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THE UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
AND THE INTERNATIONAL TRADE PROBLEM
APPROVED:
Major Profes sor
Minor Pro fe s sor
Director of the Department of Economics and Sociology
Dean of the Graduate School
THE UNITED NATIONS C O N F E R E N C E ON TRADE AND D E V E L O P M E N T
AND THE INTERNATIONAL TRADE P R O B L E M
T h e s i s
P r e s e n t e d to the G r a d u a t e Counci l of the
North T e x a s State U n i v e r s i t y in P a r t i a l
F u l f i l l m e n t of the R e q u i r e m e n t s
F o r the D e g r e e of
MASTER O F ARTS
By
W e s l e y F. Booth, R. A,
Denton, T e x a s
J 3 nu h x ' y . 10 6 3
TABLE OF CONTENTS
Page
LIST OF TABLES iv
LIST OF ILLUSTRATIONS v
INTRODUCTION 1
Chapter
I. TRADE AS AN ASPECT OF INTERNATIONAL DEVELOPMENT ACT REPORTED BY THE THIRD COMMITTEE OF UNCTAD 4
P r e b i s c h Report
II. TRADE AS AN ASPECT OF DEVELOPMENT VIEWED BY THE DELEGATIONS 12
Underdeveloped "Seventy-Five"
III. ECONOMIC GROWTH AND EXTERNAL DEBT 27
Analytical F r a m e w o r k L o n g - t e r m Aspect of Debt Servicing Capacity A Stat is t ical P re sen ta t i on Conclusions
IV. TWO STUDIES REVIEWED BY THE THIRD COMMITTEE . 50
Fo rma t ion of an Internat ional T rade Organizat ion Promot ion of T o u r i s m
V. OCEAN SHIPPING AND DEVELOPMENT .60
Impact and Incidence of F re igh t Rates The Development of Merchant Mar ines Conclusions
i n
Chapter • Page
VI. FINANCING AN EXPANSION OF INTERNATIONAL TRADE 71
The Distr ibution of Flows to the Developing Countr ies
Export Receipts The Flow of Long- t e rm Funds in Relation
to Development T a r g e t s and the Recipients ' Needs
Aid Pol ic ies , Insti tutions and P r o c e d u r e s Internat ional Co-ordinat ion of Aid M e a s u r e s to I nc r ea se the Flow of Externa l
Finance and to Improve the T e r m s The P r o b l e m of Debt Service Burden of
Developing Countr ies Internat ional Compensatory Financing Pro tec t ion Against Risks in Export Finance
VII. DEVELOPMENT THROUGH PRIVATE DEVELOP-MENT FINANCE COMPANIES 100
Supplying Management and Recrea t ing Capital
Es tabl ish ing a Finance Company
VIII. CONCLUSIONS 109
LIST OF TABLES
Table Page
I. Share of Two Pr inc ipa l Commodi t ies in Total Expor ts 30
II. Growth in Public Indebtedness, Thir ty-Seven Countr ies , End 1955 to End 1962 40
III. Selected Debtors: Public Debt Outstanding 1955-1962, End of the Year 43
IV". Growth in Publ ic Debt Service, Thir ty-Seven Countries, 1956 through 1963 45
V. P e r Cent of Debt Incur red as of the End of 1962 Repayable in 1963-1965 and in 1963-1967 46
VI. F re igh t Charges as a Pe rcen tage of the F. O. B. Value of Expor t s F r o m Seven Developing Countr ies „ 64
VII. Net Flow of L o n g - T e r m Capital, and Official Donations F r o m Developed Market Economies and Mul t i la tera l Agencies to Developing Countr ies 72
VIII. Net Official Flow F r o m North Amer ica , Wes te rn Europe and Japan and F r o m Mul t i la tera l Agencies to Developing Countr ies 74
IX. Developing Countr ies : Pe rcen tage Distr ibut ion of Net Internat ional Flow of L o n g - T e r m Capital and Official Donations, by Region 77
X. World Bank, IDA, and IFC Financing of Development Finance Companies 106
LIST O F ILLUSTRATIONS
F i g u r e Page
1. Growth in Externa l Publ ic Indeb tedness - -37 Countr ies 41
2. Growth of Service Payments on Exte rna l Debt- -37 Countr ies 44
VI
INTRODUCTION
The concept of "economic underdevelopment" is of recent origin.
It owes i ts exis tence to the emergency si tuation which was the resu l t of
World War II. The m a j o r i t y of the nations occupying the g r e a t e r par t
of the world were cal led "underdeveloped" or m o r e recent ly , "developing."
The t e r m itself impl ies a f r a m e of reference,, To be "unde r -
developed., " these countr ies must be compared with something m o r e
developed; to be "developing, " they mus t be on the i r way to a m o r e
des i rab le stage of development. The re fo re it is a s sumed that t h e r e
is a bas ic pa t tern which provides a ya rds t i ck for the degree of advance-
ment toward a goal. The aim of the developing nations, then, is to
achieve the stage of development which exis ts in the developed count r ies .
Any s ta tement comparing the degree of development of two or
m o r e countr ies mus t acknowledge m o r e than one fac tor . The Thi rd
Commit tee of UNCTAD considered the problem of internat ional t r ade
as an in tegral par t of the total development problem.
It is genera l ly accepted that no country can exist in isolation,
that in our world every nation is an in tegral pa r t . Some of the devel-
oped nations have exp res sed a g rea t wil l ingness to extend ass i s t ance .
However, a f t e r a s s i s t ance p r o g r a m s were begun, the genera l p rac t i ce
was for the developed countr ies to set the i r own economic a ims and
execute the i r own economic pol icies r e g a r d l e s s of the impact on the
developing economies.
The a r e a of development is one of the mos t p r e s s ing p rob lems
of today. With new nations emerging and o lder nations beginning to
develop, t he re has been a focus of attention on t r ade as a par t of devel-
opment. As these nations ma tu re , they mus t be able to s tep into the i r
r o l e s as par t of the world economy. UNCTAD undertook the p rob lem
of t ry ing to begin a s e r i e s of studies to solve this problem.
The study of the r e su l t s of th is Conference is important be-
cause th is was the f i r s t t ime an internat ional gather ing of so l a rge a
number of countr ies was held speci f ica l ly to d iscuss t rade and develop-
ment problems. One hundred and nineteen nations met in Geneva in
a sp i r i t of cooperat ion and with the exp re s sed will ingness to pe rmi t
internat ional i n t e r e s t s to prevai l over national i n t e r e s t s .
The re a r e cer ta in e lements of t rade as a par t of development
which faci l i ta ted the c rea t ion of a specia l commit tee . The f ea tu re s
will be surveyed. The situation of the world that prompted the cal l -
ing of the Conference and the s ta tements by the delegates on this topic
a r e of special in te res t . The paper s p resen ted at th is Th i rd Com-
mi t t ee will be examined as a device to show the re la t ion of i n t e r -
national finance, pr iva te development finance companies, t ou r i sm,
ocean shipping, and external debt to the problem of development. Also,
the c rea t ion of an Internat ional T rade Organizat ion will be d i scussed
as a possible beginning to the solution of the development- t rade
p rob lem.
