ADDRESS BY EUGENE R. BLACK, PRESIDENT OF THE BANK, IN PRESENTING THE NINTH ANNUAL REPORT TO THE BOARD OF GOVERNORS, SEPTEMBER 25, 1954 This is the sixth of the Annual Meetings We look forward here not only to the of the Board of Governors that I have had formal deliberations of this Annual Meeting the honor to address, and I am glad to have but also to the renewal of personal contact yet another opportunity of meeting so many with the Governors that has proved so re­ old friends again at the Bank's headquarters warding in the past. We greatly value the here in Washington. opportunity which discussion, formal and in­ I am particularly happy to greet two formal, gives us to evaluate the Bank's work, new member countries, Indonesia and Israel, and to exchange and develop new ideas that both of whom have joined us since we last can be translated into action in the perform­ met. ance of the Bank's day-to-day tasks. [ 6] Let me say a special word of welcome to of Mission; and one to Syria, under the dis· our guests. We are favored at this meeting tinguished leadership of our good friend, a by the attendance of many distinguished former Governor of the Bank, Dr. Pieter private citizens of our host country and of Lieftinck. The report of the mission to 16 other countries in both hemispheres. I Nigeria was made available earlier this week, hope these few days will give our guests the in Lagos and Washington, and the other re- opportunity to meet each other and to com- ports are nearing completion. pare notes on matters of common interest, as Two features of the Bank's operations well as to acquaint themselves with the af- during the year seem to be particularly sig- fairs of the Bank. nificant and encouraging. The Bank was In its eighth full year of operations, the established, among other things, to mobilize Bank has continued to be a growing institu- capital on an international basis, and to do it tion. The statistics in which we customarily in close cooperation with private capital. summarize our activities are still moving We have done both with increasing success. along upward curves. I should like to men- Most of our lending during the year was tion a few of the figures to you quickly: based on funds raised in the private market. Our annual report shows more loans- This, of course, was not new: the Bank's 26-and a greater amount of lending-the bonds for some time have served as one of equivalent of some $324 million-than in any the chief means whereby private loan capital other fiscal year. Since the end of the fiscal is deployed internationally. year, we have maintained that pace and a What was new, however, was the scale little bit better, with $90 million more of on which the Bank was able to put portions lending. Our gross total of loan commit- of its loans into private hands. We lent, as I ments, since the beginning of operations, have mentioned, $324 million during the now amounts to something over $2 billion. year. At the same time, we had sales from Disbursements on loans, at $302 million our portfolio and direct participations by in the last fiscal year, moved faster than at private investors in new loans amounting to any time since the exceptional requirements more than $34 million. of the reconstruction loans made in 1947. One striking fact about these transac- Disbursements repayable in currencies other tions was that in nearly 80 percent of them, than United States dollars, equivalent to $82 the other investors assumed the risk, without million, were markedly higher than in any any guarantee by the Bank. A second preceding year. striking fact was that participations, all of It was the Bank's most active year of these without Bank guarantee, were enlisted borrowing. In the 12 months since the last in five of our seven most recent loans. I Governors' Meeting, we have sold eight issues think it is safe to say that private participa- of bonds in various currencies amounting to tions, rare in preceding years, will become a nearly $300 million. continuous and growing part of the Bank's The Bank has continued, at the request operations from now on. of member countries, to give advice on for- A still more conspicuous development ward steps in development-particularly in during the year was the increasing interna- the formulation of development programs tionalization of the Bank's financial re- and on the mobilization of local capital. sources. The operations of the Bank, in the Three of our general survey missions were beginning, were inevitably based on dollars organized during the year to draw up pro- drawn from the United States capital sub- gram recommendations: one to Nigeria, scription and from the capital market in the headed by Mr. Broches, a senior member of United States. From this base-which is the Bank's staff; one to Malaya and Singa- still, and for some time must continue to be, pore, for which we were fortunate enough to our most important base-we took important have the services of Sir Louis Chick as Chief forward steps in 1951, when we sold our [7] first public offering of non-dollar bonds, in system of bilateral payments agreements and the United Kingdom, and in 1952, when the of barter arrangements is being dismem- whole of the original Canadian dollar sub- bered. The dollar problem, if not finally scription to our capital became available for solved, seems to be coming under control. lending. The Netherlands is an outstanding ex- At our Annual Meeting in 1953, I was ample of the extent of the improvement in able to report that the European members of the economic position of our European mem- the Bank were releasing their currencies to bers. The Bank's second largest loan was us in encouraging amounts. N ow I can re- granted to the Netherlands in 1947 to aid in port a like development in the Bank's access reconstruction. Since then the Dutch posi- to capital markets outside