth Conference in Trinidad and Tobago. As originally proposed, the "Trinidad terms" entailed the cancellation of two-thirds of the stock of pre-cutoff date debt and the restructuring of the remaining one-third, to be repaid over 25 years, including 5 years of grace. 1/ Note: This progress report was prepared by Ronald L. Johannes of the Debt and International Finance Division, International Economics Departnent, World Bank, and by Michael Kuhn and Charles Collyns of the Exchange and Trade Relations Department, International Monetary Fund. 2/ "Implementation of the Debt Strategy and Its Impact on the Development Prospects of All Severely-Indebted Developing Countries,7 EB/CW/DC/91119 (August 9, 1991). 58 Debt Strategy The Heads of State and Government of the Group of Seven at the London Summit in July 1991 and the Interim Committee and the Development Committee in October 1991 called on the Paris Club to consider concessions in debt reschedulings for low-income countries going well beyond Toronto terms. Ensuing discussions in the Paris Club revolved largely around the design of a menu of options which would allow creditors to provide concessional debt relief while taking account of their varying institutional and budgetary constraints. The new menu introduced in December 1991 in the rescheduling agreements with Nicaragua and Benin, and subsequently applied in the agreements with Bolivia and Tanzania, increases significantly the degree of concessionality in comparison with Toronto terms and also contains a provision for a possible future stock-of-debt operation. More specifically, with respect to non-ODA debt, the new menu of enhanced concessions involves a 50 percent reduction in net present value terms of the amount of debt consolidated, with a graduated repayjment of principal over 23 years in the two main options (debt reduction and interest rate reduction). In contrast, under Toronto terms the maximum reduction of debt in net present value terms, as mentioned above, was 33 percent. In addition, the nonconcessional option under Toronto terms has been retained to allow a creditor to participate while considering a solution to budget issues associated with concessional debt relief. With respect to consolidated debt service on ODA credits, under enhanced concessions these obligations are rescheduled over 30 years, including a grace period of 12 years, at concessional ODA interest rates, entailing a reduction in the net present value of debt. In addition, the new menu incorporates the provision for local currency debt swaps which was first introduced for low-income countries in June 1991. Accordingly, on a voluntary and bilateral basis, the government of each creditor country may undertake Oimited in the case of non-ODA loans) debt-for-nature, debt-for-aid, debt-for- equity swaps or other local currency swaps. The reschedulings with enhanced concessions contain the provision that the Paris Club would be willing to consider the matter of the stock of debt after a period of 3-4 years. For such consideration, the debtor country must have fully implemented the earlier rescheduling agreements, made comparable debt-relief arrangements with other creditors, and continued appropriate arrangements with the Fund. On this basis, if the adjustment policies needed to establish the basis for a restoration of viability are successfully implemented and sustained, Paris Club creditors would be prepared to provide a definitive resolution with respect to. pre-cutoff date official bilateral external debt, which for the majority of low- income countries represents the preponderant share of total debt. The extent of external support required for a country to graduate from restructurings would need to be tailored to the individual circumstances of each case. Bilateral creditors that do not participate in the Paris Club hold a large share of the debt of several low-income rescheduling countries. For a number of these countries, other bilateral creditors have also provided concessional debt relief, which in many instances entailed a reduction in the net present value of debt well in excess of 50 percent; but in other countries agreements have yet to be concluded. As the Paris Club provides enhanced concessions, it will be important that other bilateral creditors provide comparable treatment. For those rescheduling countries that do not benefit from concessional rescheduling, official bilateral creditors have continued to provide comprehensive cash-flow relief. Since October 1991, the Paris Club creditors have agreed to reschedulings with Brazil, Cameroon, C8te d'Ivoire, the Dominican Republic, Ecuador, Jordan, and Morocco. Of note in the rescheduling with Ecuador, Paris Club creditors 59 Debt Strategy increased the ceiling for local currency debt swaps for nonconcessional credits from US$10 million to US$20 million, or 10 percent of the outstanding credits, whichever is higher. In addition, in early January 1992 official bilateral credito:rs concluded a debt deferral agreement with the former Soviet Union and its successors, which deferred principal payments falling due between December 1991 and end- December 1992 on medium- and long-term debt contracted before January 1, 1991. The prospects for viability for middle-income countries are in general more favorable than those in the low-income countries. It is nornetheless recognized that some lower-middle-income countries other than Egypt and Poland, whose restructurings were in response to unique circumstances, may also need debt relief going beyond traditional Paris Club rescheduling. The July 1991 Economic Summit communique noted the Paris Club's continued examination of the special situation of some lower-middle- income countries on a case-by-case basis. Other Official Support In addition to multilateral reschedulings, many official bilateral creditors have forgiven concessional debt obligations, mainly for low-income countries. While creditor countries have announced no major new initiatives concerning further forgiveness of official bilateral development assistance loans since October 1991, several have continued to implement plans announced earlier. In 1989 and 1990, official bilateral creditors forgave a total of almost US$7.5 billion of ODA claims on low-income countries, an amount equivalent to about 13 percent of ODA claims and 6 percent of the total end-1990 debt of severely indebted low-income countries (excluding Nigeria, whose debt is mainly on commercial terms). Official creditors continue to support heavily-indebted countries through the provision of new loans, credits, and grants. In middle-income countries, this support is mainly in the form of officially- supported export credit cover, loans from international financial institutions, and IMF drawings, for countries that are undergoing adjustment. In 1991, official flows accounted for almost one-half of total net long-term resource flows to these countries. In low-income countries, the bulk of new official financing is in the form of grants and concessional loans. Bilateral donors continue to provide concessional assistance through the World Bank's Special Program of Assistance (SPA) for debt-distressed countries in Sub-Saharan Africa. Currently, 24 countries are eligible fo:r SPA support. The program, now in its second three-year phase (1991-93), is expected to average about US$1.7 billion per year in disbursements of cofinancing and coordinated financing of IDA credits. These funds, mostly in grant form, are intended to be additional to traditional development assistance flows to these countries. Commitments by IDA to 36 low-income countries in the form of quick disbursing structural and sectoral adjustment credits, plus the supplemental adjustment credit program (the so-called Fifth Dimension) over the period 1986 to date totalled US$6.9 billion (US$5.5 billion for countries in Sub-Saharan Africa), and disbursements over the same period totalled US$5.9 billion. The IMF provides concessional support to low-income countries with protracted balance of payments difficulties that are undertaking adjustment programs through its Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF). Since the establishment of these facilities, the Fund has committed a total of US$5.8 billion to 37 countries (US$3.5 billion for 60 Debt Strategy countries in Sub-Saharan Africa), of which US$4.3 billion has been disbursed. The Fund Executive Board has recently decided to add 11 countries to the list of countries eligible for ESAF support. PROGRESS CONCERNING DEBT TO PRIVATE CREDITORS Recent Developments in Commercial Bank Debt Restructuring Following the modification of the debt strategy to allow for official support of debt reduction operations, in 1989 and 1990 a significant number of heavily-indebted developing zountries reached agreement with commercial creditors on debt restructurings, including Costa Rica, Mexico, Morocco, the Philippines, Uruguay, and Venezuela. In 1991, progress toward conclusion of bank packages was relatively slow, however, and only Niger, Mozambique, and Nigeria completed such packages. The Niger and Mozambique agreements completed in March and December 1991, respectively, involved buybacks of the bulk of bank debt at a high discount, while the Nigeria package, signed in December 1991,, involved a menu of options including a buyback and a par exchange for reduced interest bonds and was financed out of Nigeria's own resources. In addition, in February 1992, the Philippines reached agreement with bank creditors on a term sheet for a financing package including a menu of options, which would provide a comprehensive restructuring of the bank debt remaining after the 1990 buyback. A number of countries continue to be at various stages of negotiations on debt-restructuring agreements with commercial banks, most of which would include debt- and debt-service reduction options.2 Official support, including from the Fund and the Bank, has played an important part in financing the commercial bank debt-restructuring packages that have been concluded. This support has been provided to countries pursuing strong economic policies where the implementation of market-related debt reduction has been assessed as contributing to the restoration of economic viability. Consistent with the guidelines for support of such operations, the terms of the buybacks and debt exchanges that received such financing were broadly consistent with prevailing secondary market conditions. The debt operations for Mozambique and Niger were financed in part from the IDA Debt Reduction Facility, which was established in 1989 specifically to provide grant assistance to low-income countries seeking to reduce long-term debt to commercial banks. Bilateral donors also provided significant grant support for these two operations. The slow progress in the negotiation of commercial bank debt restructuring packages over the past year has reflected in part the fact that many of the remaining cases are characterized by severe fiscal and external imbalances and weaker records of policy implementation. In such circumstances, it is difficult to miobilize sufficient financing to support "one-shot" restructuring operations. Moreover, in a number of countries, growing interest arrears have compounded negotiating difficulties. Comprehensive solutions in mlany of these cases may require substantial time and will depend importantly on the debtors' sustained policy efforts. In the interim period, making progress in negotiations is likely to require a phased and flexible approach, which may involve interim payments to banks and sequencing of market-based debt- reduction operations. In this regard, a resumption of limited debt-service payments to banks by Argentina and Brazil and the down payments on arrears by Brazil and Poland in 1991, have served to establish a framework conducive to more comprehensive negotiations. 61 Debt Strategy For low-income countries in particular, the slow progress toward debt-reduction agreements may have reflected some reluctance on the part of banks to agree to terms involving high discounts that could set precedents for other cases. However, banks may also be generally less interested in reaching agreement on operations with countries in which their exposure is relatively small and highly provisioned. In some cases, debt conversions have provided a useful tool for making progress toward lowering external indebtedness prior to or in place of a comprehensive restructuring, particularly where the potentially adverse macroeconomic effects can be contained. The overall pace of such conversions slowed in 1991, however, after an acceleration in 1990 associated with the Argentine privatization program. The most active countries in this area in 1991 were the Philippines and Mexico, reflecting the resumption of debt-equity programs and debt conversions in the context of privatization. A number of countries--- particularly those in the low-income category---have participated in debt-for-nature and debt-for- development swaps (mainly for education, health and agriculture), especially arranged by international agencies such as UNICEF and the World Wildlife Fund, although, to date, the amounts involved have been relatively small. Spontaneous Capital Market Financing The process of market re-entry by developing countries that have experienced debt-servicing difficulties gathered momentum in 1991. Several countries that had attained a degree of access to international capital markets in 1989 and 1990---including Chile, Mexico, and Venezuela---attracted increasing volumes of flows on improving terms, as markets responded to sustained implementation of adjustment policies in combination with lowered debt servicing burdens. Mexican borrowers in particular benefitted from declining spreads and longer maturities and have used an increasingly diversified range of instruments. At the same time, both Argentina and Brazil were able to establish a limited degree of access to markets even though the commercial bank debt problems of these countries remained to be resolved. The experience of these two countries may in part have reflected improved market perceptions about the likely success of their adjustment programs and the prospects for eventual bank debt restructuring, and the greater awareness of the potential rewards to early investors. New private market flows to this group of countries have been almost exclusively channeled through bond and equity markets. Access to spontaneous commercial bank lending has remained extremely limited, essentially confined to trade and a small amount of project finance. The fact that negotiable securities have been the main avenue for re-entry has reflected a number of factors, including expectations that, as in the 1980s, bonds would receive debt-servicing priority over bank debt, the difficult financial position of a number of major international banks, and increasing constraints on bank capital as banks adjust their balance sheets to satisfy the Basle capital adequacy guidelines. In addition, as discussed further in the next section, for banks in some industrial countries, continued high provisioning levels may pose a disincentive to bank lending to countries with recent debt servicing difficulties. Developing countries that have avoided debt-servicing problems have generally maintained their access to capital markets, although there has been a system-wide tightening of market conditions. As in 62 Debt Strategy earlier years, individual country access was affected by shifts in domestic and external conditions. As regional conditions stabilized, Middle Eastern borrowers were able to meet large financing needs, while South Africa regained access to bond markets after a gap of several years. Both Czechoslovakia and Hungary retained access to international bond markets, as authorities persevered with tough economic programs despite difficulties raised by the process of political and economic reform in the region. The Soviet Union and its successor states, by contrast, were not able to gain access to capital market financing in 1991 as domestic conditions became increasingly difficult. In December 1991, agreement was reached with creditor banks on a deferral of principal falling due through March 1992. Developments in Reiulatory and Tax Poliay Since 1982, the supervision of banks in major creditor countries has undergone important changes, partly in response to the onset of widespread debt-servicing problems among developing countries. Over this period, banking regulators in most creditor countries have established guidelines covering loan-loss provisioning of exposure to countries with debt-servicing difficulties. Moreover, in 1988 regulatory authorities in the major industrial countries agreed to implement a framework for regulation of bank capital adequacy, based on the notion of risk-weighted assets, that had been developed by the Basle Committee for Banking Supervision. In addition, the tax implications of provisions against sovereign loans and of losses realized in debt-reduction operations have needed to be clarified. The supervisory and tax treatment of commercial bank loans to developing countries is described in more detaiil in the annex to this report. In assessing the impact of banking regulation and tax policy on commercial banks' developing country claims, it is important to distinguish between debt restructuring and new lending. There were initial concerns that uncertainty over the regulatory and tax treatment of debt reduction might impede bank participation in such operations, but such concerns have not been borne out as national authorities worked closely with banks to clarify the application of national regimes. Moreover, the use of the menu approach to debt restructuring, featuring a variety of debt- and debt-service reduction instruments, has enabled individual banks to tailor debt reduction to their particular circumstances and