EXTERNAL CAPITAL AND DEVELOPMENT : AN ECONOMIC APPRAISAL OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Abstract

Economic development can be financed with either domestic or external capital. In underdeveloped countries, domestic resources are scarce and external capital fulfils the additional role of assisting the preservation of balance of payments equilibrium during the early stages of growth. This study appraises one type of external capital - the loans of the International Bank for Reconstruction and Development. The I.B.R.D. obtains its funds mainly from borrowings in major international capital markets at prevailing interest rates ranging from 4-6%. It lends out on conventional terms. The pattern of loans is biased towards infrastructure facilities; 66% of loans between 1946 and 1969 were for transport, communications and power. The I.B.R-D. functions both as a financial institution on sound credit principles and as a development institution with clear development objectives. This dual standard, when translated into lending operations, constitutes the banking criteria and development criteria. In adhering to the banking criteria, the credit principles of capital, character, capacity and conditions are adopted. When applied, they often impose stringent debt service conditions for many underdeveloped countries. By 1969, about 60% of IBRD's loans have been granted to Asian and Latin American countries; yet these countries have between 1954-55 and 1964-65 exhibited a discouraging trend in export earnings. A possible solution is to extend soft loans, for which the establishment of the International Development Association was an apt recognition. The development criteria emphasize industrialization, capital formation and absorptive capacity as the basic tenets of economic development. However, the accent on industrialization did not sufficiently recognise the possibility of increasing productivity through the choice of industrial locations, alternative techniques and the rechannelling of low-productive activities. Emphasizing increased capital formation alone is also inadequate, since capacity to absorb determines its performance. Absorptive capacity, however, necessitates the fathoming out of obstacles and leverages bearing on growth. With this in view, I.B.R.D. financial assistance hinges on a "development strategy" which programmes complementary projects and the effective utilization of all resources to initiate self-generating growth. The convincing proof of the contribution of the I.B.R.D. lies essentially in the. economic record of the 1960’s, the second decade of its establishment. Between 1960-67 gross domestic product increased by 4.5% for Latin America and 5.0% for most of Asia