the United States. tion has so improved that the government Of the eight bond issues I mentioned a has been able to agree to the release to us of moment ago, three were sold for United 100 million guilders from the Dutch subscrip- States dollars; but investors outside the tion to our capital as well as to the flotation United States took up nearly half the amount by the Bank of a 40 million guilder bond offered-more than $100 million of a total of issue in the Dutch capital markets. Recently $225 million. Our most recent issue, a $50- the Netherlands government has also made million placement of five-year 2% percent prepayments on the 1947 loan amounting to bonds concluded earlier this week, was a $52% million. United States dollar issue sold entirely out- I would like also to call your attention to side the United States. Subscriptions the case of Austria. After the end of the amounting to approximately $78 million war, Austria was beset by difficulties, not of were received for these bonds and allocations her own making, which were discouraging to made to investors in 23 different countries. any foreign investor. In 1949 she needed Bonds of this issue traded yesterday in New almost $200 million in foreign aid to cover York at 101, a full point premium over the her external deficit; but today she has issue price of par. Five other offerings, achieved equilibrium in her balance of pay- during the twelve months, were sold for cur- ments. rencies other than United States dollars: one issue for Canadian dollars, two for Swiss In July the Bank made its first loan to francs, one for sterling, and one for Nether- Austria and this loan, incidentally, is another lands guilders, which was our first quotation illustration of how the improvement in Eu- in that currency. rope's economic position has affected the Bank's operations. It will be disbursed en- Of all Bank bonds sold in the last twelve tirely in European currencies, largely in months, investors outside the United States Italian lire, Dutch guilders and Swiss francs have bought three-fifths. and it is the seventh of the Bank's loans to And of every $1 million which the Bank be disbursed entirely in currencies other than has had available for lending since the be- dollars. ginning of its operations, $400,000 has now These are examples of encouraging originated outside the United States. progress. Especially during the past two These important developments in the years, our European members have more operations of the Bank are symptomatic of and more resumed their role of exporters of the improvement in world production and capital to the world. They are once again trade during the last five years, especially in able to produce and finance their share of the Europe. With some regrettable exceptions, capital equipment needed to hasten the de- financial stability has largely been achieved. velopment of other countries. The Bank The debilitating effects of inflation, both on welcomes this greater availability of credit the balance of payments and in distorting and, to the extent that private capital cannot patterns of production, have been largely directly meet the needs, we expect to play our eliminated. The complex and uneconomic full part in promoting this increased flow of [8 ] capital into the channels where it will do the form not only of competition in terms of most good. price, quality and delivery date, but also competition in the offer of medium-term sup- The Bank itself has large amounts of pliers' credits. The Bank does not know- member currencies which so far have been nor, I think, does anyone know-the exact wholly or partly inconvertible and therefore volume of credits of this kind now outstand- of limited use. Let me repeat what I have ing. But, as one positive measure toward said so often, that I consider the liberal re- meeting the situation, I plan to explore the lease of these currencies to be of extreme possibility of establishing an information importance. I want to add now that I service which would centralize all available believe that the time has come when the con- data on the total volume of suppliers' credits ditions attached to the Bank's use of these outstanding. currencies should be reviewed and relaxed to the greatest extent possible. The Bank, as Suppliers' credits, I need hardly say, are well as the Fund, has a vital interest in all an appropriate type of international financ- evidence of progress toward convertibility ing when applied to the proper transactions. because it is at the same time the promise of But they can be misused and over-used, and further expansion of long-term investment there is some disturbing evidence that this is in development. happening-too much credit given, under the Some of the currencies we need will pressure of competition, sometimes on inap- come, I hope, from the greater availability, propriate terms and for the wrong purposes. without restriction, of the capital subscrip- The situation, in my view, is becoming tions of member countries. We will also go serious. The danger is that bad credit will on raising capital by issues of our bonds. drive out good, and tend to bring interna- There is still another way in which we tional investment back into disrepute-this may utilize these capital resources. It is en- at a time when the world is still negotiating tirely natural that, in a world in which finan- adjustments of debts incurred during the cial equilibrium has been disturbed for a earlier period of excessive borrowing, over- long time, the confidence of investors re- eager lending and mis-investment to which I turns only gradually and that capital is referred just now. therefore lent at short term. We offer a ve- Suppliers' credits can serve a useful hicle for capital of thi'3 kind in the form of purpose in financing the normal, short-term loan participations and sales of our bor- flow