regulatory and tax environment. In consequence, regulatory and tax treatment do not appear to have served as a significant impediment to bank participation in debt-reduction packages. As regards new bank lending, provisioning requirements for countries that have experienced debt- servicing difficulties imply that new lending bears a substantial capital cost that is likely to have been one of thle factors deterring renewed bank lending to countries that have recently gained access to securities markets. As described in the annex, the degree to which provisioning requirements allow for a differentiation between debtor countries to reflect the improved performance of those countries that have sustained sound policies and emerged from debt restructuring varies among different national jurisdictions. In some cases, there may be scope for more timely recognition of countries' progress toward creditworthiness, whiletaking care notto compromise prudential standards. Such a change should not be expected to spur an immediate resurgence of bank financing to these countries, but would help set the stage for a gradual resumption of bank lending in appropriate circumstances. In practical terms, banking authorities might consider more frequent revisions of country-specific guidelines (as done, for example, by the Bank of England's provisioning matrix) or, in countries where provisioning requirements 63 Debt Strategy are against a basket of debtor countries, more frequent reviews of which countries would be included in the list. The application of the Basle capital adequacy guidelines is also likely to affect banks' attitudes to new lending to developing countries. Under these guidelines, in assessing capital adequacy, a risk weight of zero percent is placed on claims on governments of OECD countries or those that have participated in the General Arrangements to Borrow with the IMF and a 100 percent risk weight on all other countries (unless the claim is short-term or funded in the debtor's national currency). The application of a risk weight of 100 percent risk on medium- and long-term loans to most developing countries raises the funding costs for such loans, and is therefore likely to imply---other things being equal---that such countries have access to bank credits on somewhat less favorable terms than countries with a zero percent risk weight. It should be recognized, however, that there are many factors that affect the pricing of syndicated bank credits, and in some recent instances countries with a 100 percent risk weight have obtained bank credits on terms not substantially worse than those obtained by countries with a zero percent risk weight and with similar economic and political characteristics. In view of the difficulties in disentangling causes and effects in bank lending decisions, it is difficult to find firm evidence that high-risk weight under the Basle capital adequacy guidelines has in itself been decisive in excluding a country from market access. Another issue concerns the favorable treatment given to short-term loans under the Basle guidelines. This lower risk weight may be a partial explanation for the fact that short-term trade credit has been almost the only form of spontaneous commercial bank lending to countries emerging from debt servicing difficulties. It may be noted, however, that such treatment could lead to problems if it were to encourage a general pattern of funding of long-term investments through short-term flows, which was one of the factors behind the emergence of the debt crisis in the early 1980s. It has been suggested that consideration could be given to alternative weighting schemes in which greater differentiation would be provided for risk weights for developing countries, and to reduce the incentive favoring short maturities. Though this question is beyond the scope of this paper, in considering possible modification of the Basle guidelines, it should be noted that the guidelines were intended to provide broad-brush minimum standards, and that an effort to obtain a consensus on an alternative, particularly one involving more finely-tuned credit ratings, would likely be a protracted process raising difficult technical and political issues. CONCLUDING REMARKS The objective of the debt strategy remains restoration of access to spontaneous official and private flows and attainment of external viability while achieving satisfactory rates of growth. The keys to achieving these objectives lie in the sustained implementation by the debtor country of sound macroeconomic and structural policies, and the provision of adequate external financing in support of the adjustment process. In view of the heavy burden of debt faced by many countries and the disincentive effects which may arise, it has been recognized that external support may in many cases need to include substantial debt relief, including a significant reduction of debt stocks. Accordingly, since 1989 official support has been available to finance voluntary, market-based restructuring of commercial bank debt for those countries 64 Debt Strategy pursuing appropriate policies. Moreover, official bilateral creditors have steadily adapted their debt relief practices in ways that have increased the flexibility of external support. A major step forward in recent months has been the agreement by Paris Club creditors in December 1991 to provide enhanced concessions on rescheduling for low-income countries, going well beyond the debt relief granted under Toronto terms. The menu of enhanced concessions incorporates a reduction of 50 percent in the net present value of the debt service rescheduled over the consolidation period. Creditors also indicated that they would be willing to consider the stock of pre-cutoff date debt after a period of 3-4 years. Similar concessions on the part of other official bilateral creditors would be essential. The availability of such terms combined with strong adjustment efforts should help resolve the debt servicing difficulties of many low-income countries, and allow them to complete the transition to viability. However, even after taking account of concessional support now available, some low-income courntries with particularly difficult debt situations may nevertheless continue to experience difficulties arising from their debt burden. With respect to some of the lower middle-income countries that have uncertain prospects for viability, there is a continuing need for creditors to examine their situations and consider how best to provide external support on a case-by-case basis. One of the clear successes of the debt strategy has been that a number of middle-income countries that have maintained strong adjustment efforts and completed restructuring of their commercial debt have succeeded in regaining a degree of access to international capital markets. This is evidenced by the rising volumes of spontaneous flows on improving terms and the increase in the secondary market prices on their remaining bank claims. For countries that have not yet completed negotiations on their debt to banks, progress will be importantly contingent on putting in place and sustaining comprehensive adjustment policies. Resources from multilateral and bilateral sources will continue to play a critical role, on a case-by-case basis, in supporting adjustment efforts and, where appropriate, supplying resources to finance debt-reduction operations. Though the debt strategy has been adapted to the varied circumstances of debtors and creditors, the remaining unresolved cases continue to pose significant challenges. Experience indicates that the primary responsibility will fall on the debtor country to establish the credibility of its adjustment strategy. In this regard, it is important to convince creditors that sufficient real resources are being generated on a sustainable basis to reduce transfer risk, and that credible domestic policies are being implemented. In particular, policies should seek to ensure that the primary fiscal balance attains a sustainable level sufficient to service domestic and external debt. An important aspect of debt- and debt-service reduction operations in highly-indebted countries is their contribution to the creation of a more sustainable fiscal situation. Critical policy actions needed to facilitate private capital inflows thus lie in a reduction in domestic financial imbalances through improved budgetary performance and prudent monetary policies, reinforced by measures to increase the efficiency of the economy and its supply response (including appropriate interest and exchange rate policies), backed where necessary by appropriate support for debt- and debt-service reduction. With such policies and support in place, specific techniques aimed at addressing domestic and foreign investors' risk concerns may accelerate the process of capital repatriation and increase foreign direct and portfolio investment inflows. Countries that have maintained sound financial policies and avoided debt rescheduling or restructuring have generally retained spontaneous access to international capital markets, including some countries with heavy debt burdens that have been able to endure external shocks and have succeeded in 65 Debt Strategy maintaining full debt service payments. The preservation of market access is of vital importance, as experience has underscored that the costs of rescheduling and loss of market access are high and often long lasting. On the basis of this experience, it would seem that commercial debt restructuring by a number of heavily-indebted countries has not had adverse consequences for the market access of countries that have sustained sound economic and financial policies and where future business prospects are regarded favorably. The high responsiveness of credit markets to changed conditions in individual countries underlines the importance of debtors responding promptly to address adverse developments, and that external support be made available promptly in support of adjustment programs. In addition, it remains important to pursue prudent debt-management policies and to avoid large build-ups in debt, particularly of short maturities, that can quickly lead to strains when market conditions turn less favorable. Since the onset of widespread debt-servicing problems among developing countries in 1982, the supervision and tax treatment of banks in major creditor countries have undergone important changes, partly in response to the debt problem. The evidence to date suggests that supervisory and tax policy has not served as an impediment to banks' participation in debt-reduction packages. However, the more stringent provisioning and capital adequacy requirements that are now in place do appear to have been one of the factors that has deterred new bank lending to countries seeking to regain market access. While care would be needed to avoid compromising prudential standards, implementation of supervisory guidelines that differentiate between countries and provide for a reduction in requirements for those countries that have made sustained progress toward re-establishing their capacity to meet debt-servicing obligations could assist such countries in regaining access to bank lending. 66 Debt Strategy ANNEX: SUPERVISORY AND TAX TREATMENT OF COMMERCIAL BANK LOANS TO DEVELOPING COUNTRIES Loan-loss Provisioning Since the onset of the debt crisis in 1982, banking regulators in the main creditor countries have encouraged commercial banks to improve standards of international risk assessment and to raise the level of loan-loss provisioning of exposure to countries with debt servicing difficulties. These efforts have been reflected in the building up of provisioning levels by creditor banks, often to levels in excess of strict regulatory requirements as markets have rewarded high provisioning as an indication of financial resilience. The regulatory treatment of provisioning varies in important ways between national jurisdictions (Table 1). Provisioning regulations may be either mandatory, indicative, or voluntary. Mandatory minimum levels of provisioning are specified in the United States, France, and Canada. For instance, in the United States, "allocated transfer risk reserves" (ATRRs) are set country-by-country by an interagency committee, the Interagency Country Exposure Review Committee (LCERC). Recently, the Italian banking authorities have indicated their intention to introduce a mandatory minimum level of provisioning against exposure to a list of countries. By contrast, supervisors in Japan and the United Kingdom provide guidance on appropriate levels. For instance, in the United Kingdom, the Bank of England's matrix specifies recommended ranges for provisioning levels country-by-country, on the basis of debt servicing history and economic position. In Japan, until March 1991, the Ministry of Finance set a maximum allowable level of specified-overseas receivables that could be made against countries on a list which was not publicly disclosed. Since that time, however, the statutory cap has been abolished, though guidance is still provided. An example of a voluntary provisioning scheme is Germany, where adequate levels of provisions are determined by each bank's management in consultation with external auditors. Banking authorities in the United States and the United Kingdom specify provisioning levels by individual country, whereas those in Japan, Canada, and Switzerland specify averages across countries. Provisioning indications are reassessed relatively frequently in some countries, such as the United States, and less frequently in others such as Japan and Canada. For instance, in the United States, ICERC meets three times a year and has quite often, in recent years, made changes in a country's risk category based on recent developments. Basle Capital Adequacy Guidelines In 1988, the authorities of the major industrial countries endorsed a framework to harmonize capital stamdards for international commercial banks under their jurisdiction, which had been developed under 67 Debt Strategy the auspices of the Basle Committee for Banking Supervision. The Basle capital adequacy guidel]ines set a minimum ratio for core (or Tier-1) capital to risk-weighted assets of 4 percent and for core plus supplementary (Tier-2) capital to risk-weighted assets of 8 percent, both to be attained by end-1992. Agreement to implement the Basle guidelines was driven by two principal motivations. The first was the desire to strengthen regulations covering capital adequacy, particularly in view of the rapid evolution of the international financial system and a perception that the capital base of commercial banks had been eroded. The second was the view that an international harmonization of capital measurement and standards was important to reduce the possibility that any one national banking system enjoyed a competitive advantage as a result of its country's supervisory treatment of capital. Key elements of the Basle guidelines include the definition of capital and the calculation of risk- weighted assets. Core capital comprises equity plus accumulated net income. Supplementary capital comprises undisclosed and revaluation reserves, general loan loss reserves (up to a limit of 1.25 percent of risk-weighted assets), hybrid debt instruments (such as long-term preferred stock), and subordinated debt. Both on-balance-sheet assets and off-balance-sheet exposure are combined to form a total of risk- weighted assets. The combination is achieved by assigning each asset and exposure to a risk category with a pre-assigned risk weighting lying between zero percent and 100 percent. The asset total for the capital test is the weighted sum of the individual assets and exposures. For example, holdings of U.S. Treasury Bills would attract a zero percent weighting, whereas claims on the U.S. private sector would attract 100 percent weighting. Hence, a bank with a balance sheet of US$100 million, of which US$20 million was invested in U.S. Treasury Bills and US$80 million lent to U.S. corporations, would have risk-weighted assets of US$80 million. Other categories of assets are given risk weights of 10 percent, 20 percent, or 50 percent. In setting risk weightings, the Basle guidelines draw a distinction between OECD countries (plus other countries that participate in the General Arrangements to Borrow with the IMF, at present only Saudi Arabia) and all other countries. For claims on central governments and central banks, those on OECD countries receive a risk weight of zero percent, whereas claims on countries outside the OECD receive a weight of 100 percent (unless denominated and funded in the debtor's national currency, in which case they are zero weighted) (Table 2). For claims on other nondomestic public sector entities a risk weight of 20 percent is assigned within the OECD and 100 percent outside. Claims on banks incorporated within the OECD receive a 20 percent risk weighting, whereas those outside receive a 100 percent weighting, unless the claims are of maturity up to one year, in which case they receive the 20 percent risk weight. The implementation of the Basle guidelines through national regulation has been broadly similar across OECD countries, although with minor differences as to what is allowed in capital and what risk weights are assigned to particular classes of assets. One area of significant difference between these countries has been in the differential treatment of general and specific loan-loss provisions. General provisions, made on the basis of general expectation of probable loss but not assigned to specific loans, are allowable in Tier-2 capital (up to 1.25 percent of risk-weighted assets). An exception is Germany, where general provisions are not allowed in the capital base. One type of general provision is hidden reserves, the value of which is not publicly disclosed; such reserves are important to German and 68 Debt Strategy Japanese banks. Specific provisions, made on the basis of specific assessment asset-by-asset of impaired value, usually are not allowable in the capital base. Tax Treatment The tax treatment of loan-loss provisioning against exposure to developing countries that have expeirienced debt servicing difficulties also varies in significant ways among the main creditor countries. In some jurisdictions, including Canada, France, Germany, and the United Kingdom, contributions to such provisions can be applied as tax deductions, in most cases subject to an upper limit corresponding to the level of provisioning indicated by bank supervisors. Elsewhere, in particular in Japan and the United States, general provisions are not tax deductible, although specific provisions, for example the ATRR in the United States and "specified overseas receivables" in Japan may be. With regard to the tax treatment of losses arising from bank participation in debt reduction operations, such losses are generally deductible to the extent that losses exceed tax deductions already claimed on provisions against such losses. There are important differences in detail among the various tax regimes, for example pertaining to the carry-forward or carry-back of losses and the method used to assess the loss arising from a particular operation. 