Finally, against the background of the Conference i tse l f ,
the r epo r t of the Th i rd Commit tee will be analyzed and i t s r e s u l t s
evaluated.
CHAPTER I
TRADE AS AN ASPECT OF INTERNATIONAL DEVELOPMENT AS
REPORTED BY THE THIRD COMMITTEE OF UNCTAD
The United Nations Conference on T rade and Development was
convened in 1964 with the goal of finding ways to accompl ish the main
object ives of the United Nations Development Decade. The United
Nations Genera l Assembly had set the goal of an at tainment of a min i -
m u m annual growth r a t e of 5 p e r cent in the income of the developing
count r ies by 1970. This was not an excess ive ly high ta rge t s ince it
was not much higher than the average ra te of 4. 4 per cent r e g i s t e r e d
in the 1950's. Never the less , it would have been difficult for many of
the developing countr ies to achieve and mainta in th is r a t e of growth.
The United Nations Conference on Trade and Development had as i ts
p r i m a r y goal the development of a "policy of internat ional co-opera t ion
that would make it poss ible to e l iminate the imbalance in t r ade"
(1, p. 5).
In o r d e r for the developing countr ies to r ea l i ze an inc rease of
5 per cent pe r yea r in income, t he i r impor t s had to i nc rease by a
somewhat h igher r a t e . One of the main r e a s o n s fo r this is that a c c e l e r -
ation in the r a t e of growth r e q u i r e s additional investment; and the impor t
4
content of capital goods compris ing this investment is normal ly much
higher than that of the export genera ted income as a whole. Consequently,
impor t s would have to r i s e at a ra te higher than that of total income .in
o r d e r to finance investment (1, p. 5).
Another implicat ion of the 5 p e r cent growth ta rge t was that
expor ts of the developing countr ies would have to r i s e at the r a t e of 6
p e r cent p e r annum in o rde r to maintain ba lance-of -payments equi l ibr ium.
More p rec i se ly , a volume of exports should r i s e at a r a t e which, a f t e r
allowing for changes in the t e r m s of t rade , would pay fo r a volume of
impor t s increas ing each y e a r .
During the 1950's th is growth ra te was not rea l ized . The annual
r a t e of growth in export volume of the developing countr ies was only 4
pe r cent pe r annum, and if the pe t ro leum-expor t ing countr ies were ex-
cluded, the average would have been signif icantly lower . At the same
t ime the t e r m s of t r a d e (an excess of expor ts over impor ts ) de te r io ra ted
so that the purchasing power of exports r o s e by l e s s than 2 p e r cent p e r
annum (1, p. 6).
This was the s ta r t ing point of the Conference on T rade and
Development. If the t r end of the 1950's continued, the economic s i tu-
ation of the developing countr ies would continue to worsen . UNCTAD's
mi s s ion was to t r y to es tabl ish de termined poli t ical e f fo r t s by the de-
veloping nations to improve the existing world t r ade si tuation.
Prebisch Report
At the opening of the Conference, the Secretary-General of the
Conference, Dr. Raul Prebisch, gave a report entitled "Towards a
New Trade Policy for Development. " In this report , Prebisch defined
the underlying assumption of the Conference as "a clear-cut political
concept which has apparently ceased to be a subject of controversy:
that the prosperous countries of the world should not neglect the
problems of the economic periphery where two-thirds of the world 's
population live in very precar ious conditions" (2, p. 86). He pointed
out that there is a basic difference between recognizing this fact and
formulating any vigorous policy to correct it. He said that "never
before has there been an opportunity like the present of quickly solving,
thanks to enormous potential of contemporary technology, the problem of
poverty and its inherent evils in the developing countries" (1, p. 76).
Despite this, the world tensions at that t ime acted as a check on poor
countries ' growth.
He correct ly s ta tes the developing countries ' feelings in his report
by noting
The developing countries have come to this conference with a view to attaining a policy which
-will enable them to accelerate their ra te of economic and social growth and to draw attention to the im-perative need for a fundamental change in the policy of international co-operation which must be based on reality (1, p. 76).
After defining the developing countries ' viewpoint, Prebisch
gave a brief summary of their economic situation. He noted that the
non-industrial countries have the advantage of having at their disposal
the great potential of modern technology. Nevertheless, he feels that
the problems of adapting this technology to their "infant" economies
overcame the advantage. For example, modern technology requi res
a very high input of capital per person and the developing countries
have a low per capita income, which makes it difficult for them to
accumulate capital quickly f rom their own resources . Also, the high
ra te of population growth present in most underdeveloped nations i s
an added liability.
Prebisch points out that another obstacle, a " trade gap, "
keeps developing countries f rom realizing their full potential growth
ra te . He says that if the underdeveloped are to achieve the 5 per
cent minimum rate of annual income growth by 1970 (as set by the
United Nations Development Decade), they must import approximately
$20, 000 million over and above their export proceeds — assuming that
the t rends of the past decade continue and if the t e r m s of t rade do not
continue to deter iorate . He explained the "trade gap" by using eco-
nomic principles. As per capita income grows owing to technological
advances, the demand for pr imary commodities r i s e s much more
slowly than the demand for industrial goods. This becomes more
apparent with the development of synthetics. The goods for which
8
demand grows slowly a r e usual ly raw m a t e r i a l s f r o m the developing
count r ies . On the other hand, they impor t products for which t h e r e i s
an acce l e r a t ed demand. Hence a pe r s i s t en t imbalance exis ts in the
developing countr ies , and the opposite in the indus t r ia l ized count r ies
(1, p. 79).
P r i m a r y production i s not sensi t ive to marke t changes.
T h e r e f o r e , it tends to expand beyond demand. T h e r e a r e economic
and social impediments to the rap id adjus tment of p r i m a r y production,
especia l ly when the re a r e l a rge i nc rea se s in productivi ty following
technological advances in the l a t t e r s ec to r . P r i m a r y commodity p r i c e s
have a tendency to fall in re la t ion to the p r i c e s of manufac tured goods
due to the " f r e e play" of marke t f o r ce s . However, the indus t r i a l i sed
economies only exper ience this in the i r in ternal s e c t o r s . To solve this
p roblem, the developed economies only have to r ed i s t r ibu te t he i r income
in ternal ly . On the other hand, when the same thing happens in the de-
veloping economies, it is r e f l ec ted in a t r a n s f e r of income to the indus-
t r i a l count r ies . In effect , t h e r e is a r e g r e s s i v e red is t r ibu t ion of income
that can only be offset by thorough co-opera t ion of the indus t r ia l
countr ies (1, p. 77).
Regarding the s a c r i f i c e s the indust r ia l countr ies would have to
make to offset the " t r ade gap , " Dr . P reb i sch said that in the long run
the s ac r i f i ce will take place anyway "because the i r indus t r i es will lose
such promis ing export opportunit ies" (2, p. 87).