of imports or in financing investment rowers' securities from our portfolio; and as projects which can pay their way within the I mentioned some moments ago, these activi- term for which the credit is given. But, ties are increasing rapidly. If private funds although the availability of these credits are still hesitant about undertaking long- may seem to present an opportunity to speed term commitments, loan participations can the rate of development, there is a risk that be arranged with such funds taking short the use of short-term finance may be pressed and medium term maturities while the Bank beyond these limits. When this happens, the itself takes the long maturities. result is likely to be unfortunate. We must, at this stage of the world's N or can the balance of payments aspects recovery, I think, remember the conse- of these transactions be overlooked. Expe- quence of what happened in the 1920's and, rience teaches us that it is imprudent to count bearing that example in mind, we must real- on a steady flow of capital year after year. ize that the growth of credit brings its own Reliance on suppliers' credits, indeed, in gen- problems. As the availability of capital and eral means reliance on something particularly capital equipment has risen, we have passed volatile. The importing country may run from a seller's to a buyer's market and a into payments difficulties that check further competitive race is developing among sup- investment from outside. The exporting pliers all over the world. This takes the countries themselves may experience pay- [9] ments difficulties that force them to insist on The increase in competition in suppliers' cash payment. Or a boom in the world or credits also has its dangers for the exporting home market may make it possible to sell for countries. Suppliers' credits are usually cash and reduce the need to extend credit. financed only in minor part by the suppliers There is the risk, in other words, that the themselves. Most of the industrial nations- borrower may have raised his rate of invest- and I include not only European countries ment only to find that he must later make, but the United States, Canada and Japan- perhaps. a drastic cutback and that what was now have one or both types of official insti- looked forward to as a period of sustained tutions to give financial aid to exports. One economic advance may end as a period of type finances the export of capital goods; the stagnation or, even, of retrogression. other, without supplying capital, underwrites the risk. These suppliers' credits are usually The manner in which suppliers' credits made largely at the ultimate risk of the gov- are offered, moreover, sometimes results in projects being undertaken which are far ernment of the exporting country. from the highest priority in developmental I would like to make clear, of course, needs. The exporting country wishes to that I am not talking primarily about the boost its exports and therefore offers credits flow of private investment capital. If the for financing a project using its equipment. supplier were venturing more of his own The manufacturing supplier of equipment capital, he would necessarily have to be more naturally welcomes any opportunity to in- concerned with the financial soundness of the crease his sales and he can certainly not be investment and with the creditworthiness of blamed if he takes advantage of whatever the country. But the result of the supplier's credit facilities may be made available. And relative freedom from risk is that he is con- the importing country may feel that the stantly entreating his own government to credit, being available, should be accepted grant more liberal credit facilities. In each even if not for the most useful of purposes of the exporting countries governments hear nor on the best of terms and even if, as often the complaint that other governments are happens, under these arrangements a higher being more liberal. So a race is developing, price for the goods must be paid. This is a race in which none of the competitors can contrary to the interests of the importing win because the faster each one goes, the country and may result in slower rather than faster all the others go. faster development. Indeed, I think we are approaching a sit- Long-term capital funds represent, in uation about which a warning was sounded general, the most appropriate method of fi- ten years ago at Bretton Woods. The spokes- nancing development projects reqUIrmg man of one of the delegations there pointed heavy capital equipment, from the point of to the danger, saying that, in a time of pres- view both of the nature of the projects them- sure for exports, "countries would embark selves and of the impact on the borrowing on bilateral credit arrangements no doubt country's balance of payments. But any po- linked with deals relating to the purchase tential long-term investor-and not only the and sale of goods; and as soon as certain International Bank-must take into account countries began to adopt this course others the total external debt burden of the borrow- would find that they had to follow suit to ing country. So an excessive use of short or protect their trade interests. It is difficult," medium term credit must necessarily dimin- the spokesman went on to say, "to imagine a ish a country's access to long-term capital more fruitful source of international dissen- funds. In short, the indiscriminate use of sion than a competitive trade and credit credit of this kind may increase the costs of expansion program of this character." development, may interrupt the continuity of I certainly do not wish my remarks effort, may upset the balance of investment, about the dangers inherent in an undiscrim- and may make the goals of investment inating use of credit to be interpreted as a harder, and not easier, to reach. warning