69 Debt Strategy TABLE 1. TREATMENT OF COUNTRY-RISK LOAN RESEAVES ACROSS CREDITOR COUNTRIES .. .. .. . ... .. . . . . .. ... .. ........ " ''" ' " '" ''" ' -'i i' ' ' "' '''''"" ' - .:.~~~~~~~~~~. . .- - . .- . ....... ..............,,..D f ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. --.....-.-,. -.-..-.-.,'-.'':.''... United States 60 percent average, 50- Mandated: percentages If mandated, no; general If mandated, yes; otherwise 55 percent money center vary from country to up to 1.25 percent of no. banks, 70-75 percent country based on risk weighted assets regional assessment by Federal Regulators Japan 30 percent Mandated: provision If mandated, no; general Limited to 1 percent of Average of minimum 1 percent. up to 1.25 percent of rescheduled debt and weighted assets increased exposure 21 United Kingdom 67 percent No mandatory no yes, but case-by-case (4 largest) requirements, but a matrix of recommended ranges that vary from countrsy to country France 60 percent Mandated: provisions up to 1.25 percent yes; but on a case-by-case (3 largest) for a list of countries (temporarily 2 percent) basis for provisioning above based on past industry of weighted assets mandatory level averages for each Germany 60 percent No mandated or no yes; but case-by-case (3 largest) suggested provisions Canada 72 percent Mandated: provisions If mandated, no; general yes; up to 45 percent of minimum 35-45 up to 1.25 percent of percent for the overall weighted assets portfolio. Allocation to each country is left to banks. Source: Jonathan Hay and Mirmaijit Paul, "Regulation and Taxation of Commercial BanJks During the International Debt Crisi,"7 World Bankc Technical Paper No. 158 (W"ashington, D.C., World Bank, October 1991) and further Bank staff updates. 1/ All data are as of end-December 1990 except for Japan which is as of end-March 1991. Reserve levets are given as percentage of developing counsy exposure. 2/Except for provisioning requirement of 50 percent of exposure when a claim has not been serviced for three years. 70 Debt Strategy Annex: Table 2. Basle Capital Adequacy Guidelines - Risk Weights for On-Balanc-Sheet Assets Category 1: (0% weight) Cash (includes gold bullion) Claims on central governments and central banks denominated and funded in national currency Other claims on OECD/GAB central governments and central banks Claims collateralized by cash or OECD/GAB central govermnent securities or guaranteed by OECD/GAB central govermments CategorY 2: (0%. 10%. 20%. or 50% weight at national discretion) Claims on domestic public sector entities, excluding central government and loans guaranteed by such entities. Categorv 3: (20% weight) Claims on multilateral development banks (IBRD, IADB, AsDB, AfDB, EIB) and claims guaranteed by or collateralized by securities issued by such banks Claims on banks incorporated in the OECD and loans guaranteed by OECD- incorporated banks Claims on banks incorporated outside the OECD with a residual maturity of up to one year and loans with a residual maturity of up to one year guaranteed by by banks incorporated in countries outside the OECD Claims on nondomestic OECD public sector entities, excluding central govermnent, and loans guaranteed by such entities Cash items in the process of collection Categorv 4: (50% weight) Loans fully secured by mortgage on residential property that is or wil be occupied by the borrower or that is rented Categorv 5: (100% weight) Claims on private sector Claims on banks incorporated outside the OECD/GAB with a residual maturity over one year Claims on central governments outside the OECD/GAB (unless denominated and funded in national currency) Claims on commercial companies owned by the public sector Premises, plant and equipment, and other fixed assets Real estate and other investments (including nonconsolidated investment in other companies) Capital instruments issued by other banks (unless deducted from capital) All other assets Source: Committee on Banking Regulations and Supervisory Practices, International Convergence of Cavital Measurement and Capital Standards. 71 PROGRESS REPORT ON IMPLEMENTING THE WORLD BANK'S ASSISTANCE STRATEGIES TO REDUCE POVERTY 1NTRODUCTION' In recent years, poverty reduction has been reaffirmed as the central goal of development. From the experiences of the past few decades, a consensus has emerged that regards policies that promote broad-based growth and those that promote human development as equally important elements of progress. This thinking was embodied in the World Bank's 1990 World Development Report on Poverty and in the UNDP's 1990 Human Development Report. Based on country experiences, the 1990 WDR articulated a two part strategy for reducing poverty-first, aiming for broad-based economic growth that generates efficient labor demand and second, improving the access of the poor to education, health and other social services and, thus, to income earning opportunities. The WDR also recommended that social safety nets should be established to protect those who are most vulnerable. The World Bank management has repeatedly emphasized that reducing poverty is the Bank's fundamental objective, and has taken steps to support developing countries more effectively in their efforts to reduce poverty. It has stressed that reducing poverty should be the integral theme of any country's development strategy and, therefore, it should also be central to the design of the Bank's assistance strategies. In the communique of the Spring 1991 meeting, the Development Committee supported the poverty reduction strategy presented in the .1990 WDR and welcomed the Bank's efforts to apply it in its operations. This paper has been prepared in response to the Committee's request for a progress report at the April 1992 meeting on how the implementation of the strategy is proceeding. UPDATING TRENDS IN POVERTY The 1990 WJDR, using data up to 1985, estimated that poverty remained high despite the progress made in many developing countries over the preceding few decades. More recent estimates, which will be cited in the 1992 WDR, indicate that in 1990 over 1.1 billion people lived in poverty in the developing world (calcuiated on the basis that their annual per capita consumption was less than $370 at 1985 prices). (See Table 1.) There was no significant progress in reducing poverty during the second half of the 1980s; with the numbers of poor people increasing at roughly the rate of population growth.2 1 Note: This progress report was prepvared by Helena Ribe of the Poverty Analysis and Research Division, Populktion and Human Resources Departmentt, World Bank. (The IMF and Poverty Reduction section, requested by Executive Directors, was prepared by the Fund's Fiscal Affairs Department.) 2 These estimates are based on national household sample surveys from 31 countries (representing roughly 80 percent of the population in developing countries) and extrapolations using an econometric modelfor 56 additional countries. The proportion of the region's population covered by a household sample survey is on average over 95 percent in Asia and 72 Strategies to Reduce Poverty The incidence of and trends in poverty vary across regions. In South and East Asia, poverty incidence has continued to decline steadily. By contrast, both absolute poverty and its incidence worsened in Sub-Saharan Africa, in the Middle East and North Africa and in Latin America. The incidence of poverty in Sub-Saharan Africa is now estimated to be almost equal that in South Asia, which is the region with the highest poverty incidence.3 But because of population distribution, about half of the world's poor still live in South Asia. Progress on reducing poverty will depend on economic growth and on the effectiveness of country specific strategies. The 1992 WDT)R concludes that by the year 2000, even under fairly hopeful assumptions about economic recovery, there will be over 50 million more poor people than in 1985. But if economic growth is low and recent trends in poverty continue, there could be 200 million more (around 1.3 bi[llion) poor people by then. Unless there is a significant increase in economic growth rates, the 1990 VDR goal of reducing the number of poor by 300 million between 1985 and 2000 is not likely to be met. Trends in social indicators are more favorable. The 1990 WIR indicates that there have been significant long-term improvements in the mortality rate of children under five, life expectancy (which has risen to an average of 62 years) and primary school enrollment (now at 84 percent). The situation in the early to mid-1980s was substantially better in every region than it had been at any time during the previous two decades. Though more recent data are not available, projections for the year 2000, based on the long- term trends in each region, indicate that under-five mortality and primary school enrollment will continue to improve. Still, some countries in South Asia and Sub-Saharan Africa are likely to lag significantly behind the rest of the developing world. This fact, combined with the disturbing trends in poverty described above, are prompting increased international concern about the urgent need to implement more effective strategies for reducing poverty. The rest of this report summarizes what the World Bank has done to date to strengthen its operational efforts towards this goal. ACTIONS IN THE WORLD BANK TO IMPLEMENT THE POVERTY REDUCTION STRATEGY To apply the strategy outlined in the 1990 VDR, the World Bank prepared a policy paper, Assistance Strategies to Reduce Poverty, which was endorsed by the Bank's Board of Executive Directors in January 1991. It has two key elements. First, a poverty assessment should be made in every country to establish whether its policies, public expenditures and institutions are consistent with the goal of reducing poverty and to recommend any necessary changes. Second, assistance strategies should be Eastejn Europe and over 80 percent in Latin America. Estimates are less precise for the Middle East, Northern Africa and Sub-Saharan Africa, where sample surveys have been carried out in countries whose population is only 11 percent of these regions' aggregate population. See details in notes to Table 1. 3 During 1985-90, the number of poor people in Sub-Saharan Africa is estimated to have increased at a compound rate cf 3.3 percent per annum. In the Middle East and North Africa and in Latin America, the number of poor people increased at 4.0 percent and 4.4 percent per annum respectively. 73 Strategies to Reduce Poverty designed to ensure that the Bank's programs support and complement countries' own efforts to reduce poverty. The first round of poverty assessments was to be completed in almost all countries within three years, and periodic updates were to be done thereafter to analyze specific poverty issues in depth. The policy paper stressed that ways should be found to improve the reliability and quality of the available data on poverty. It also recommended that government efforts to reduce poverty should be one of the criteria used to determine the volume of IDA and IBRD lending and that the composition of lending should support efforts to reduce poverty. (See key recommendations of Assistance Strategies to Reduce Poverty in Table 2). To guide Bank staff in implementing this strategy, an Operational Directive (OD) 4.15, Poverty Reduction and the Poverty Reduction Handbook have recently been prepared. The OD provides practical guidelines while the Handbook provides further details and highlights examples of good practice. The Bank's Executive Directors discussed these two documents in draft form at a seminar in December 1991, where they stressed the importance of making the completed poverty assessments available to them, as well as to donors and to UN agencies. They noted that implementing the strategy would have budgetary costs and skill mix implications for the Bank, and they stressed the importance of improving the Bank's implementation capacity, including its ability to promote institutional development. A report on the progress in implementation will be prepared for the Bank's Executive Directors by the end of 1992. As part of this strategy, the Bank is making efforts to improve donor coordination. In September 1991, for example, the Bank discussed strategies to reduce poverty with high level officials from developing countries, from the UN and bilateral agencies, from NGOs and from academia at a Round Table Seminar sponsored by the German Foundation for Development (DSE) in Berlin. In preparing the Handbook, the Bank sought comments from UN agencies and NGOs. The discussion draft of the Handbook was presented at the Bank! NGO Committee Meeting in New Delhi in October 1991 and discussed at a seminar with UN agencies, multilateral and development banks in Washington during November 1991. Some donor agencies have provided inputs and comments on the Handbook. These contributions will help to provide a firmer basis for aid coordination through consultative group meetings and other fora. Examples of donor coordination at the country level resulting from poverty assessments are given in paragraph 32. PROGRESS IN IMPLEMENTATION The following sections outline the progress that has been made in assessing country policies and in designing assistance strategies to reduce poverty. They indicate that poverty reduction is at the center of the Bank's policy agenda and of its operational activities. Poverty assessments are influencing the design of assistance strategies so that they are now based more firmly on the analysis of overall country policies. 74 Strategies to Reduce Poverty Progress in Assessing Countrv Policies Eighteen poverty assessments have been completed since FY89 and two more are scheduled to be completed during FY92. In total, 85 assessments in 82 countries are expected to have been completed by the end of FY95 (see Table 3 and Annex 1). (In fact, most are expected to have been completed by the end of FY94 with only seven assessments scheduled for FY95.) Typically, the assessments consolidate existing data and analysis in order to build up as complete a picture of the poverty situation as possible. Assessments analyze the extent of poverty in the country in question and the consistency of the country's policies and public expenditures with the goal of reducing poverty. They also make reconmmendations for government actions that will generate the kind of growth that creates efficient demand for labor, that will develop human capital and that will improve safety nets. (See details of contents of poverty assessments in Annex 2.) Patterns vary across the Bank's six operational regions, in terms of the number of poverty assessments that have been completed. - Country coverage in East and South Asia, where over two thirds of the poor in developing countries live, is nearly complete (except for countries that have recently become active borrowers) and work on the four assessments scheduled for FY93 (including updates in Pakistan and the Philippines) has begun. Most assessments are fairly comprehensive and include an analysis of the broad policy framework, the social sectors and the effectiveness of specific targeted interventions. Most rely on a fairly good information base, and, in some cases, efforts are under way to improve both the quality of the data and the access to it. * In Latin America and the Caribbean, almost one third of the countries have completed an assessment, mostly focusing on the social sectors.4 In the remaining countries in the region, for the most part, an adequate information base exists; economic work on selected topics has been completed; and comprehensive assessments are planned over the next two years. * In the other three regions (Sub-Saharan Africa, the Middle East and North Africa and Eastern Europe and Central Asia), country coverage is less extensive. Only three assessments have been completed.5 Progress has been constrained by poor data availability and weak institutions and, at times, by political sensitivities. Across all six regions, 65 poverty assessments are scheduled to be prepared during FY93-95. In some countries, preliminary studies and data collection are under way. Many of these assessments will have to be completed using inadequate data and qualitative judgments. Basing assessments on national 4 In cases where the existing poverty assessments do not conform with the requirements of OD 4.15 on Povertv Reduction, the Region is undertaking additional analysis tofill in the gaps, particularfy in the analysis of poverty profiles and the relation of poverty with macroeconomic policies. 