To attack the problem of the persis tent " t rade gap, " Dr.
Preb isch proposed six main points that he considered to be the at-
tainable minimum. F i r s t , Dr. Prebisch proposed that pr imary com-
modities should be given eas ie r access in the marke ts of the m a j o r
industrial centers and be assured a reasonable share in growth of
consumption. Secondly, the purchasing power generated by export
earnings of the poor countries should be increased and stabilized,
either by commodity agreements or by compensatory financing. Third,
res t r ic t ions presently hampering the entry of developing country manu-
fac tures and semi-manufactures should be replaced by a preferent ia l -
type policy in order to ass is t infant industries of the underdeveloped in
finding external marke ts . Fourth, groups of developing nations should
come together in order to encourage import substitutions. Next, t rade
with the socialist countries must be encouraged on a long-term basis in
o rder to move f rom bilateral to mult i lateral t rade . Finally, the need to
reduce the burden of servicing external debt by readjust ing loan periods
and t e r m s must be studied {1, pp. 78-79).
Concluding his repor t , Prebisch acknowledged the idea that
countries must develop through their own effor ts . He points out, though,
that these developmental procedures must be allowed to take the form of
increases in exports. In this respect , the international institutions should
be changed and the industrial countries should help bear the cost. He
s t r e s sed the "great opportunity" the Conference had of solving the basic
10
prob lems of the developing world and hoped this opportunity would not
be wasted (2, p. 87).
P r e b i s c h ' s concluding r e m a r k s a r e remin i scen t of B a r b a r a
W a r d ' s philosophy. In h e r book, The Rich Nations and the Poor Nations,
she says the indus t r ia l ized nations must r ea l i ze that the re is a social
and economic revolution taking place in the world and must take s teps
to help the developing countr ies . She says the developed countr ies
mus t supply the capital to fill the " t r ade gap" {1).
Thus the developing countr ies were able to identify the i r cause
with Dr. P r e b i s c h ' s r epor t .
CHAPTER BIBLIOGRAPHY
1. Proceedings of the United Nations Conference on Trade and Development, Vol. II of Policy Statements, 8 vol . , New York, 1964.
2. "United Nations Trade and Development Conference,11 U. N. Monthly Chronicle (May, 1964), pp. 48-62.
3. Ward, Barbara , The Rich Nations and the Poor Nations, New York, W. W. Norton and Co. , Inc. , 1962.
11
CHAPTER II
TRADE AS AN ASPECT OF DEVELOPMENT AS
VIEWED BY THE DELEGATIONS
After P reb i sch ' s report , UNCTAD was organized. Abdel
Moneim El Kaissouni, Deputy P r ime Minister of the Arab Republic,
was elected President of the Conference by acclamation. The vice-
presidents were elected f rom representat ion of Western Europe, the
United States, and other nations. There were twenty-seven Vice-
Pres idents . George Hakim of Lebanon was elected. Rapporteur and
the selection of committees was begun (2, p. 86)
Af ter this initial phase of UNCTAD was completed, the dele-
gates made their opening remarks in behalf of their countries. These
r emarks fell into three distinct categories: the seventy-five under-
developed nations, the industrial nations, and the Soviet Bloc nations.
Underdeveloped "Seventy-Five"
Among the seventy-five developing countries, three main sub-
groupings could be discerned. The f i r s t consisted of the so-called
"modera tes" : India, Pakistan, Malaysia, and the Philippines, occa-
sionally the United Arab Republic, and many of the Latin Americans,
especially Colombia and Peru . The Indians played an outstanding
12
13
l eade r sh ip role of th is segment of the underdeveloped nations. The
mode ra t e s were genera l ly anxious to avoid an acr imonious o r un re -
warding confrontat ion between the developing countr ies and the indus-
t r i a l i zed count r ies and sought to secu re some genuine reconci l ia t ion .
of viewpoints between the two groups which would hold out r e a l hope
of wres t ing meaningful concess ions f r o m the Wes te rn indus t r ia l ized
countr ies . While shar ing the d e s i r e s common to all " seventy- f ive"
for new ini t ia t ives in t r ade m a t t e r s , they rea l i zed that the eff icacy of
any new m e a s u r e s would be dependent upon the active cooperat ion of
the indus t r ia l ized West (3, p. 12).
The modera t e s p r e f e r r e d to work for a compromise between
the in t e re s t s of the developed and underdeveloped economies. F o r
example, Wahid-Uz-Zaman, Pakis tan ian delegate, stated:
It is quite c l ea r that what is r equ i red is a fundamen-tal change in the approach of the indust r ia l ly advanced coun-t r i e s in the p rob lems of l ess -deve loped countr ies . . . . In-deed, would it be too much to expect the indust r ia l ly-advanced countr ies to b e a r on our p rob lems the s a m e determinat ion with which they a r e tackling the needs of the l e ss -deve loped p a r t s of t he i r countr ies . . , (1, p, 304),
Zaman also said that UNCTAD should not concern itself with-
spec i f ic m e a s u r e s for ass i s t ing the underdeveloped countr ies without
f i r s t having an awareness of these countr ies ' p rob lems . Likewise,
the Phil ippine delegation noted that an expanded GATT would aid in
solving some of the internat ional f inancial p rob lems . The Phil ippines,
with this action, conceded one of the indust r ia l W e s t ' s a rguments thus
14
demonstra t ing i ts compromis ing attitude {1, p. 315). The Malays ian
delegation actual ly s ta ted this policy in i t s opening r e m a r k s . They
e x p r e s s e d the des i r e that the developing economies not " lose sight of
rea l i ty" and r e m e m b e r that "we, the developing countr ies , a r e going
boldly to ask the indus t r ia l ized countr ies f o r a g r e a t e r contribution.
But the solutions we r e a c h should endeavor to reconci le the di f ferent
i n t e r e s t s involved!' (1, p. 263).
The second sub-group was the eighteen Af r i can Assoc ia t e s
of the European Economic Community. They genera l ly followed the
l ead of F r a n c e , and were natura l ly anxious that the p re fe ren t i a l t r e a t -
ment they enjoyed in the EEC should not be d i scarded until some a l t e r -
native benef i ts could be ag reed upon. This was a distinct advantage to
the indus t r ia l ized nations fo r it often resu l ted in sha rp divisions be-
tween the different Af r i can fact ions.
Final ly, the " r a d i c a l s " were the th i rd sub-group. They were
numer ica l ly in the ascendancy and displayed few inhibitions. This
group was l a t e r able to push resolut ions through commit tees by
" s t e a m ro l l e r " techniques without r e g a r d to e i ther the other countr ies
o r the consequences (3, p. 13).
Aime Matsika, r ep resen ta t ive f r o m the Republic of the Congo
(Brazzavi l le) , s ta ted the case for the " rad ica l " developing nations:
15
We, the under-developed countr ies , a r e unanimous in our case . Our will to achieve posit ive r e s u l t s i s es tabl ished. It is a question of the two- th i rds of mankind who s h a r e only 15 p e r cent of the wor ld ' s income that must be helped (1, p. 156).