against a sound increase in credit [10 ] accompanying a healthy expansion of inter- factor in the exchange of goods throughout national investment, particularly in the pri- the world at a rate never before experienced. vate sector. At the moment, I am happy to Advances in the underdeveloped coun- say, the world is enjoying relatively prosper- tries have been harder to observe-if for no ous conditions of high employment and trade other reason than that these countries extend and the total volume of international credit over so much of the earth-and the advances is probably still expanding. But, if these have in any case been uneven. But to me conditions are to continue and if the flow of they are a source of immense encouragement. international trade and investment is to re- flect a growing and dynamic world economy, The process of economic development is the world's trade policies will need to be not easy to set in full motion, involving as it liberalized. Last year I said that "merely to does a host of technical skills and a complex refrain from reversing the downward trend of behavior patterns that took centuries to in United States import tariffs over the last evolve in the industrial world of today. Yet two decades would not be enough to put in- the process is accelerating. ternational trade on an even keel"; and that If we had a magic carpet here this there was need for a further reduction in the morning to take us all around the globe, I obstacles to imports. think we would be struck by the many evi- I share the disappointment of many of dences of this progress. We would see trac- you that the United States Government did tors working on land that before had only not find it possible to put into effect this year known the bullock, and we would see small the trade liberalization features of its foreign factories working where industry had never economic policies, and I welcome the Presi- appeared before. We would see truck roads dent of the United States' recent statement, replacing donkey and camel trails and new which was reaffirmed by Secretary Hum- farms being cleared along these roads. In phrey, that it is his intention to give high the mountains, we would see streams being priority to them in next year's legislative harnessed to produce energy, and, in the program. deserts, hundreds of miles of pipe bringing natural gas to productive use. Down in the The first of the Annual Meetings of the villages, we would see grain being milled by Governors at which I had the honor of ad- machinery, instead of being pounded out by dressing the Governors was six years ago. hand, and electric light replacing the old oil I hope the Governors will forgive me if, as a lamp. privileged witness of some of the events of the past six years, I end these remarks I'd like to give you one small illustration briefly with a personal and impressionistic of what I am talking about. This concerns retrospect. one of our loans to the Federal Electricity Commission in Mexico--and the installation In 1949, the ruins of war were still ap- of a small diesel power plant of only 600 parent in Europe. Famine was abroad in kilowatts generating capacity. We financed some parts of the world and the threat of it the installation of this plant in the rural town was only thinly veiled in other parts. Recon- of Tecuala, in Mexico's west coast area. In struction was far from complete; the or- three years' time, with this small diesel plant, ganized attack on development problems, here are some of the results: industrial users evident in many countries now, had scarcely of electricity in Tecuala have risen from 3 to at that time begun. 33; the town has acquired a public library, a The contrast today, as we all know but daily newspaper, a radio station, and a night perhaps too seldom remember, is quite re- school; Tecuala's population has tripled, and markable. The facts about recovery in Eu- the number of students in its schools has rope are too familiar to need repetition; let increased seven times. The municipal hos- me remark only on the obvious: that the pital has installed refrigerators and put in a revival of production there has been a major modern fluoroscope, which is the only one [11 ] within a radius of 60 miles. The mayor of from the mobilization of capital, internally the town recently said: "I have witnessed and internationally, to the application of our emergence from the dark ages into an capital to bring about new production and age of light." trade. Indeed, in this Report, you can sur­ Now, as I said, the advance in develop­ vey our technical and financial assistance to development institutions in many countries, ment has been uneven. In some areas it has to the construction of electric power capacity not occurred at all, and in others the gains of something over three million kilowatts, to have as yet been meager. And we must re­ the improvement of some millions of acres of member, as one of the Governors well said farm lands, to the improvement of services here a year ago, that we are faced today by a on railways in a dozen countries in five revolution of expectancy. continents. In many parts of the world, people are By comparison with what usefully can less and less content to live in the past or to be done, these figures are modest enough, and think in the past. The way to deal with a I have no illusions about the magnitude and revolution of expectancy is to turn it into a the difficulty of the tasks that face our mem­ revolution of achievement and progress. ber countries and the Bank. What I do have It is in this kind of a revolution that the is evidence that convinces me, more than Bank can see itself playing a part. In the ever, that these tasks can be accomplished, Annual Report before you, you will find the and that the revolution of achievement can full range of the Bank's interests displayed- be won. [ 12]