5 In many countries where a poverty assessment has not been completed, traditional economic and sector reports analyze selected aspects of poverty. 75 Strategies to Reduce Poverty household survey data may not be feasible in many countries until the second half of the decade. Collecting data, however preliminary, requires considerable resources, and country policymakers will need technical assistance not only to collect but also in many cases to analyze the data and to design strategies. This is a major challenge, as poverty seems to be growing fastest in those countries where knowledge of the problems and the solutions is limited, as is the institutional capacity to implement the solutions. Some topics may need to be given more attention in future assessments and when updating existing ones. These include institutional aspects, ways to improve service delivery and the relationship between poverty and public expenditures other than on the social sectors. Progress in Designing Country Assistance Strategies Reducing poverty is a key objective of all Bank-supported assistance strategies. Nevertheless, where poverty assessments have been completed, they have helped to strengthen the policy dialogue and to develop lending programns that support governments' efforts to reduce poverty. The degree to which the findings of poverty assessments have been reflected in assistance strategies varies from region to region. This is influenced partly by the magnitude and nature of the poverty problem and partly by the capacity to carry out assessments--namely, the availability of information and analysis of poverty and institutional and political factors. Where assessments have not been completed, the Bank's traditional economic and sector reports have often been used to influence the design of assistance strategies, as operational departments collect and analyze data on poverty and address the most severe problems in the context of the country program. In some cases, the conclusions reached in an assessment, once completed, will necessitate changing the strategy, but in other cases they will simply strengthen the approach that the Bank is already taking. South and East Asia. There is a strong anti-poverty focus in government policies and in the Bank's operations in these regions. Most poverty assessments have been completed and, where they have not, substantial background work is proceeding. On the whole, the Bank's lending program is supporting economic restructuring and the reallocation of government spending towards the social services and specific targeted investments. The following country examples illustrate how poverty assessments, whether completed or ongoing, are influencing the policy dialogue and the composition of lending. In India, reducing poverty has long been high on the government's list of priorities. The assessment finds that steady progress is being made, due mainly to rapid economic growth, direct anti- poverty interventions and publicly provided social services. Further progress will depend, however, on far-reaching and often politically sensiitive structural reforms--to address, for example, distortions in the manufacturing sector and in trade and financial policies that threaten sustained and rapid economic growth; and to ensure that existing targeted programs and safety nets are reaching the poor who tend increasingly to be concentrated in specific regions and in specific occupations. In response ta these findings, IBRD and IDA resources have been used to help to restructure and stabilize the economy. The recent structural adjustment loan has focused on reducing trade barriers, reforming public enterprises and improving the financial system. A complementary operation has been proposed that will help to address 76 Strategies to Reduce Poverty the redeployment of public sector workers and that will mitigate the negative effects of the adjustment reforms on the poor. In the Bank's lending portfolio, the share of social sector projects rose from 0.6 percent in FY81-86 to 7.4 percent in FY86-90, and is projected to rise still further to 18.6 percent ($2.6 billion) during FY91-95, including projects in education, safe motherhood and nutrition. In agriculture, lending is targeting resource poor areas, including, for example, five projects in FY92-94 ($550 million) designed specifically to reach poor farmers and neglected and drought prone areas of the country. In Indonesia, the poverty assessment recommends investing in labor-intensive export industries, stimulating non-rice crops and smallholder tree crops to diversify agricultural production and expanding support services. It also recommends expanding access to social services for people living in the outlying provinces. These recommendations are the basis of the Bank's assistance strategy, which aims to reduce trade and domestic distortions and to promote growth in the rural outer islands. Donors are supporting a variety of projects in agriculture, basic education, health, nutrition and water supply, particularly in the outer islands. An important topic that was not covered in detail in the poverty assessment is the role of public expenditure policy in reducing poverty. This is being addressed in subsequent economic and sector work. Pakistan, where an assessment was completed in 1990, has exceptionally poor social indicators even for a low-income country. The Bank has encouraged the government to expand and improve basic social services. It has already indicated to the government that IDA funding is available, primarily for projects in the social sectors and for others that address poverty. The Bank prepared a report identifying the main impediments to progress in the social sectors and suggesting priorities for reform, which was endorsed at the Pakistan Aid Consortium meeting in 1991. This has resulted in the Bank providing the government with technical assistance to prepare a Social Action Plan, which is expected to receive continued support at a forthcoming Consortium meeting. An update of the poverty assessment is scheduled, which will use a recently completed Living Standards Measurement Study (LSMS) and ongoing analysis of public expenditures to evaluate whether the government's policies and incentives and the composition of its public expenditures are consistent with the goal of reducing poverty. In China, where a poverty assessment will be completed in FY92, the ongoing policy dialogue is focusing on improving poverty monitoring at the national and provincial levels, increasing funding for social services, encouraging rural enterprise and agricultural development in poor areas, building rural infrastructure and facilitating labor migration out of poverty stricken areas. These issues have surfaced in the Bank's traditional economic and sector work. The Bank is supporting a number of projects in agriculture, the social sectors and rural infrastructure in the poorest areas. The share of lending for poverty-related projects was about 15 percent in FY85, and this had doubled to some 30 percent, or to some $445 million, by FY91. Latin America. As in South and East Asia, completed poverty assessments in this region are influencing the design of country assistance strategies. In Bolivia, the poverty assessment emphasizes the neecd to maintain a supportive macroeconomic environment and to improve sectoral policies and institutions. It points out that the poorest groups are rural smallholders and agricultural workers of Indian origin and that poverty is fundamentally a problem of low incomes due to low productivity. Better targeting of infrastructure and social services to these households is needed. As a result, the government has given greater importance and more resources to the education and health sectors. The Bank's lending has supported the government's efforts with a number of operations, including recent projects in health, 77 Stregies to Reduce Poveny agriculture Oand titling), urban water supply and structural adjustment (macroeconomic stability and taxation). The Social Investment Fund helps to develop medium-term social development projects, especially in underserved areas, and to strengthen institutions. In Mexico, the assessment finds that poverty is predominantly rural and is associated with past government policies. For poverty to be reduced, market imperfections in agriculture must be removed, the land tenure system reformed and the pervasive urban bias in social and infrastructure spending corrected. Also, programs targeted directly to the poorest groups are essential. Two recent agricultural sector adjustment loans (AGSAL I and AGSAL II) have supported the rationalization of public investment, the privatization of parastatals and a nutrition/health pilot project specifically for the poorest groups. Untargeted subsidies are being eliminated and the present system of targeted subsidies is being improved. Resource are being reallocated towards four of the poorest states through three projects coordinated under the umbrella of the Regional Decentralization Project for the Disadvantaged States. These projects support reforms to decentralize budgetary, management and operational responsibilities from the federal level to the states and to finance physical infrastructure and health care improvements in the poorest states. About two thirds of the poverty, assessments in Latin America remain to be done. In these cases, the Bank's general approach has been to design adjustment programs to lay the basis for sustained output and employment growth while, at the same time, introducing targeted programs in the social sectors to protect the most vulnerable groups. This has meant that countries' own resources have had to be reallocated to support these interventions, for example, by eliminating general food subsidies and replacing them with nutrition and health programs targeted to those most at risk. This has happened in a number of countries such as El Salvador, Mexico, Panama and Venezuela. Another method of targeting assistance to the poor has been by establishing social funds that finance interventions and mobilize donor support in areas such as water, sanitation, basic health, nutrition and employment programs. So far, the Bank has financed such funds in Bolivia, Guyana, Haiti, and Honduras and has supported their prepar- ation in a number of other countries. The region has also developed targeted projects that provide basic social services and infrastructure in rural areas, such as Northeast Brazil and the poorer states in Mexico. Sub-Saharan Africa. the Middle East and North Africa and Eastern Europe and Central Asia. In these three regions, few poverty assessments have been completed, mainly due to inadequate databases and institutional constraints. Assistance strategies, which have had to be designed in the absence of full data and analysis, have a strong anti-poverty orientation. However, poverty assessments are still necessary to confirm that efforts are on the right track or to modify them if they are not. In Sub-Saharan Africa, although only two poverty assessments have been completed, lending strategies reflect broad-based concern with poverty reduction. Many countries have experienced a decade of falling per capita income; the resumption of growth is therefore seen as essential for poverty reduction and remains a high priority. The Bank has supported adjustment programs that reduce explicit and implicit taxation of agriculture and shift the terms of trade in favor of the rural sector, that eliminate regulations that restrict growth of employment and private investment and that redirect public expenditures towards the social sectors and rural areas. The bulk of investment lending consists of projects in primary education, health, family planning and rural development including infrastructure and agricultural extension. At the same time, social action programs, which exist in 12 countries, are 78 Strategies to Reduce Poverty intended to protect the poor during adjustment, while 5 food-security projects have been either approved or are at various stages of appraisal. Although the region has only recently started doing poverty assessments, mainly because of insufficiency of data, most assessments are scheduled to be completed by FY94. This effort will be specially supported by the Social Dimensions of Adjustment (SDA) project, and by completed and ongoing economic and sector work in the areas of food security and women in development. Under the SDA project, field data collection for priority surveys has been completed in eight countries, is ongoing in another four, and is getting started in another four. Poverty profiles based on SDA and other existing sources of data have been completed in two countries and are under preparation for six more. In the area of food security, six formal reports and six informal reports have been prepared. Combined with data normally collected in the course of ESW, these sources will provide the basis for completing poverty assessments as planned. Malawi is one of the two countries in this region where an assessment has been completed, and is an illustration of how data shortcomings can be overcome if existing information is carefully analyzed. The assessment finds that poverty reduction has been limited by regulatory controls on business and agriculture and by financial and labor market imperfections. It also finds that public expenditure on the social sectors is inadequate. To address these problems, around 40 percent of the FY90-92 lending is being directed towards smallholder agriculture. The Agriculture Sector Adjustment Credit enables smallholders to get access to a broad range of cash crops. The Entrepreneurship and Capital Market Adjustment Program has been set up to reduce investment delays. It has also reformed the trade and tax systems, reoriented public expenditures towards physical infrastructure and basic social services and reformed minimum wage regulations to stimulate employment and protect labor incomes of the poor. Most human resource projects in Malawi target female-headed households. In the Middle East and North Africa region, relatively little is known about the magnitude and nature of poverty and few country assistance strategies have developed an explicit poverty reduction component. In Egypt, the only country in this region where a poverty assessment has been completed, the findings of the assessment have influenced the Bank's assistance strategy in a number of ways. First, interventions have been designed to change the structure of growth. The FY91 Structural Adjustment Loan and a macroeconomic program supported by the IMF have encouraged the reform and privatization of public enterprises, the liberalization of prices, changes in trade policy and have supported the private sector. Second, a medium-term program of interventions, principally in the social sectors and to increase the productivity of the rural poor, is being prepared. Third, a Social Fund has been set up to provide a short-term safety net for those adversely affected by the economic reforms and by the Gulf crisis. And, fourth, analytical work is being done on improving social security. A Living Standards Measurement Survey is also planned, and will provide the basis for a second poverty assessment in FY95 and for establishing poverty monitoring mechanisms as an integral part of the poverty reduction strategy. For other countries in this region, the Bank has focused its lending and policy advice on economic restructuring (designed to improve the productivity of the public sector and to support the private sector) and on developing human resources. For example, in Morocco, where a poverty assessment has not yet been completed, the discussions about the forthcoming second structural adjustment loan have raised poverty issues, particularly those concerning growth such as trade policy and public investment policy. In addition, the loan establishes an agreed set of objectives related to the reduction of poverty and 79 Strategies to Reduce Poverty supports sharp increases in public spending on basic health and education. An LSMS household survey is also planned to update the 1985 consumption profile. The survey will provide information on, for example, access to rural education, the effectiveness of food subsidies and compensatory programs and the patterns of use of various public services, and will be used in the poverty assessment planned for FY93. This work is expected to provide the analytical foundation for an FY94 Social Priorities Support Loan. In Europe and Central Asia, much has been done quickly despite the absence of reliable data on and analysis of poverty issues. Since chronic poverty does not yet seem to be a serious problem, the priority has been to establish safety nets to mitigate the short-term poverty expected during the restructuring process. The Bank's strategy has been to encourage governments to improve the targeting of existing income support systems. The Bank has also assisted countries, including Bulgaria, Hungary, Poland and Romania, to develop employment promotion programs and to create unemployment compensation programs that are financially sustainable. Crucially, countries are being encouraged to improve their databases to enhance future assistance. The region anticipates that similar support will be provided to the countries of the former USSR as they are granted Bank membership. In these countries, poverty is a fairly recent phenomenon and, thus, the poverty assessmients that are scheduled to be carried out during the next two years will provide timely analyses of the problem. One important issue will be whether safety nets will be sustainable and adequate to cope with future levels of poverty if unemnploy- ment increases. Aid coordination. Poverty assessments are a means for the Blank to improve the effectiveness of aid for poverty reduction. In practice, some poverty assessments have generated consensus among