Many of these delegations, in the i r at tempt to define the ba s i c
p rob lems of development, voiced the i r c r i t i c i s m s against the exist ing
t r a d e si tuation. They then of fered the i r pa r t i cu la r solutions. Argen t ina ' s
Eugenio Blanco s ta ted that h is count ry ' s stagnation was caused by ad-
v e r s e developments in the external sec to r . To c o r r e c t this , he cal led
fo r u n r e s t r i c t e d marke t opportunit ies for the developing nations plus
compensat ion to the "poor" by the " r i ch , " This compensation was to be
admin i s t e red by the developing countr ies with no outside i n t e r f e r ence
(1, p. 103).
Regional organizat ions were c r i t ic ized by many delegates .
Mohammed Sar ina r Omar , Minis te r of C o m m e r c e of Afghanistan, s u r -
veyed his count ry ' s t r ade gap prob lem and said that Afghanis tan ' s t r a d e
had su f f e red because of the tar i f f b a r r i e r s of the EEC (1, p. 88). Victor
Kanga, the Cameroon delegation head, a lso s ta ted that regional agencies
could not solve the wor ld ' s economic prob lems . Blanco agreed with these
comments and accepted the i r proposed solution (1, p. 136). This was
the c rea t ion of a new organizat ion which could change t r a d e p rac t i ce s .
The proposed organizat ion would have to be world wide and the "Confe r -
ence should es tab l i sh a permanent s e c r e t a r i a t to continue the work" which
was s t a r t e d at UNCTAD (1, p. 88). This s e c r e t a r i a t would cal l
16
additional conferences and would eventually absorb the General
Agreement on Trade and Tariff . Concluding his r emarks , Omar
called for "a new global approach to the world 's problem in the field
of t rade and development" (1, p. 89).
Colonial domination, price fluctuations, quantity res t r ic t ions ,
and agricultural problems were also stated as causes of under devel-
opment. Rudolphy Yav, delegate f rom the Republic of the Congo
(Leopoldville), expressed the desire to see pr ices stabilized at r e l a -
tively high levels. He said this would benefit the developing countries
in three ways. F i r s t , it would relieve them of the burden of fluctuating
pr ices . Second, stable pr ices would permit the exporting countries to
acquire sufficient resources to import the goods they need for development.
Finally, domestic consumption of p r imary commodities would be s t im-
ulated in the industrialized countries (1, p. 157).
Despite these many proposals, these countries were pr imar i ly
interested in getting the cooperation of the developed countries. Argen-
tinian representat ive Blanco summed up the feeling by saying:
It is difficult to put forward proposals aiming at a more equitable distribution of income at the national level if policies with parallel objectives a re not put into practice on the international plane . . . the Governments of the developed countries will need to make decisions at the in ter -national level with the same foresight and sense of urgency that they habitually show when solving internal problems (1, p. 101).
To achieve the goal of enlisting the industrialized nations' help,
these "radical" developing countries t r ied to use force . Zanna Bukar
17
Dipcharina, head of the Nigerian delegation, sensing that numerical
superiori ty was now in the hands of the "seventy-five" underdeveloped
nations, urged these delegations to push proposals through the coming
committee discussions (1, p. 300).
Industrialized Nations
The second major group at UNCTAD was the industrialized
nations. They were in the minority but industrialization was their
strength. The United States, Canada, the United Kingdom, Switzerland,
and occasionally Sweden were often in disagreement with themselves
as well as with the developing countries.
While the radical developing economies were determined to
set up a new international agency and abandon GATT and push through
aid measures by numerical strength, the industrialized economies were
just as determined not to concede any of their demands. Theirs was a
defensive position however. The Conference was an attempt on the part
of the underdeveloped nations to force international t rade concessions
f rom the industrial economies. The industrial countries real ized this.
Consequently, they t r ied to preserve the status quo or concede as
little as possible. The opening statements of the delegates demonstrate
this.
For example, George M. Ball, Under-Secretary of State of the
United States, explained that the developing nations should not expect to
18
achieve se l f - sus ta in ing growth automatical ly through developed nations
giving aid. He explained that the indus t r ia l nations themse lves must
under take m e a s u r e s to mainta in full employment and a high ra t e of
economic growth.
Ball said that until full employment is gained in the indus t r ia l ized
economies , no substant ia l re laxat ion of tar i f f b a r r i e r s could be expected
because the labor sec to r of the indus t r ia l ized economies would not be
p r e p a r e d for the sudden pr ice f luctuations. Ball sa id that the Conference
"mus t be su re also that such proposa ls will not c rea te m o r e p rob lems
than they solve" (1, p. 386). He then pointed out that many indus t r ia l ized
economies had never the less lowered the i r t a r i f f s on p r i m a r y products ,
s e m i - p r o c e s s e d goods, and manufac tured goods of special in te res t (1,
p. 395). Ball introduced the polit ical aspect of world t r ade by stat ing
that
Special t rading a r r angemen t s have h is tor ica l ly evolved in the context of special polit ical re la t ionships , and that specia l respons ib i l i t ies in the a r e a of t r ade a re l ikely to c a r r y with them specia l respons ib i l i t i es in the a r e a s of poli t ics and even defense (1, p. 386).
Instead of the developed countr ies opening the i r m a r k e t s to the
underdeveloped countr ies , the United States ' position was that the under -
developed countr ies should spend m o r e effor t t rying to support and ex-
pand the i r own in ternal m a r k e t s . This is pa r t i cu la r ly t r ue fo r the
a g r a r i a n economies . If in terna l m a r k e t s were not l a rge enough (one
hundred nations r ep re sen t ed at UNCTAD have populations of l e s s than
19
15 million) then t h e r e might be regional m a r k e t s to turn to (1, p. 397).
Ball also pointed out that in o r d e r for economies to s tabi l ize
and grow, the countr ies must put as ide considera t ions of poli t ical
p re s t ige and advantage and commit themse lves to a full l ine of action.
The developing economies could also educate the i r bus inesses in the
s t andards of conduct of in ternat ional bus iness which have been changing
over the y e a r s . He pointed'out that many nations a r e s t i l l influenced
by "c l i ches" of the past (1, p. 398).
The United States ' position on aid to the developing nations was
f i r m . Bal l said that any fore ign aid should a s s i s t developing countr ies
with a supplemental source of capital . The i r contribution should be
given to produce a catalyt ic effect within the developing economy not
to support the economy by external donations. The developing countr ies
should take this capital and al locate it into worthwhile p ro jec t s . Ball
pointed out that the developed nations have not, in some ins tances ,
acqui red the exper ience to fo rmula te such p ro j ec t s (1, p. 398).
In summat ion Ball emphas ized that economic growth depends
on a number of i n t e r r e l a t ed f ac to r s . To pick a f ac to r and emphas ize
i t - - c ap i t a l ass is tance—would dis tor t the function of UNCTAD. The
conference should not t r y to adopt m e a s u r e s that in helping some, h a r m
o thers . Finally, he cal led fo r an in tegrat ion of ideas and an intelligent
appra i sa l of all p roposa l s (1, p. 399).