the major aid donors, though more progress is still needed. For exampile, at the 1989 Consultative Group (CG) meeting, there was considerable disagreement over how best to handle the problems of Mozam- bique. A decision was taken to commission a paper that, when it waLs completed, had all the features of a full-scale poverty assessment. As a result of this exercise, at the 1990 CG meeting, a consensus was reached among the donors and the government. The Bolivian poverty assessment was discussed at the CG meeting in 1990 and the government produced its strategy for social policy at the CG meeting in 1991, which emphasized the need for a coordinated approach by donors to poverty reduction. It was agreed that the education sector would be a pilot, and the Bank has been requested to take the lead role in formulating the details of the policy and investment framework. The Prop-ram of Targeted Interventions One measure of the Bank's efforts to reduce poverty is the nmagnitude of its lending designed to benefit the poor directly. The policy paper Assistance Strategies to Reduce Poverty uses the term Program of Targeted Interventions (PTI) to identify these projects. It proposes that targeting, however broadly defined, should determine whether a lending operation can be classified as attempting to reduce poverty directly. Projects included in the PTI should meet one of two criteria; the project should either include a specific mechanism for identifying and reaching the poor or, where no such mechanism is used, the participation of the poor in the project should significantly exceed the proportion of the poor in the population as a whole. OD 4.15 on Poverty Reduction confirms these criteria. The kinds of targeted interventions included in the country strategy should emerge frorlm the conclusions of the poverty 80 Strategies to Reduce Poverty assessment. These interventions are only one element of countries' efforts to reduce poverty, as they should complement broader macroeconomic and sectoral policies and public expenditures. Consequently, targeted interventions provide only a partial picture of the Bank's efforts to reduce poverty. The complete picture can only be seen by looking at the overall country strategy, which includes the policy dialogue, the lending program (whether policy based or investment, targeted or untargeted), technical assistance and research and policy work. The Bank has been monitoring its targeted poverty lending using an information system that tracks the project's Primary Objective Category. This system provides a rough but low estimate of direct poverty lending.6 According to this, during FY89-91, the share of Bank lending directly related to poverty increased from 5.9 percent to 8.3 percent. A system for monitoring the projects in the Program of Targeted Interventions is currently being established. Preliminary estimates of the PTI indicate that, during FY92, about 12 to 15 percent of Bank lending falls within this category. Given the fact that poverty is widespread across all of Africa, the share of targeted interventions in Africa is relatively low, accounting for approximately 10 percent of all lending to the region. In Latin America and in Eastern Europe, where poverty is more localized, the share of targeted interventions is higher, consisting of around 20 and 25 percent of overall regional lending respectively. The PTI includes projects designed to improve the productivity of small farmers; to provide basic education, basic health care, nutrition services, and water supply and sanitation to those, especially women and children, who lack access to basic services; and to provide basic infrastructure in regions of concentrated poverty. A well-known example of such projects are social funds and social action programs. These were originally set up to protect those affected by economic adjustment, but now they increasingly target the chronically poor, mostly by providing timely temporary finance for specific projects. Social funds have proved to be an effective way to reach target groups because they involve local governments, private sector groups and NGOs in the design and implementation of projects. Nevertheless, it is important to ensure that their activities are consistent with sectoral priorities, that their project selection criteria are adequate and that they are financially and institutionally sustainable. The Bank is also working to ensure the effectiveness of its targeted projects by encouraging local participation and involving NGOs in the design and implementation of projects. Experience shows that where there is participation by the people at the local level, more progress has been made in reducing poverty. As a part of this effort, the Bank is supporting a growing number of beneficiary assessments. These assessments evaluate the sociocultural conditions of the beneficiary population to ensure that beiiefits are reaching the intended groups and that the projects provide the right kind of infrastructure and services for their needs. The results of a beneficiary assessment can also lead to changes in sectoral policy (as happened in Mali). Twenty beneficiary assessments are scheduled for FY92 and FY93. 6 The information system used at present in the Bank classifies projects according to their primary objective. This system gives a rough indication of the magnitude of poverty related lending in the Bank (or of the Program of TarReted Interventions, P77). However, it underestimates poverty related lending because it excludes projects that have another primary objective (for example, human development or women in development) but are also poverty related. Because of chlmges in definition, estimates of the P77 are not directly comparable to the group of projects classified according to their primary objective. 81 Strategies to Reduce Poverty Progress in Developing the Information Base Policy analysis. The policy and analysis work on poverty in the Bank has two aims. One is to support the efforts of member countries to reduce poverty, and the other is to draw lessons from experience that can be generalized to strengthen the Bank's own poverty reduction strategies. The objective is to disseminate examples of good practice in country assistance strategies and to improve the measurement and analysis of poverty. Several training courses for Bank staff and 10 seminars on poverty related issues for policymakers from developing countries have taken place in FY92 and more are planned for subsequent years. A number of studies are under way that analyze in more depth some of the topics that were raised in the 1990 WDR. These topics include: (i) the impact of macroeconomic policies on growth and income distribution; (ii) ways of increasing the access of the poor to basic social services; and (iii) the effectiveness of safety net programs. Specific studies address: the distributional effects of structural adjustment programs; alternative ways of targeting public expenditures to the poor; the effectiveness of public employment schemes; the impact on poor households of agricultural policies; the characteristics of successful credit programs; how to improve women's access to education, health care, agricultural extension and credit; and the performance of targeted programs in hbealth, education and water supply. Some of the main tasks that have recently been completed or are ongoing are listed in Table 4. Some issues require further analysis. These include assessing the effectiveness of targeted Bank projects, the potential tradeoffs in terms of growth and poverty reduction inherent in specific policies, the links between labor market regulations and poverty, the alternative approaches to reducing poverty in resource poor areas and the political economy of successes and failures to reduce poverty. Data. Helping countries to improve the quality and reliability of their data on poverty is an important ingredient of country assistance strategies. The Bank has provided financial support and technical assistance to improve household data through the Living Standards Measurement Study (LSMS) in OSP and the Social Dimensions of Adjustment (SDA) program in the Africa region. These activities can be tailored to fit the circumstances prevailing in any given country. The services they offer range from providing technical assistance to line ministries to help them maximize the use of the data to conducting actual household surveys in collaboration with national statistical offices. As of January 1992, results are available from LSMS multipurpose surveys in eight cotntries and two more surveys are currently under way. Priority surveys (which are a simpler version of the LSMS) have been completed in eight out of the total of 25 Sub-Saharan Africa countries where surveys are planned. Despite these efforts and the consequent progress in data collection, much more needs to be done to improve the data gathering and analysis capacity in developing countries. Weak institutions and sometimes adverse political conditions are the main constraints, particularly in Sub-Saharan Africa where those conducting surveys have had to deal with poorly equipped national statistical offices confronting tasks beyond their capacity. Most of the household surveys have faced delays. In Madagascar, which is an extreme example, the program has been delayed for two years; fieldwork was about to begin when deteriorating political conditions forced further postponement. Solving institutional weaknesses is a long- 82 Strategies to Reduce Poverty term endeavor. Meanwhile, the aim is to continue to encourage household surveys, while collecting other data with sufficient value to serve as a basis for poverty assessments. In many instances, raising funds to finance data collection and analysis has been difficult. Domestic institutions are overstretched and need external support, but may not be willing to use nonconcessional resources to finance this up-front investment. UN funding is scarce and bilateral funds may not provide sufficient flexibility. Because the need for thorough poverty analysis has been made such a high priority in development, it seems appropriate that more attention should be given to making additional concessional funds available for this purpose. At the macro level, the Bank annually compiles information on social indicators in 173 countries from country, UN and other sources, and publishes them in the Social Indicators of Development (SID). SID focuses on key aspects of human and natural resource endowments, income distribution, expenditure patterns and investment in human capital. Efforts are under way to sharpen SID's poverty focus and to improve the quality and comparability of the data. The worldwide estimates of poverty included in the 1990 WDR and the 1992 WDR are also being updated regularly. CONCLUSIONS The slow and uneven progress in reducing poverty since the 1980s, underscores the high priority that the development community must give to help countries in identifying and implementing more effective strategies to reduce poverty. Poverty reduction is now firmly placed at the core of the Bank's policy agenda and the Bank has taken steps to strengthen existing operational efforts towards this goal. As a result, poverty reduction is increasingly being explicitly reflected in the design of the Bank's operational activities. Progress is being made in implementing the recommendations in the policy paper, Assistance strategies to Reduce Poverty. Poverty assessments have been completed or are scheduled for completion this fiscal year in 20 countries, covering most of the population and over two thirds of the poor in the developing world. As a result, the Bank's country assistance strategies are more explicitly linked to the poverty profile of each country and to each government's policies and programs for reducing poverty. In countries where assessments have been completed, the recommendations they contain have helped to shape not only the policy dialogue but also the Bank's assistance strategies and lending programs. Even in countries where an assessment has not yet been completed, assistance strategies have been adjusted to reflect the need to make poverty reduction a more central concern. Many poverty assessments remain to be done, notably in the poorest countries in Sub-Saharan Africa but also in the Middle East and North Africa and in Eastern Europe and Central Asia. Lack of data, institutional weaknesses and the sheer number of countries are the major obstacles to completing the task. This is a major challenge as; in many of these countries, it is estimated that the numbers of the poor are increasing faster than in other regions. Progress has been made in gathering and analyzing high quality data on poverty, but much remains to be done to improve the capacity of developing countries in this respect. It is important to continue to 83 Strategies to Reduce Poverty support these efforts, including organizing financial support where needed. Where high quality data is not available, the Bank's priority must be to assist country policymakers to design policies using the best available information while simultaneously improving data gathering efforts. There has also been some progress in coordinating aid from donors for reducing poverty. At the policy level, donors agree that poverty assessments provide a firm basis for improving the effectiveness of aid provided for poverty reduction. But so far, there have been only a few instances where assess- ments have been used for this purpose. This underscores the urgency of the need to improve the effectiveness of external assistance in enhancing the efforts developing countries are making to reduce poverty. 84 Strategies to Reduce Poverty The IMF and Poverty Reduction The Fund is continuing its efforts, along with the rest of the international community, to find ways of reducing poverty in the developing world. In working toward this goal, it focuses on four key areas. The Fund helps member countries pursue sound macroeconomic and structural policies, thus promLoting sustainable growth worldwide. The Fund assists member countries in assessing the impact that policy reforms are likely to have on the poor. To this end, Fund staff cooperate and exchange information with other concerned agencies, including UN institutions. In particular, they have cooperated with the World Bank in preparing the Poverty Reduction Handbook, in overseeing the Social Dimensions of Adjustment Project (SDA) and in reviewing public expenditure policies in Africa in the context of the Special Program of Assistance (SPA). The Fund also helps member countries integrate social safety nets into their reform programs to mitigate any adverse effects those programs might have on the poor. This often entails substantial Bank involvement. The Fund's role is to integrate these measures into the macroeconomic framework. Examples of these include: establishing special investment funds (e.g., Bolivia, Costa Rica, El Salvador and Honduras); reforming subsidies on basic commodities (e.g., Jamaica, Jordan and Trinidad and Tobago); strengthening food security (e.g., Bangladesh and Mozambique); improving the targeting of educational programs (e.g., Kenya); and introducing and reforming social security benefits (e.g., several Eastern European countries). The Fund bears the social impact of reforms in mind when it gives policy advice as, for example, when it advises members on the pace of reforming subsidies (e.g., Egypt). In addition, the Fund provides technical assistance to countries, both with and without Fund- supported programs, on how to design an effective social safety net. The Fund is also currently giving technical advice to the member republics of the Commonwealth of Independent States on the budgetary consequences of social safety net options. Prepared by IMF staff at the request of the Bank's Board of Executive Directors. 85 TABLE 1 ESTIMATES OF POVERTY IN THE DEVELOPING WORLD 1985-1990 Incidence of Poverty Number of Poor Region (percent of population) (million) 1985 1990 1985 1990 Aggregate 30.5 29.7 1051 1133 South Asia 51.8 49.0 532 562 East Asia 13.2 11.3 182 169 Sub-Saharan Africa 47.6 47.8 184 216 Middle East and North Africa 30.6 33.1 60 73 Eastern Europe 7.1 7.1 5 5 Latin America 22.4 25.2 87 108 Notes: The incidence of poverty (headcount index) is the percentage of the population below the poverty line, which is set at $370 per capita consumption expenditure. The poverty line is derived from an international survey of poverty lines and represents the typical consumption standard of a number of low income countries. For details, see Ravallion, Datt and Van de Walle, 'Quantifying the Magnitude and Severity of Absolute Poverty in Developing World in the mid 1980s', WPS 587, 1991. The poverty line has constant purchasing power parity across countries based on 1985 prices. The poverty estimates for 1985 have been updated since the 1990 WDR to incorporate new data and to insure comparability across years. The poverty estimates are for 86 countries, representing about 90 percent of the population of developing countries. The estimates used in WDR 1990 were based on national household surveys of consumption or income from 22 countries, representing approximately 76 percent of the population in developing countries, and on an econometric model to extrapolate poverty estimates to the remaining 64 countries. The updated estimates shown here are based on national household sample surveys from 31 countries representing roughly 80 percent of the population in developing countries, and on an econometric model to extrapolate poverty estimates to the remaining 56 countries. The proportion of the region's population covered by a household sample survey is: South Asia, 96.4 percent; East Asia, 96.8 percent; Sub- Saharan Africa, 11.5 percent; Middle East and North Africa, 11.6 percent; Eastem Europe, 100 percent and Latin America, 83.1 percent. Sources: World Bank estimates for WDR 1992 (Ravallion, Dan and Chen, 'New Estimates of Aggregate Poverty in the Developing World') 86 TABLE 2 ASSISTANCE STRATEGIES TO REDUCE POVERTY: KEY RECOMMENDATIONS * Bank assistance strategies will reflect and be consistent with an analysis of the factors determining poverty. * For this purpose, periodic assessments of the consistency between government policy and the reduction of poverty will be prepared and presented in Country Economic Memoranda or similar documents. * Given progress to date, the first round of such assessments will be completed for all countries (with reasonable exceptions) within three years. * Documents routinely presented to the Board, specifically PFPs, adjustment loans and the first investment operation of each year for IDA countries without adjustment operations, will indicate how the Bank's assistance strategy supports and complements the country's own approach to reducing poverty. * The Bank will discuss its analysis of poverty and coordinate its program of assistance with other donors. * In the context of the first round of periodic assessments, Bank staff together with country counterparts and relevant UN agencies will prepare proposals for improving the quality and reliability of data related to poverty. * Where a proposal to improve the quality and reliability of data related to poverty is accepted by a country, the Bank will undertake to organize appropriate financial support and technical assistance to implement it. l * A Poverty Handbook, providing examples of best practice analysis and operational work, and an Operational Directive on Poverty, providing practical guidelines to staff, are being prepared. Source: Assistance Strategies to Reduce Poverty, A World Bank Policy Paper, World Bank, 1991, page 42. 87 TABLE 3 POVERTY ASSESSMENT SCHEDULE* Completed' FY92 FY93 FY94 FY95 Total Sub-Saharan Africa 2 - 12 14 5 33 South Asia 4 - 2 - - 6 East Asia and Pacific 4 1 2 2 1 10 Middle East and North Africa 1 - 1 5 1 8 Europe and Central Asia - - 3 3 - 6 Latin America and the Caribbean 7 1 8 62 - 22 Total3 18 2 28 30 74 85' Completed during FY89-91. 2 provisional Excludes inactive countries and countries with fewer than one million people. 4 Includes one poverty assessment update for the Arab Republic of Egypt. This total includes assessment updates for Egypt, Pakistan and the Philippines for which first-round ssessments were completed before FY92. The total number of countries with a scheduled poverty assessment is 82. * See country breakdown for each region in Annex 1. 88 TABLE 4 MAIN ONGOING OR RECENTLY COMPLETED ANALYSIS OF POVERTY ToPIcs * Improving the poverty database, including conducting household surveys, improving documentation for wider implementation and training, maintaining a database of social indicator trends and compiling an inventory of the available data on poverty. * Developing simulation methodologies and case studies (Chile, C6te d'Ivoire, Ecuador, Indonesia, Malaysia and Morocco) to analyze the effects of alternative adjustment packages on poverty. * Developing methodologies to quantify the effects on the poor of alternative safety net policies, including an evaluation of the cost effectiveness of public employment schemes and of the cost effectiveness of targeted schemes in Bolivia, Honduras and India. * Analyzing the incidence of public expenditures and the modes of financing these expenditures using several case studies for Asian and Eastern European countries and assessing their policy implications. * Doing comparative longitudinal research on the livelihood strategies of low income urban households during the past decade (in Ecuador, Hungary, the Philippines and Zambia) and on the implications for the design of transitional safety nets and long-term poverty policy for urban areas. * Analyzing how the demand for education is affected by household income levels and what impact changes in education pricing policy have on the poor. * Evaluating the lessons learned from encouraging popular participation in selected Bank projects. * Evaluating the effectiveness of the Bank's resettlement policy. 89 ANNEX I: POVER.TY ASSESSMENTS: COMPLETED AND SCHEDULED SUB-SAHARAN AFRICA1 COUNTRY DATE COMPLETED Malawi 03/90 Mozambique 10/90 SCHEDULED Benin FY93 Burkina Faso FY93 Central Africa, Republic FY93 Guinea FY93 Mali FY93 Mauritania FY93 Niger FY93 Senegal FY93 Tanzania FY93 Togo FY93 Kenya FY93 Uganda FY93 Cameroon FY94 Chad FY94 C6te d'Ivoire FY94 Ethiopia FY94 Gambia FY94 Ghana FY94 Guinea-Bissau FY94 Madagascar FY94 Mauritius FY94 Nigeria FY94 Rwanda FY94 Sierra Leone FY94 Zambia FY94 Zimbabwe FY94 Angola FY95 Burundi FY95 Congo FY95* Equatorial Guinea FY95 Gabon FY95* 1 Excludes inactive countries (Botswana, Liberia, Namibia, Somalia, Sudan and Zaire) and countries with fewer than one million people (Cape Verde, Comoros, Djibouti, Sao Tome and Principe, the Seychelles and Swaziland). Not firmly scheduled. 90 ANNEX I: POVERTY ASSESSMENTS: COMPLETED AND SCHEDULED SOUTH ASIA COUNTRY DATE COMPLETED Bangladesh 01/90 India 12/89 Nepal 04/91 Pakistan 08/90 SCHEDULED Pakistan FY93 Sri Lanka FY93 EAST ASIA AND PACIFIC' COUNTRY DATE COMPLETED Philippines 10/88 Indonesia 11/90 Malaysia 01/91 Korea 03/91 SCHEDULED China FY92 Thailand FY93 Philippines FY93 Mongolia FY94 Papua New Guinea FY94 Lao PDR FY95 Excludes inactive countries (Kampuchea, Myanmar and Viet Nam) and countries with fewer than one million people (Fiji, Kiribati, Maldives, Solomon Islands, Tonga and Vanuatu). 91 ANNEX I: POVERTY ASSESSMENTS: COMPLETED AND SCHEDULED MIDDLE EAST AND NORTH AFRICA COUNTRY DATE COMPLETED Egypt, Arab Republic of 07/91 SCHEEDULED Morocco FY93 Algeria FY94' Iran, Islamic Republic of FY94 Jordan FY94 Tunisia FY94 Yemen FY94 Egypt, Arab Republic of FY95 Possibly FY95 :EUROPE AND CENTRAL ASIA' COUNTRY DATE SCHEDULED Poland FY93 Romania FY93 Turkey FY93 Albania FY94* Bulgaria FY94 Hungary FY94* Czechoslovakia and Yugoslavia are not scheduled. * Not firnly scheduled. 92 ANNEX I: POVERTY ASSESSMENTS: COMPLETED AND SCHEDULED LATIN AMERICA AND CARIBBEAN' COUNTRY DATE COMPLETED Bolivia 10/90 Chile 10/90 Costa Rica 10/90 Ecuador 11/90 Mexico 05/91 Venezuela 06/91 Paraguay 02/92 SCHEDULED Peru FY92 Argentina FY93 Colombia FY93 Brazil FY93 El Salvador FY93 Guatemala FY93 Guyana FY93 Honduras FY93 Jamaica FY93 Dominican Republic FY93-94* Haiti FY93-94* Nicaragua FY93-94* Panama FY93-94* Trinidad & Tobago FY93-94* Uruguay FY93-94* Excludes countries with fewer than one million people (Belize, Grenada, and Suriname). * Not firmly scheduled. 93 ANNEX II The World Bank Operational Manual OPERATIONAL DIRECTIVE Guidelines for Poverty Assessment Summaries The poverty assessment summary is prepared for reaching target groups. Indicates programs exam- countries for which poverty assessments have been ined, including basic infrastructure, housing, completed. It is included in the Regional submis- access to education, nutrition,, family planning, sions for the preparation of periodic progress and health services, and subsidies and programs reports for the Board. It succinctly draws from targeted directly to the poor. Assess institutional the poverty assessment the most salient points. capacity for formulating and executing policies and The summary is brief (2-3 pages in most cases) delivering services. and includes the table of Priority Poverty Indica- tors. Examples of poverty assessment summaries 5. Safety Net. Describes the major elements of the are found in Annex 4 of the Poverty Reduction social net, if one exists. Assesses its cost-effec- Handbook. The major elements of the typical tiveness in reaching targeted poor and vulnerable Poverty Assessment Summary follow. groups. Assesses role of existing public or private organizations, including non-governmental organi- Poverty Profile. Summarizes the most important zations. economic,1 demographic,2and social characteristics of the poor. 6. Poverty Strategy. Summarizes recommenda- tions for strengthening government's poverty Incentive and Regulatory Framework. Sum- reduction strategy and indicative targets for pover- marizes the major macroeconomic and/or regula- ty reduction, as reflected in the social and income tory issues that impede poverty reduction. Where indicators. applicable, indicates the impact of structural adjustment. 7. Statistical System. Summarizes the major weaknesses of country poverty data and the pro- Public Expenditures. Summarizes the impact of posed steps-including recommendations about public expenditures on poverty reduction, includ- technical assistance or other external support-to ing and examination of their effectiveness in improve it. 1/ Includingfood security. 2/ Includingfertility. * Source: Operational Directive 4.15: Poverry Reduction, December 1991, Annex A. 94 AiNNEX II The World Bank Operational Manual OPERATIONAL DIRECTIVE Priority Poverty Indicators 1960 1970 1980 1989 1990 1991 2000 Poverty Lines Upper Poverty Line' Headcount Lower Poverty Line' Headcount Memorandum Item GDP Per Capita 1960 1970 1980 1989 1990 1991 Short-Term Income Indicators2 Wage (Unskilled)' CPI (Lower Income)4 Rural Terms of Trade 1960 1970 1980 1989 1990 1991 2000 Social Indicators,' Share of Public Expenditures for Basic Social Services in GDP Net Primary Enrollment6'7 l Under-Five Mortality6 Immunization6l Child Malnutritions Female-to-Male Life Expectancy Total Fertility Rate Maternal Mortality The upper poverty line is the cut-off for the poor, the lower poverty line is the cut-off for the very poor. 2 Country-specific indicators. Where available, quarterly data for these indicators facilitate monitoring during adjustment. Urban and rural, if available. Where available, price index based on poor's consumption basket. Where not available, CPI for food only. Indicative targets for the year 1995 may also be presented. For PFPs, target years should coincide with the program period. For the year 2000, targets are in line with UNICEF's National Programs of Action developed under the framework of the World Summit for Children. Female and Male. Attendance data are preferred, if available. Or alternative measure of malnutrition. 5 Source: Operational Directive 4.15: Poverty Reduction, December 1991, Annex B. 95 PROGRESS REPORT ON THE "LEGAL FRAMEWORK" FOR THE TREATMENT OF FOREIGN INVESTMENT INTRODUCTION' In the Communique of its April 1991 meeting, the Development Committee "recognized the need of an overall legal framework which would embody the essential legal principles so as to promote FDI; in this regard it took note of some proposals, notably by France, and urged MIGA to consult with other competent institutions and report to the next spring's Development Committee. " This report explains the nature and scope of the work undertaken so far and the remaining steps to be completed before a final report is presented to the Committee irn its forthcoming meeting. Work on this subject is a natural sequence to the conclusion of the MIGA Convention which envisaged a role for this agency in the progressive development of the rules governing foreign investment, and of MIGA's Operational Regulations which require the Agency to assure itself, before issuing an investment guarantee, that the law and practice of the host country in respect of foreign investment is consistent with international law. It is also a timely work in view of the growing importance of private foreign investment in developing countries which has experienced a fast growth in recent years and may hold great potential for further growth in the 1990s. An appropriate legal framework is a basic prerequisite in developing countries' efforts to promote a business environment characterized by stability and predictability where transactions are governed by preestablished rules and disputes are settled fairly and without undue delay according to such rules. Following the Spring 1991 Development Committee meeting, the President of the World Bank Group institutions entrusted the preparation of the requested principles to a task force consisting of the General Counsel of the Bank (Chairman), IFC and MIGA. This Task Force, where all the Bank Group institutions are represented (the General Counsel of the Bank being also the Secretary-General of ICSID), has been asked to prepare necessary background papers and to enter into broad consultations before preparing a report to the Development Committee including a set of essential principles constituting a desirable legal framework. NATURE AND PURPOSE OF THE PROPOSED FRAMEWORK While the promotion of private foreign investment is a common objective of the World Bank and its affiliates, IFC and MIGA, none of these agencies is empowered to issue binding legal rules to govern the attitudes of their members in this (or other) fields. Furthermore, any attempt on their part to prepare a multilateral draft convention to codify universally agreed customary law rules on the subject and to open 1 Note: Thiwprogreu repe was prepared by a Task Force consung of Ibrain .l. Shglata, Vice Pnreset and General Coensd of ate Word Ran, Josc B. CAwcho, Vie Presdent and General Cousel of the Itrnatol Fnace CorporaiJon, and LaO Dodero, General Coausd of aie MAcerol Inveshen Guaante Agecy. 96 Legal Framework it for signature by their member countries may prove to be counterproductive. Efforts of other international agencies to this effect have been protracted and have ended either in no agreement or in a limilted agreement representing the lowest common denominator of what the states involved deemed to be undisputed customary law. This obviously falls short of representing desirable practice or devising rules which would readily contribute to a more positive investment climate. It is deemed more appropriate therefore not to duplicate the efforts of other international fora in this respect and to aim instead at elaborating guidelines on what may constitute acceptable and desirable standards. To achieve these qualities, such standards would have to be based, on the one hand, on prevalent trends in existing legal instruments such as bilateral investment treaties (BITs), multilateral instruments (conventions, draft conventions, international declarations and resolutions, etc.), international law precedents as well as national legislation, and, on the other hand, on best practices conducive to the evolution of an attractive investment environment. The envisaged guidelines cannot, of course, replace existing bilateral and multilateral treaties or national legislation. They are meant to be recommended by the Development Committee to member states as acceptable international standards which complement applicable treaties. Naturally, these treaties will prevail in all matters governed by them. The envisaged guidelines are also meant to apply to bona fide private foreign investments which operate in full conformity with the laws and regulations of the host state. These guidelines could thus serve a number of purposes: * they may guide further judicial and scholarly work in the identification and development of international principles on the subject; * they may over time serve as a basis for generally accepted customary international law to the extent that the future practice of states conforms to them in a consistent manner reflecting a general conviction as to their binding character; and e they could serve as a source on which interested countries may draw in formulating their legislation on foreign investment. In this respect, the Guidelines may be helpful to countries in the process of issuing or revising their legislation and may contribute to the coordination of technical assistance to such countries in this field. Knowledge of internationally acceptable standards and of best practices in other countries is an important element in legislative policy which obviously takes into account the particular needs of the country concerned, including the need to adopt more attractive conditions when required. The objective of the proposed guidelines is not therefore to pronounce at this stage definitive rules of international law in an area where consensus is absent, but to identify, on the basis of existing legal instruments reflecting broadly acceptable norms in state practice, those rules that are deemed to be most appropriate to a hospitable environment for foreign investment, but which are also balanced in character and therefore likely to receive broad international acceptance. 