20
The United Kingdom's recommendat ions were along the s ame
l ine. In the opening of his speech, Edward Heath d i f fered with some
conclusions of the P r e b i s c h repor t . Heath said that P reb i sch had
argued that the exist ing ru l e s of internat ional t r ade did not take into
account the fundamental d i f fe rences in s t r u c t u r e between the developed
and the developing economies, and that the d i f fe rences tended to lead
to a continuing de ter iora t ion in t e r m s of t r ade of p r i m a r y producing
countr ies and redis t r ibut ing the i r incomes to the i r disadvantage.
Heath pointed out that the t e r m s of t r ade of the underdeveloped nations
had genera l ly improved s ince 1962, thus bringing about the question
of whether this is a r e v e r s a l of the t r end or m e r e l y an in terrupt ion.
The re fo re , the United Kingdom felt that no concre te conclusions should
be drawn. Heath suggested that the individual p rob lems of the nations
should be dealt with without making un iversa l o r permanent p roposa l s .
The United Kingdom s t r e s s e d a p ragmat ic approach to che in ternat ional
t r a d e p rob lems (1, p. 391).
Heath also exp re s sed Br i t a in ' s confidence in GATT. He said
that despite the change in internat ional t r ade s ince i t s formation, GATT
should not be swept as ide fo r a new, untr ied body. Heath said that GATT
was itself an evolving organizat ion and that, as it evolved, it would become
a m o r e effect ive ins t rument for dealing with internat ional t r ade p rob lems
(1, p. 394).
2 1
Finally, Heath suggested the need fo r a r ea l i s t i c atti tude at
UNCTAD. Pointing out the complexity and vas tness of the conference,
he said the delegates should r ea l i ze that all the p rob lems could not be
solved. The delegates should think of UNCTAD as a s tage in a continuing
ef for t "to improve the economic conditions of the world, and to see that
the p roposa l s adopted would move in this direct ion (1, p. 394). "
The Swedish delegation pointed out that a sy s t em of p r e f e r en t i a l
t r e a tmen t of export goods f r o m the underdeveloped countr ies , as p r o -
posed by these underdeveloped countr ies , could possibly slow down the
p r o c e s s of reducing tar i f f b a r r i e r s . Pointing out that p r e f e r e n c e s
would be meaningful only if they were stable and were maintained at a
f a i r l y high level, Sweden said that such p r e f e r e n c e s would likely delay
the l ibe ra l i za t ion of world t rade . Finally, Sweden said she was not in
favor of c rea t ing a new agency and that any action should be conducted
through GATT {1, p. 355).
The Swiss delegation also s ta ted a f i r m conservat ive policy.
Admitt ing that some advantages must be given up by the indus t r ia l ized
nations, the Swiss never the less emphas ized that in o r d e r for a proposa l
to work effectively, it must have the full cooperat ion of the indus t r ia l ized
nations. The head of the delegation, Hans Schaffner , s ta ted that the
exist ing inst i tut ional mach ine ry (GATT) was adequate and could solve
most of the p rob lems . Finally, Schaf fner s u m m a r i z e d the feel ing of al l
indus t r ia l ized nations by concluding:
22
Trade policy connot alone supply the solution to all the economic p rob lems of the developing world. Financial aid can do much, but not everything. The mainspr ing of s u c c e s s will have to be provided by the developing countr ies themse lves . It i s the individual human beings, the i r feel ings, t he i r ambit ions, t he i r intel lectual and m o r a l background ;• . . that will be decisive fo r the fu tu re of the country . . . . Economic help f r o m abroad is important ; but the human element , i ts quality and distinction, a r e t ru ly i r r ep laceab le (1, p. 357).
Soviet Bloc
The las t m a j o r r ep resen ta t ion was the Soviet Bloc. It was often
split on a number of i s sues , specif ical ly the changing of Soviet t rading
pol ic ies . This group, however, agreed that a new world t r ade organ i -
zation was needed. The Soviet Union and i t s bloc were in a p r e c a r i o u s
posi t ion at the Conference . They w e r e t rying to get the support of the
developing nations while at the s a m e t ime t ry ing to r e f r a i n f r o m
changing the i r t r ade pol icies . N. S. Pa to l ichev ' s opening r e m a r k s
brought up such "cold war" i s sues as the r ep resen ta t ive of Red China,
the Cuban blockade, and Wes te rn i m p e r i a l i s m . An attack against
colonial ism followed {1, p. 385). Then Patol ichev t r i ed to achieve
a unification of purpose with the underdeveloped nations by stat ing that
the USSR was p r e p a r e d to par t ic ipa te with other countr ies in the
"e labora t ion and rea l iza t ion of m e a s u r e s " designed to extend " t r ade
and economic cooperat ion" in the internat ional sphere according to the
bes t i n t e r e s t s of the underdeveloped nations (1, p. 386). Again asse r t ing
R u s s i a ' s cooperat ive atti tude, Patol ichev s ta ted that his country believed
23
the solution to the problem of economic growth for the developing
economies lay in the indus t r ia l ized nations supplementing the under-
developed countr ies with economic and technical a s s i s t ance " r e n d e r e d
on easy t e r m s with due r e spec t for national sovereignty of the rec ip ient
countr ies" (1, p. 387).
A f t e r this wholehearted acceptance of the developing countr ies '
cause , the Soviet Union t r i ed to dec rease i ts par t ic ipat ion in the aid
p r o g r a m s by stat ing that the "Soviet Union has no excess ive capital
which should be invested abroad. This prac t ice runs counter to the
very nature of our sys tem. " However, Pa to l ichev said that the
Soviet Union did find poss ibi l i t ies to al locate par t of its funds which
could be used internal ly fo r render ing ass i s t ance to the l ibe ra ted
peoples in the development of the i r national economies (1, p. 387).
Despite i ts al legiance to the underdeveloped nations' cause,
the Soviet Union felt that the United Nations should establ ish an agency
within i ts control to study the problems of internat ional t r ade . This
organizat ion would not have control over internat ional t rade , as the
underdeveloped nations proposed, but would "become a cent re co-
ordinating the act ivi t ies of the United Nations subs id iary bodies and
o ther internat ional organizat ions in the field of t r ade" (1, p. 389).
The Soviet Union, Poland, and Czechoslovakia presen ted the i r propo-
sa l s for this organizat ion in a .paper " P r i n c i p l e s of Internat ional T rade
Relat ions and T rade Policy. "
CONCLUSIONS
The evidence indicates that although the par t ic ipat ing nations
of UNCTAD pledged f r o m the beginning to cooperate fo r the be t t e rmen t
of world development, they had very different ideas about how this
should be accomplished. Each m a j o r group was willing to engage in
ac t iv i t ies to benefit the underdeveloped, so long as that g roup ' s object ives
were not impa i red .