97 Legal Framework BACKGROUND STUDIES To ensure an acceptable outcome, two phases have been envisaged. In the first phase, a series of background papers have been prepared on the basis of comprehensive research of the specific legal instruments covered by each paper. Differences among the rules in such instruments have been reconciled in general trends, or reflected in different representative provisions, bearing in mind the importance of best practice. This phase has now been completed and the background papers will soon be published for the benefit of users and researchers.2 The second phase envisages i) the preparation of draft guidelines based on the conclusions reached in the first phase and ii) series of consultations on these draft guidelines with other interested international institutions concerned with the subject. Benefiting from such consultations, the draft guidelines would then be submitted to the Committee of the Whole of the Bank's Executive Directors and to MIGA's Board of Directors for a broad discussion before the Fall meeting of the Development Committee. Study on BITs The background study on bilateral investment treaties (BITs) examines most of the treaties concluded as of the end of 1991. The 253 treaties examined involve, between them, nearly all the OECD countries and over 75 developing countries. Like the other background studies, the one on BITs presents tabular reviews and commentaries on the treaties' approach to the principal areas of study (admission, treatment, expropriation and dispute settlement). The study also presents representative BIT provisions in each of those areas of study. (A;ll studies are descriptive in nature and avoid the ideological approaches which often influence standard writings on the subject.) As the study shows, BITs generally approach the question of admission through provisions in which the States undertake, on the one hand, to encourage or facilitate foreign investments and, on the other hand, to admit such investments in accordance with the States' laws and regulations. With respect to general standards of treatment, the study shows that the overwhelming majority of BITs call upon States to accord foreign investors treatment that is "fair and equitable." Many of the BITs couple this with a reference to most favored nation or national treatment. All of the BITs surveyed call upon the States to allow for transfer without delay or without undue delay of foreign investment proceeds. A significant number of the treaties however allow repatriation of capital in installments. Most of the BITs require that foreign investments only be expropriated in the public interest; a sizable number add that expropriatory measures should not be discriminatory. All of the BITs call for compensation to be paid in the event of expropriation. In this connection, treaties use either the familiar 2 The background papers include: Treatment of Foreign Investment in Bilateral Investnent Treaties (December 1991), Principles Governing Foreign Investnent as Reflected in National Investment Codes (December 1991), Multeral Approaches to the Treatment of Foreign Investment (December 1991) and General Principles Governing Foreign Investment as Articulated in Recent International Tribunal Awards and Writings of Publicists (February 1992). 98 Legal Framework "prompt, adequate and effective" formula or such alternatives as "just" or "full" compensation. While all of the BITs studied provide that such compensation shall be transferable without delay or undue delay, a subtstantial number also envisage the possibility that there may nevertheless be delay in effecting transfer and provide for the payment of interest in case of such delay. With respect to the last area of study, dispute settlement, the study points out that almost all of the BITs examined provide for the resolution by arbitration (normally international arbitration) of all or some disputes between the foreign investors and their host States. More than half of the treaties mention ICSID and/or the ICSID Additional Facility in this connection. Multilateral Instruments The background study on multilateral approaches to the treatment of foreign investments surveys 23 multilateral instruments with a view to identifying general trends on admission, treatment, expropriation and settlement of disputes regarding foreign investment. The multilateral instruments reviewed include multilateral conventions of a global or regional character, draft multilateral provisions including those relevant to the GATT, codes, declarations and resolutions, including those prepared by the UNCTC and the OECD, as well as a number of pertinent U.N. General Assembly resolutions. The study looks first at the history, status and nature of the instruments reviewed in order to put thei!r relevance and importance in perspective. The main part of the study consists of (a) representative provisions on the admission, treatment, expropriation, and settlement of disputes in the context of foreign investment; (b) a descriptive comment substantiating the contents and formulation of the representative provision chosen on the basis of the texts and official commentary of the multilateral instruments surveyed; and (c) tables, which provide an overview of the various subjects discussed, following each csomment. The study maintains that a majority of the sources reviewed support the following general conclusions: (a) while it lies within states' sovereign authority to regulate foreign investment, this should be done with a view to attract and facilitate foreign investment; (b) investors are granted national treatment except in certain instances where distinctions are reasonably justified; (c) domestic laws regulating the transfer of payments relating to foreign investment are not to unduly restrict the right of the investor to dispose of his capital; (d) the right of states to expropriate is recognized whenever at least two main conditions are met: The payment of compensation, which is described as "adequate," "appropriate" or "just" or as reflecting "fair" or "genuine" market value, and the respect of applicable dornestic laws; and (e) investment disputes are to be amicably settled and failing this to be submitted to local courts; if the parties so agree, other dispute settlement procedures, including arbitration, may be elected. National Lgislation The main background study of foreign investment codes is based on codes enacted in developing countries over the past decade. There are 48 such codes--26 of African states, 9 of Asian countries, 6 99 Legal Framework of European (mostly Eastern European) ones and 7 of countries in the Latin America and Caribbean region. The study presents analysex and tables on these codes' approach towards the fundamental questions of admission, treatment, expropriation and dispute settlement. The conclusions are presented in the form of rules summing up the overall approaches of the codes. It should be noted, however, that these codes constitute only part of the legal regime governing foreign investment in the countries concerned. A number of related issues covered in other laws and regulations are not included in the study. The conclusions show that the codes as a group wholly reserve to the host States, acting in accordance with their respective laws, the decision of whether or not to admit particular investments. Many of the codes also differ from the BITs in assigning a prominent place, in connection with admission, to the economic priorities of the host State. The codes also differ from most BITs with respect to the question of general standards of treatment to be accorded to foreign investors. In this regard, the majority of the codes provide for the "national treatment" standard. A small minority of the codes surveyed employ the "fair and equitable" formula commonly used in the BITs. The majority of the codes also allow transfer of capital and profits while carefully adding that such transfer can only be done in accordance with the host State's foreign exchange and other relevant regulations. In very few cases the codes provide for totally unrestricted transfer. Most codes include "performance requirements" such as a minimum local content, local staff and export targets but the majority make these conditions of granting tax or other privileges rather than conditions of admission of the investment. With respect to expropriation, most of the codes, like most of BITs, provide that assets of foreign investors may only be expropriated in the public interest and against compensation. The code provisions can in fact be said to be more elaborate than the corresponding BIT provisions: many of the code provisions, unlike those in BITs, also emphasize that permissible expropriations must be effected only by virtue of law. However, the codes are in general less detailed than the BITs with respect to compensation for expropriation. Most of the codes that have provisions on this question simply employ the terms "fair," "equitable" or "just" or other terms to the same effect in order to describe the required compensation. On the question of dispute settlement, the study of investment codes shows that the majority of the codes, while recognizing that the courts of the host State will normally have jurisdiction over disputes between the State and foreign investors, also provide for the resolution of such disputes by such agreed mechanisms as conciliation and independent arbitration. As in the case of the BITs, the codes frequently mention ICSID and the ICSID Additional Facility in this connection. The above conclusions are compared in the study with the requirements of identified investment laws of industrial countries that have single principal pieces of legislation on the topic. In view of the fact that few industrial countries have legislation of this type, the study also covers in a general manner the foreign investment law regimes of other selected industrial countries. The study shows that the laws of industrial countries do not conflict with the broad conclusions reached on developing country codes. However, for obvious reasons, they often take a less actively promotional approach towards foreign investment than the corresponding codes of developing countries. 100 Legal Framework Arbitral Awards and International Law Literature The background study of cases and doctrine surveys more than 310 awards of international arbitral tribunals (both institutional and ad hoc), the majority of which (270) are awards of the Iran-US Claims Tribunal which has special characteristics, as well as writings of international law experts. Given the nature of the sources, it is not surprising that the awards and writings furnish little material on such question as admission of foreign investment. However, the awards and writings are prime sources for details in the area of expropriation in particular, which receives rather summary treatment in investment treaties and laws. Thus the study shows that several cases and writings support the propositions respecting expropriation that can be gleaned from the laws and treaties (e.g., that expropriation must be in the public interest and accompanied by just compensation). Some of these cases and writings also specifically suggest that expropriation of foreign assets may not be lawful if it violates express undertakings to refrain from such expropriations. More importantly perhaps, the cases and writings offer precisions on the question of the measure of compensation for expropriation not available in the instruments covered in the previously mentioned studies. As shown in the background study, the cases and writings inter alia indicate that the amount of compensation payable in the event of expropriation cannot possibly be governed by a single formula. While such compensation is generally required to be equal to the value of the taken property as of the date of the taking, such value is to be determined by the method most appropriate to the circumstances of the case and, in particular, to the nature of the expropriated property. The arbitral awards are particularly helpful in providing guidance on evaluation methods which may include, depending on the circumstances, the going concern value, the liquidation value, the replacement value and, in limited situations, the book value of the investment or the assets. Knowledge of the situations under which each of these methods may be employed would obviously help in avoiding future disputes. With respect to treatment, some cases based on investment treaties suggest that investors should be accorded fair and equitable treatment and require host states to exert due diligence to ensure constant (or full and constant) protection and security to the foreign investors. Other principles brought to light by the review of awards and writings include the principle that agreements between government and foreign investors are binding and should be performed in good faith. This is however subject to the exception that a State's unilateral termination or change of a contract to wbich it is a party may be permissible under the same conditions as apply to expropriations (i.e., if in the public interest, in acc:ordance with applicable law, duly compensated, etc.). The writings and arbitral awards also provide aulhority for several principles supportive of the arbitration process (such as that arbitration agreements and awards are binding and in some cases that an arbitration clause survives invalidity of the contract in whiich it may be set forth). SUBSTANCE OF THE PROPOSED DRAFT GUIDELINES The guidelines are expected to reach beyond the generalities which often lead to disputes in practice and provide practical provisions on some important details based on the trends identified in the 101 Legal Framework above-mentioned studies and on the need to ensure a balanced outcome that would help the stability and predictability of investment climates and would also respect the interests of host states. After clarifying their scope of application and the fact that they are meant to complement, but not to substitute for BITs and other treaties, the guidelines will cover detailed rules on the four major areas usually dealt with in investment treaties, i.e.: * Admission of foreign investment, including the procedures and limits relevant to such admission. Treatment of foreign investment, including the general standards of treatment in the establishment, operation, management, control and enjoyment of rights and in particular rights related to transfer of profits and repatriation of capital. Expropriation of foreign investments and assets, including standards of compensation in cases of expropriation or similar measures and of unilateral termination or alteration of contracts by the state party. Mechanisms for the settlement of disputes between governments and foreign investors. 102 COMMNUIQUE OF THE FORTY-THIRD MEETING OF THE DEVELOPMENT COMMITTEE April 28, 1992 The 43rd meeting of the Development Committee took place in Washington D.C. on April 28, 1992, under the chairmanship of Mr. Alejandro Foxley, Minister of Finance of Chile. I/ TRADE The Committee's first annual review of the interlinkages between the policies of the industrial and developing countries focussed on trade. Ministers agreed that the speedy completion of a successful Uruguay Round would be of enormous value to the world as a whole. Failure would mean delaying progress in areas provisionally negotiated during the Round; risking an increase in protectionist measures; and leaving the world trading system less flexible and less able to respond to changing conditions. They therefore urged all participants to recognize the international importance of the Round, and to work urgently for an outcome which will result in a substantial reduction of trade barriers. They welcomed the significant efforts made by many developing countries to undertake trade reform and open up their markets, and the important trade moves many have been prepared to make as part of the UJruguay Round. To complement these measures, they encouraged industrial countries to accelerate the pace of their liberalization efforts. The Round's successful conclusion requires that all participants now make clear liberalization commitments. They encouraged all developing countries to take full advantage of the new market opportunities which the Round will bring. They stressed the importance to developing countries of open markets in industrial countries. Industrial countries in turn should maximize these new opportunities to enter their markets. The Bank and the Fund should undertake and publish regular assessments of the impact of changes in world trade patterns on developing countries. They should support the efforts of developing countries with appropriate technical assistance, policy advice and financial assistance, where necessary, to help them enter new markets. Continued trade liberalization may also require financial support from other multilateral agencies and bilateral donors. The Bank and the Fund will continue to collaborate with the GATT in promoting open trade policies. While recognizing the need to control potential damage to the environment, Ministers agreed that such legitimate concerns should not be used by any country to justify new or existing barriers to trade. These should not be used to impose environmental policies on the exporting country save wheie there is international agreement that this is necessary. 1/ Mr. Lewis T. Preston, President of the World Bank, Mr. Michel Camdessus, Managing Director of the International Monetary Fund, Mr. Alhaji A. Alhaji, Minister of Finance of Nigeria and Chairman of the Group of 24, Mr. Arthur Dunkel, Director-General of the GA 77, Mr. Maurice Strong, Secretary-General of UNCED, and Mr. Peter Mountjield, Executive Secretary, participated in the meeting. Observers from a number of other international and regional organizations and from Switzerland also attended. 103 Development Committee Communique Ministers noted the preliminary assessment of the probable impact of the Uruguay Round on certain groups of developing countries, notably those which are net food importers, or those whose existing preferential access would be eroded, and urged the Bank and the Fund to consider the case for transitional financial help to these countries. Ministers also noted the emergence in many parts of the world of regional trading arrangements, a tendency which may increase if the Uruguay Round fails. Such arrangements should be outwardly- oriented, should emphasize trade creation rather than trade diversion, and should not slow down the process of greater multilateral liberalization. The Committee asked the Bank and Fund to provide a progress report on trade issues for their September meeting and, once the Round is complete, a report on the implications of its outcome for the two institutions. ENVIRONMENT The Committee reviewed the interaction between environment and development policies and the preparations for the United Nations Conference on Environment and Development which meets in Rio de Janeiro in June 1992. Ministers agreed with the conclusion of the World Bank's forthcoming 1992 World Development Report, that continued, and even accelerated, economic growth and human development can be consistent with improving environmental conditions, but this will require significantpolicy, program, and institutional changes in dealing with national and global environmental problems. At the national level, developing countries will require a threefold strategy. First, the mutually- reinforcing roles of sustainable development and environment must be vigorously exploited through sound macro-economic policies which will promote growth and reduce poverty. The fight against poverty helps to preserve the environment. Second, such policies must be supplemented by an incentive structure which will discourage overuse of natural resources; developing countries will need external support for technology transfer and for capacity-building in the environmental area. The top sectoral priorities for direct national action are clean water and sanitation, air quality, soil, water and agricultural productivity, and natural habitats. Thirdly, people and institutions (inpublic and private sectors alike) shouldbe motivated to adopt less damaging behavior by bringing environmental considerations into their decisions---wherever possible by the use of market-based instruments which have the advantage of allowing reduction of environmental damages in the most cost-effective way. Ministers recognized that many developing countries will continue to need increased outside help to tackle these national environmental problems. They agreed that official support should be provided through existing development institutions, which have strengthened their capacity to deal with environmental activities. Existing lenders and donors can help through increased aid, some of it on concessional terms. World Bank-led Consultative Groups and UNDP-led Round Tables can help to coordinate such aid and to integrate country strategies with environmental action plans. Ministers agreed that consideration should 104 Development Committee Communique be given to a special "Earth Increment" to the tenth replenishment of the International Development Association (IDA-10). At the global level, Ministers accepted that certain problems transcend national boundaries and require internationally-negotiated solutions. They recognized that in the absence of conclusive scientific proof, a precautionary strategy to address the risk of climate change required a broad international consensus, as did the need to preserve biodiversity. They noted the early progress made in the operations of the Global Environment Facility, which they considered should play a leading role as the multilateral funding mechanism to provide new and additional financial resources through a mix of grant and concessional funding of incremental costs for achieving agreed global environmental benefits. The GEF should encourage universal membership. Its governance should ensure effective representation and participation by all countries. They asked the GEF participants to reach early decisions on the future coverage, governance and financing of the Facility. Ministers also welcomed the Bank's account of its own environmental activities, contained in two successive reports, and the related activities of the Fund. They noted the considerable progress made by the World Bank Group in adjusting its existing programs to accommodate environmental concerns; and the emphasis being given to such concerns in the design of the Bank's lending programs, in technical assistance, in the policy dialogue with developing countries and in its research work. They supported the Bank's efforts to assist borrowers and donors to design and implement environmentally-acceptable progr ams, including timely production of environmental impact assessments and environment action plans. They asked for a progress report for the September meeting on the outcome of the Rio Conference and the follow-up action planned. TRANSFER OF RESOURCES The President of the World Bank gave his regular overview of the prospects for resource flows to the developing countries. Ministers expressed their concern that the volume of official development assistance has not increased, since last year, and agreed to discuss all resource flows and transfers in more depth during their September meeting, as requested previously, in order to examine the scarcity of financial resources for development and to make concrete proposals. ECONOMIES IN TRANSITION The Committee noted the historic changes which have taken place since their last meeting and they warmly welcomed the states of the former Soviet Union into the two institutions. They received renewed assurances from the President of the World Bank that IBRD lending to the new members (and in Eastern and Central Europe) could be supplied without jeopardy to the borrowing requirements of the Bank's other developing country shareholders. They supported the Fund's current and proposed operations in this area, and noted that the rapid acceptance of the new quota increase would allow increased Fund activities there. They recognized the need for close coordination between the Bank and the Fund and with other international organizations. They recognized the importance of integrating these countries quickly into the world trading system, and the GATT, and the need for them to liberalize their own external trade 105 Development Committee Communique regimes. They called on donor countries to provide additional funds for this area without diverting resources from other recipients. IDA-10 AND ESAF The Committee was briefed on the current state of negotiations for IDA-10. Ministers recognized the many new calls on IDA from the increasing needs of the poorest countries which have traditionally benefited from concessional IDA lending, from newly-eligible countries and new and potential members of the Bank Group, and from the increased importance of environmental concerns. They stressed once again the need to enhance the focus on poverty reduction in IDA operations. While recognizing the budgetary constraints of many donors, Ministers recognized the need for IDA Deputies to reach agreement by the end of 1992 on a Tenth Replenishment of IDA, preferably at a level substantially above that of IDA-9. They noted that the Bank would submit a further progress report at the time of its September meeting. They welcomed the recent expansion in the list of ESAF-eligible countries, and the Fund's operations in support of adjustment efforts. The momentum of these efforts to sustain growth and raise living standards must be maintained, with financial support from the international community, including for low-income countries under the Fund's enhanced structural adjustment facility. POVERTY The Committee received a progress report on the implementation of the Bank's poverty strategy and the related work of the Fund. Ministers regretted that because of the worsening economic situation the Bank believed there would be over 50 million more poor people at the end of the century than in 1985, despite their earlier hope of a substantial reduction. Ministers reaffirmed their view that poverty reduction must remain, in the context of sustainable growth, the Bank Group's main priority. Every effort should be made to apply this priority at the country level in the design of individual lending operations and the production of poverty assessments, and to allocate the necessary staff resources with appropriate skills. They noted that the Fund pays full regard to the impact of members' Fund-supported adjustment programs on the poor, and helps member countries to integrate social safety nets into their reform programs. DROUGHT IN SOUTHERN AND EASTERN AFRICA Ministers noted with grave concern the impact of the severe drought in southern and eastern Africa, and urged donors and the Bank and the Fund to provide maximum support for efforts coordinated by the United Nations to alleviate the effects of the drought. FOREIGN INVESTMENT Following the proposal by France at the April 1991 meeting, the Committee received a progress report on the study being made by the World Bank Group of the legal framework governing foreign direct 106 Development Committee Communique investment. Ministers welcomed the work in hand as a basis for discussion of guidelines to help all countries create a hospitable environment for foreign direct investment. They agreed to return to this subject in the September meeting to discuss the proposed guidelines. DEBT The Committee reviewed recent developments in international debt management. Ministers noted the continued progress being made under the international debt strategy in reinvigorating the reform efforts in debtor countries. They recognized however that for many heavily-indebted countries, the debt overhang continued to pose a serious problem. They welcomed the recent agreements reached with commercial banks, most recently by Argentina, covering nine countries accounting for more than 60 per cent of the commercial bank debt of the major debtor nations. Ministers encouraged all parties concerned to complete commercial bank agreements on a timrely basis. They welcomed the decision to extend the IDA Debt Reduction Facility for a further two years. Ministers noted that re-entry to the capital markets accelerated during 1991 for heavily-indebted countries which have been successfully adjusting their economies. They noted that countries which had avoided debt rescheduling generally maintained their access to markets but the Committee agreed that their efforts deserved continuing support. They welcomed the consensus reached by the Paris Club on a new treatment, including 50 per cent debt relief, for the poorest and most heavily-indebted countries, which are pursuing appropriate adjustment policies. Members noted that the Paris Club has agreed to consider the stock of debt, under certain conditions, after a period of three to four years. They recognized that debt-reduction, while necessary in certain cases, meant that certain creditors would be unable to advance new loans to the countries concerned. Ministers considered the impact of current accounting, taxation and supervisory practices upon the willingness of commercial banks to conclude debt reduction agreements, and noted that these had not been a significant barrier. They agreed to consider further whether such procedures seriously inhibited new lending. * * * The Committee agreed to meet again in Washington D.C. on September 21, 1992, when, as already decided, it will discuss papers on the transfer of resources to developing countries, and on the legal framework for the treatment of foreign investment. 107 Appendix A. Agenda for the 43rd Meeting of the Development Committee, Washington, D.C., April 28, 1992 1. Main Issues Papers for discussion (a) Interlinkages between the Policies of the Industrial and Developing Countries, Emphasizing Trade Aspects1 (b) The Interaction of Environment and Development Policies (in preparation for the UJN Conference on Enviromnent and Development to be held in June 1992).2 2. Progress Reports (to take note) (a) Trends in the Transfer of Resources3 (b) The Implementation of the Debt Strategy (covering both official and commercial bank creditors, including taking account of developments in the area of banking supervision)4 (c) The Status of the International Development Association (IDA) Negotiations on the Tenth Replenishment' (d) Implementing the World Bank's Assistance Strategies to Reduce Poverty6 (e) Legal Framework for the Treatment of Foreign Investment.7 3. Other Business Notes 1. This joint issues paper will be provided by the World Bank and the IMF, as requested in paragraph 23 of the October 1991 cornmunique. 2. This issues paper will be preparedi by the World Bank in consultation with the IMF, as requested in paragraph 23 of the October 1991 communique. 3. The President's Report will include a section on this topic. 4. This joint progress report responds to the request to the World Bank and the IMF in paragraph 9 of the October 1991 communiqu6. 5. This progress report relates to paragraph 12 of the October 1991 communique; it will be included in the President's Report. 6. This progress report responds to paragraph 6 of the April 1991 communiqu6. 7. This progress report relates to the request to the World Bank Group in paragraph 8 of the April 1991 communique. 108 Appendix B. Members of the Development Committee (List of Countries Represented by them and their Executive Directors at the World Bank and the International Monetary Fund: as of April 28, 1992) Members Executive Directors Countries 1. Mohammad Abalkhail Ibrahim A. Al-Assaf Saudi Arabia Minister of Finance (Bank) and National Economy Muhammad Al-Jasser Saudi Arabia (Fund) 2. Ibrahim Abdul Karim Fawzi Hamad Al-Sultan Bahrain, Egypt, Minister of Finance (Bank) Jordan, Kuwait, and National Economy Mohamed Finaish Lebanon,Maldives, Bahrain (Fund) Oman, Pakistan, Qatar, Syrian Arab Republic, United Arab Emirates, Republic of Yemen 3. Anwar Ibrahim Aris Othman Fiji, Indonesia, Lao Minister of Finance (Bank) People's Democratic Malaysia J.E. Ismael Republic, Malaysia, (Fund) Myanmar, Nepal, Singapore, Thailand, Tonga, Viet Nam 4. Mohamed Berrada Mohamed Benhocine Afghanistan, Algeria, Minister of Finance (Bank) Ghana, Islamic Morocco Abbas Mirakhor Republic of Iran, (Fund) Socialist People's Libyan Arab Jamahiriya, Morocco, Tunisia 5. Nicholas F. Brady E. Patrick Coady United States Secretary of the Treasury (Bank) United States Thomas C. Dawson II (Fund) 6. Guido Carli Rosario Bonavoglia Greece, Italy, Malta, Minister of the Treasury (Bank) Poland, Portugal, Italy Renato Filosa (Albania) (Fund) 109 Members Executive Directors Countries 7. Alemayehu Daba Jabez A. Langley Angola, Botswana, Acting Minister of Finance (Bank) Burundi, Ethiopia, Ethiopia L.B. Monyake The Gambia, Guinea, (Fund) Kenya, Lesotho, Republic of Liberia, Malawi, Mozambique, Namibia, Nigeria, Seychelles, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe 8. John Dawkins John H. Cosgrove Australia, Kiribati, Treasurer (Bank) Korea, New Zealand, Australia E.A. Evans Papua New Guinea, (Fund) Solomon Islands, Vanuatu, Western Samoa (Mongolia) Alternate Member: R.F. McMullan Parliamentary Secretary to the Treasurer Australia 9. Kablan D. Duncan Jean-Pierre Le Bouder Benin, Burkina Faso, Minister Delegate to the (Bank) Cameroon, Cape Verde, Prime Minister in Corentino V. Santos Central African charge of Economy, (Fund) Republic, Chad, Finance and Planning Comoros, Republic of C6te d'Ivoire Congo, C6te d'Ivoire, Djibouti, Equatorial Guinea, Gabon, Guinea-Bissau, Madagascar, Mali, Mauritania, Mauritius, Niger, Rwanda, Sao Tome and Principe, Senegal, Somalia, Togo, Zaire 110 Members Executive Directors Countries 10. A.,lejandro Foxley Felix Alberto Camarasa Argentina, Bolivia, M:inister of Finance (Bank) Chile, Paraguay, Chile Alejandro Vegh Peru, Uruguay (Fund) Alternate Member: Juan Jose Dfaz Perez Minister of Finance Paraguay 11. Tsutomu Hata Masaki Shiratori Japan Minister of Finance (Bank) Japan Hiroo Fukui (Fund) 12. W. Kok Eveline Herfkens Bulgaria, Cyprus, Deputy Prime Minister (Bank) Israel, Netherlands, and Minister of Finance G.A. Posthumus Romania, Yugoslavia Netherlands (Fund) Alternate Member: J.P. Pronk Minister for Development Cooperation Ministry of Foreign Affairs Netherlands 13. Norman Lamont David Peretz United Kingdom Chancellor of the (Bank and Fund) Exchequer UJnited Kingdom 14. Philippe Maystadt Bernard Snoy Austria, Belgium, Minister of Finance (Bank) Czechoslovakia, Belgium Jacques de Groote Hungary, Luxembourg, (Fund) Turkey 15. Donald Mazankowski Frank Potter Antigua and Barbuda, Deputy Prime Minister (Bank) The Bahamas, and Minister of Finance C. Scott Clark Barbados, Belize, Canada (Fund) Canada, Dominica, Grenada, Guyana, Ireland, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines 111 Members Executive Directors Countries 16. Wendell Mottley Ernest Leung Brazil, Colombia, Minister of Finance (Bank) Dominican Republic, Trinidad and Tobago Alexandre Kafka Ecuador, Haiti, (Fund) Philippines, Suriname, Trinidad and Tobago 17. Michel Sapin Jean-Pierre Landau France Minister of Economy (Bank and Fund) and Finance France 18. Manmohan Singh J.S. Baijal Bangladesh, Bhutan, Minister of Finance (Bank) India, Sri Lanka India G.K. Arora (Fund) Alternate Member: Montek Singh Ahluwalia Secretary, D.E.A. Ministry of Finance India 19. Carlos Solchaga Moises Naim Costa Rica, Minister of Economy (Bank) El Salvador, and Finance Angel Torres Guatemala, Honduras, Spain (Fund) Mexico, Nicaragua, Panama, Spain, Venezuela 20. Carl-Dieter Spranger Fritz Fischer Germany Federal Minister for (Bank) Economic Cooperation Bernd Goos Germany (Fund) 21. Wang Bingqian Wang Liansheng China State Councillor and (Bank) Minister of Finance Che Peiqin China (Fund) Alternate Member: Xiang Huaicheng Vice Minister of Finance China 22. Anne Wibble Einar Magnussen Dernark, Finland, Minister of Finance (Bank) Iceland, Norway, Sweden I. Fridriksson Sweden (Fund) 112 Appendix C. Observers to the Development Comnmittee African Development Bank (AfDB) Associate: Arab Bank for Economic Development in Africa (BADEA) Arab Fund for Economic and Social Development (AFESD) Asian Development Bank (AsDB) Commission of the European Communities (CEC) Associate: European Investment Bank (EIB) Commonwealth Secretariat (COMSEC) General Agreement on Tariffs and Trade (GAT) Inter-American Development Bank (IDB) International Fund for Agricultural Development (IFAD) Islamic Development Bank (IsDB) Organisation for Economic Co-operation and Development (OECD) Associate: Development Assistance Committee (DAC) OPEC Fund for International Development (OPEC FUND) United Nations (UN) Associates: UNCTAD (UNCTAD) UNDP (UNDP) Switzerland (SWITEAND) 113 Joint Ministerial Committee of the Boards of Governors of the World Bank and the International Monetary Fund on the Transfer of Real Resources to Developing Countries (Development Committee) 1818 H Street, N.W., Washington, D.C. 20433 U.S.A. Telephone: (202) 477-1234 Telex: WUJI 64145 WORLD BANK RCA 248423 WORLDBK Cable Address: INTBAFRAD WASHINGTONDC ISBN 0-8213-2133-1