F o r example, the m a j o r indust r ia l countr ies continuously
p roc la imed the i r wil l ingness to help the underdeveloped. However,
when specif ic proposa ls were p resen ted that conflicted with an indus-
t r i a l nat ion 's income, that nation r e fused to agree to the proposal .
The developing countr ies a lso were guilty of th is .
While united in the i r drive for aid f r o m the developed countr ies ,
the underdeveloped could not agree among themse lves on which speci f ic
products were to be used in the new t r ade ag reemen t s .
The Soviet bloc, while agreeing to aid the developing countr ies ,
was t rying to p r e s e r v e i t s economic posit ion while using uncompli-
m e n t a r y propaganda on the West .
The s ta tements by the delegates gave a c lea r indication of the
diff icul t ies faced by UNCTAD. The developing countr ies would demand
as much as they could, the developed countr ies would give up as l i t t le
24
25
as possible, and the Soviet bloc would t r y to ridicule the Western
nations' proposals while trying to preserve its world t rade position.
CHAPTER BIBLIOGRAPHY
1. Proceed ings oi the United Nations Conference on Trade and Development, Vol. II of Policy Sta tements , 8 vo l s . , New York, 1964.
2. " T r e n d s at the T rade Confe rence , " United Nations Monthly Chronicle, (May, 1964), pp. 85-98.
3. "UNCTAD, " Year Book of World Af fa i r s 1965, New York, 1965, pp. 12-25.
26
CHAPTER III
ECONOMIC GROWTH AND EXTERNAL DEBT
At the second plenary meeting, the Third Committee was allotted
three i tems for i ts agenda. The i tems for discussion were international
commodity problems, improvement of the invisible t rade of developing
countries, and financing for an expansion of international t rade . The
discussion of these topics was led by the Third Committee 's Chairman
Janez Stanovnik (Yugoslavia), Vice-Chairman Hassan Bashii (Sudan),
and Rapporteur Giorgio Smoguina (Italy).
To aid the Committee in its discussion, several studies were
conducted and the resul t s presented. The discussion of external debt
as a facet of economic development was one such study.
This study was concerned with the problems of assess ing the
servicing problems of developing countries and the l imits of external
indebtedness these countries could assume. This study attempted to
provide a conceptual f ramework within which part icular data and
forecas ts could be analyzed. The Study did not, however, offer any
recommendatiorls on operational procedure.
i.. 27
28
Analytical F r a m e w o r k
The debt se rv ic ing capacity of a developing country is de termined,
in par t , by the benef i ts and costs of fore ign capital in the p r o c e s s of
economic growth. Fo re ign capital is a supplement of national r e s o u r c e s
in ra i s ing the r a t e of capital formation. Fore ign capital r a i s e s the r a t e
of income growth by making possible a high ra te of investment .
The cost of fore ign capital in t e r m s of payment of debt s e rv i ce
acts against the benef i t s . This payment impl ies that the b o r r o w e r
country has to give up a cer ta in amount of purchasing power which
could o therwise be used fo r consumption or investment . "Debt s e r -
vicing capacity depends on the ease with which a country can reconci le
competing c la ims on i t s r e s o u r c e s : on the one hand the re is the demand'
fo r a higher s tandard of living, on the o ther t he re is the obligation to
fore ign c red i to r s " (1, p. 75).
In the short run, debt servic ing diff icul t ies take the f o r m of a
l iquidity c r i s i s . An inequality in the balance of payments is the reason .
Whether a country can make both ends meet depends on the e lements of
r igidi ty and countervai l ing e lements of flexibili ty t ied together by the ski l l
of the debtor country ' s author i t ies . Simply making the short run balance
of payments favorable is not the answer . Debt serv ic ing capacity cannot
be sepa ra ted f r o m the long run prob lem of economic growth. As long
as the incidence of debt s e rv ice fal ls on a pa r t of the i nc r ea se in p e r
capita income, it i s possible for consumption and nationally f inanced
29
investment to r i s e pa r i passu with se rv ice payments . And, if the r a t e
of i nc r ea se in r ea l income and savings is reasonably high, it can be
said that debt se rv ic ing payments will be made smoothly. The re fo re ,
continuing growth in pe r capita production and the p r i c e s of rapid ac-
cumulation of productive capital is the bas ic long run condition of debt
se rv ic ing capacity. The main task of the long run analysis is to define
the conditions under which the economic growth p r o c e s s can succeed,
and which can provide a bas i s for continuing serv ic ing of external debt
and, if neces sa ry , i ts u l t imate r e t i r emen t (1, p. 76).
Liquidity Aspec ts : Fluctuat ing Variables
A m a j o r element of ba lance -o f -payments vulnerabil i ty of many
developing countr ies a r i s e s f r o m instabil i ty of export earn ings . Declines
in export earnings have been caused by occasional natural f a i lu res in
supply, cyclical changes in s h o r t - r u n internat ional demand, over p ro-
duction in re la t ion to demand, and domest ic policies which adverse ly
affect the incentives to produce for exports or to se l l on the in ternat ional
m a r k e t (1, p. 77).
Table I shows the sha re of two pr incipal commodit ies in total
expor ts . Relying on one o r two commodit ies l eaves an economy vul-
nerable to fluctuations in supply. Coffee o f f e r s an excellent example.
TABLE I
SHARE OF TWO PRINCIPAL'COMMODITIES IN TOTAL EXPORTS
1955-1962
30
Country
(in percen tages of total exports)
Pe rcen tage Country Pe rcen tage
Venezuela Colombia Uruguay Ecuador Costa Rica El Salvador ' Argent ina Ethiopia Pak is tan
91 86 77 77 76 74 70 64 64
Dominican Republic 63
Honduras Sudan Bolivia Braz i l Nicaragua Thailand Phi l ippines China (Taiwan) Turkey Spain
63 62 60 60 58 57 52 49 42 25
Source: Merchandise exports f r o m IMF, ' In ternat ional F inancia l S t a t i s t i c s , " var ious i s sues .
Coffee is the second mos t common p r i m a r y commodity a f t e r
pe t ro leum, moving in internat ional t r ade . F o r many developing nations
the for tunes of the world coffee marke t de termine the flow of export income
and thus the capacity to impor t . The most recent coffee cycle s t a r t ed
ea r ly a f t e r World War II, when supply was short and demand was s t rong.
The p r ice of coffee r o s e sharply until 1954 when supply caught up with and
then passed demand. F o r the next eight y e a r s , p r i c e s declined and e a r n -
ings f r o m production and expor ts of coffee fel l each yea r . The paradox of
p r i m a r y product economies is that in 1962 the quantity of coffee produced
31
was 50 per cent g rea te r than in 1954; and the exchange earnings were
one-third smal ler than in 1954. The tragedy is that some dozen coun-
t r ies in the tropic belt, including half of Latin America and Afr ica ,
depend on coffee as their main export (1, p. 78).
Before World War II, capital flows were speculative and
extremely sensitive to the ups and downs of the business cycle. In
modern international t rade, there is a different picture. Pr iva te direct
investment is based on detailed information. National and international
lending agencies are large suppliers of foreign investible funds and these
a re lent mainly for production purposes. Also, while there have been
downward swings in the capital flow into individual developing countries,
such capital flows have tended to compensate for declines in export
receipts (1, p. 80).
It is t rue by definition that a country would have no debt servicing
problem if capital inflow were always sufficient to allow it to meet its
debt servicing obligations while at the same time maintaining imports
at a level which the country considers acceptable. There are some
capital inflows on which a country can confidently rely. Disbursements
on project loans will continue so long as the project goes forward and
any other conditions of the loan a re completed. Suppliers' credits a re
usually available unless the country is considered to be in very severe
balance-of-payment difficulties. On the other hand, the inflow of private
direct investment may fluctuate with changes both in the capital importing
32
and the capital exporting count r ies . But s ince a l a rge amount of
fore ign pr iva te capital in developing countr ies is invested in manu-
fac tur ing for the domest ic marke t , th is e x e r c i s e s a s tabi l izing
influence. Also, investment loans f r o m internat ional agencies a r e
not sens i t ive to s h o r t - r u n f luctuations in the balance of payments .
Loans and g ran t s by fore ign governments a r e ant icycl ical in nature ,
but t h e r e a r e poli t ical aspec ts that cause instabil i ty in government - to -
government flows (1, p. 80).
The final element in export declines is emergency a n d / o r
inflat ion-induced impor t s . Crop f a i l u r e s and bad ha rves t s may lead
to significant i n c r e a s e s in food and other agr icu l tu ra l impor t s . Domes-
t ic inflat ion within the f r a m e w o r k of pegged exchange r a t e s also des ta -
bi l ize balance of payments . In view of these fac ts , it is becoming c l ea r
that flexible exchange r a t e s a r e needed to s tabi l ize inf la t ionary aspec ts
of developing count r ies . However, the r a t e of domest ic mone ta ry
expansion mus t be kept within l imi t s even while such stabil izing m e c h -
anics a r e used.
Liquidity Aspec ts : Offset t ing Variables
The offset t ing var iab les to a deficit in balance of payments a re
changes in r e s e r v e s (both convert ible cu r rency and gold), compensatory
financing, and compress ib le impor t s . Two changes have taken place in
the level and complexion of r e s e r v e s in the p o s t - w a r per iod. F i r s t , due
33
to the i nc r ea sed emphas i s on development and the growing need for
invest ible r e s o u r c e s , the opportunity costs of maintaining fore ign
cu r r ency and gold r e s e r v e s has r i s en . Secondly, provis ion of
l iquidity through the Internat ional Monetary Fund (IMF) has to a
ce r t a in extent reduced the need to maintain these l a rge r e s e r v e s of
gold or convert ible fore ign cu r r ency (1, p. 81).
Another fea tu re that has a s s i s t ed developing countr ies with
ba lance-of -payment diff icul t ies is compensa tory f inance. The IMF
has been of g rea t impor tance in th is a r e a . The fund introduced a
compensa tory faci l i ty to offset f luctuations in export earn ings . One'
of the most important s o u r c e s of compensatory f inance since 1945 has
been the creat ing of public lending agencies by the developed countr ies ,
pa r t i cu la r ly the United Sta tes . Still another f o r m of compensatory
financing is s h o r t - t e r m borrowing in the pr iva te marke t . The advantage
of compensatory f inance l i e s in the fact that it is an effective subst i tute
for the maintenance of l a rge gold r e s e r v e s and fore ign exchange. "As
a genera l rule , countr ies which enjoy close and harmonious re la t ions
with the m a j o r f inancial cen t r e s may be r ega rded as having a second
line of r e s e r v e s " (1, p. 8 2).
The flow of pr iva te s h o r t - t e r m capital has had two f ea tu r e s .
F i r s t , in many cases it has moved f r o m a developed country to a
p resen t ly or f o r m e r l y dependent t e r r i t o r y , l a rge ly through the b ranches
of the developed count r ies ' f inancial inst i tut ions. Secondly, where such
34
conditions prevai led , l ende r s charged a high p r e m i u m for r i s k . Such
lending led to the fu tu re th rea t of l iquidity by c r e d i t o r s . When compen-
sa to ry f inance fo r shor t t e r m credi t contracted, and export declines
l a s t ed a number of y e a r s , an overhang of debt with shor t ma tu r i t y was
c rea t ed . This overhang is the m a j o r threa t to liquidity (1, p. 8 2).
Finally., the compres s ib l e par t of the impor t b i l l s s e r v e s as an
offset t ing var iab le . The impor t s which can be reduced depend l a rge ly
on the pa t t e rns of product ion and demand in each country. Some
countr ies may produce mos t of the i r manufac tured consumer goods
domest ica l ly but impor t food and raw m a t e r i a l s , o r vice YeF?i!* ^
rough indicator which may be used to indicate the degree of c o m p r e s s i -
bil i ty i s the propor t ion of consumer goods o ther than food, in total
i m p o r t s . It has been a s s u m e d that developing countr ies would r a t h e r
cut down on impor ta t ion of these i t ems , espec ia l ly in the shor t run,,
than reduce impor t s of food, raw m a t e r i a l s , fue ls , and capital equipment.
Liquidity Aspec ts : Rigid Var iables
The degree of inflexibi l i ty of impor t s p resen t in any pa r t i cu l a r
case will depend not only on the shape and pa t t e rn of development, but
a lso on the degree of r ig idi ty with which income growth t a r g e t s a r e
pursued . While these f ac to r s vary f r o m case to case , t he i r e f fec t s can
be seen if s tudies a r e made of the pa t te rns of adjus tment of developing
count r ies to declines in t he i r capacity to impor t . It i s in deciding the
35
min imum level of impor t s that developing countr ies encounter the mos t
s e r ious p rob lems of choice.
In te res t of fore ign debt is the most r ig id element of a count ry ' s
balance on payments . F ixed - in t e r e s t debt consis ts la rge ly of public and
publ ic ly-guaranteed debt. Consequently, any fa i lu re to pay this charge
adverse ly a f fec t s the borrowing government ' s ability to save and to
t r a n s f e r savings. As a r e su l t of th is , the count ry ' s credi t standing
is undermined (1, p. 83).
Matur i t i es concentra ted in a shor t per iod a r e the most important
causes of liquidity c r i s i s . This can be cal led an unfavorable debt
s t r u c t u r e . The re a r e four causes of th i s . F i r s t , in ca ses where t he re
was a decline in expor ts , the affected countr ies bor rowed abroad, mos t ly
on shor t t e r m . If t h e r e was no quick recovery , quick liquidation became
a p rob lem. Second, in a per iod of growing export demand, the p roduce r s
i n c u r r e d s h o r t - t e r m debt in o r d e r to produce m o r e . Too opt imis t ic
expectat ions regard ing the durat ion of high p r i ce s , coupled with i m p e r -
fect ions in the mone ta ry sys tem led to a liquidity c r i s i s . In both
ins tances c red i to r s usual ly agreed to extend c red i t . The resu l t was
an overhang of compensatory indebtedness (1, p. 84).
Another cause for ma tu r i t i e s to be concentra ted in a shor t
per iod was the pos t -wa r financing of pu rchase s of capital equipment at
medium t e r m s . These medium t e r m c red i t s weigh pa r t i cu la r ly heavy
in the debt s t r u c t u r e of these countr ies which have undergone s t ruc tu ra l
36
change since the war by expanding the stock of fixed capital in the
industrial sector . Finally, a number of developing countries have
experienced inflation-induced increases of imports at one t ime or
another. Some are still in the midst of an inflation. If sufficient
foreign exchange r e se rves a r e not available, imports are then bought
on short and medium t e rm credit . After the inflation is over, the
country is saddles with a lot of short and medium t e rm debt (1, p. .
84).
All of the different types of variables combine to form the
liquidity problem facing a number of developing countries. There
a re many variables and information is inadequate.
The final choice of a country facing liquidity difficulties is between the minimum tolerable level of imports and debt servicing. In this, as in many other respects , there is an analogy between an.individ-ual and a country. For the individual al so, when his income falls, the choice is between paying his debts and meeting minimum subsistence expenses. The question for him, as for a country, is how far the belt can be tightened (1, p. 86).
Long-Term Aspect of Debt Servicing Capacity
This aspect of debt servicing capacity should focus on the
benefit and cost of foreign capital to a country in the growth process .
This can be in t e r m s of macro-economic magnitudes such as savings,
investment, income, exports and imports . In this context, the ra te
of foreign capital is to supplement national resources in raising the
37
ra te of capital format ion. Given the level of per capita income and
the p r e s s u r e of population growth, the re is a considerable gap be-
tween national savings and a des i rable r a t e of investment in many
developing countr ies . The gap is widened in some cases by capital
outflow which means that not all national savings a r e available to
f inance domest ic investment (1, p. 90).
The sav ings- inves tment mechan i sm is at the hear t of the
growth p r o c e s s and fore ign capital can play an important ro le .
Benef i t s depend on the eff iciency with which fore ign capital and the
count ry ' s na tura l r e s o u r c e s a r e t r ans l a t ed into income, the extent
to which the additional income is saved and used to finance domest ic
investment , and the rapidi ty with which in terna l s t ruc tu ra l ad jus t -
men t s a r e made and then re f lec ted in the composit ion of impor t s and
expor ts . The benefi ts a r e offset by costs . This cost i s de te rmined
by the condition on which external capital is made available and the
magnitude of g r o s s capital inflow in the fu ture (1, p. 91).
The behavior of g r o s s capital inflow va r i e s in different s tages
of what may be cal led the debt cycle, and this i s closely linked to
economic growth. In the f i r s t s tage of the development p rocess , a
country normal ly bor rows enough external ly to finance not only the
gap between sav ngs and investment , but also to pay all of the in te res t
on external debt and, t he re fo re , the burden of se rv ic ing foreign
capital is zero . As a consequence, however, the external indebtedness
38
i n c r e a s e s rapidly, s ince in te res t on debt i ncu r red previously is paid
by borrowing again which also c a r r i e s in te res t charges . The second
s tage begins when the volume of g ro s s domest ic savings equals the
volume of g r o s s domest ic investment . In this ins tance, the country
does not need to r e ly on external capital for financing investment ;
however, it s t i l l bo r rows abroad to make se rv i ce payments on debt
accumulated in the f i r s t s tage . As the second s tage p roceeds , the
country s e r v i c e s fore ign capital by paying an increas ing propor t ion of
the i n t e r e s t out of domest ic savings. At the very end of th is s tage,
ex ternal debt r eaches the peak and ceases to grow (1, p. 91).
The th i rd and final s tage now begins. Domest ic savings a r e
suff icient to finance all domest ic investment and pay the en t i re in t e re s t
cost of accumulated debt. Also, the country now begins to genera te
•excess savings and the country can begin to repay debt (1, p. 96).
The re is nothing automatic or inevitable about this p rogress ion .
However, in a " typical o r normal" developing country the IBRD
es t ima ted that the cycle would span 36 yea r s , with the phase of in-
debtedness las t ing about 25 y e a r s (1, p. 97). This was a hypo-
thet ical model based on many assumpt ions . The re a r e ins tances of
both e x t r e m e s : growth conditions which a r e ex t remely po6!r and
o thers which a r e ex t remely favorable .
39
Most developing countr ies consider the acce le ra t ion of
economic growth the bas i c t a sk fo r the fu tu re . Growth t a r g e t s a r e
ambit ious compared to domest ic r e s o u r c e s . The re fo re , t h e r e i s a
m a s s i v e demand fo r fore ign inflows of capi tal . F o r growth in
income and in savings to ma te r i a l i z e , t h e r e should be a s izeable
number of investment p ro j ec t s s t a r t ed year ly . In other words, the
aggregate investment r a t e mus t be at a suff ic ient ly high level o r the
whole p r o c e s s may never "get off the ground" (1, p. 105). /
A Sta t is t ica l P resen ta t ion
The IBRD also made a s ta t i s t i ca l su rvey which viewed i n t e r -
national capital flows and indebtedness as a par t of economic growth
and development. This study contains s ta t i s t i ca l data on internat ional
public indebtedness and on debt s e rv i ce payments .
Indebtedness
Internat ional indebtedness r e f l e c t s the cumulative r e s o u r c e gap,
changes which have o c c u r r e d in this gap over t ime, and the t e r m s on
which ex te rna l funds needed to f i l l the gap were made available. Publ ic
and publicly guaranteed loans a r e obligations of the developing govern-
m e n t s . The IBRD presen ted data f r o m 1955 to 1962 on the growth in
external public indebtedness for t h i r t y - seven count r ies . Fig. 1 and
Table II show this growth. The average annual r a t e o f ' i nc rease for the
5 regions was 15 p e r cent (1, p. 110).
40
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A f r i c a (7 countr ies)
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Lat in A m e r i c a (18 countr ies)
Fig. l - - G r o w t h in external public indeb tedness - -37 countr ies (Debt outstanding at end of yea r in thousand mil l ions of U. S. dol lar equivalents . )
Source: See Table II.
42
Table III shows the level and growth of debt in a sample of
count r ies with l a rge debts .
The i nc r ea se in indebtedness i s due to the net inflow of r e s o u r c e s
provided on loan t e r m s . An inc rease in exchange r equ i r emen t s for ex-
panded capital fo rmat ion and other import i n c r e a s e s in the developing
countr ies , as well as borrowings undertaken to supplement the sluggish
or declining exchange earn ings all have contr ibuted to the i nc r ea se in
indebtedness in some countr ies during the las t seven y e a r s (1, p. 110).
Service payments on public and publicly guaranteed debt of the
t h i r t y - s even countr ies studied r o s e f r o m $700 mil l ion in 1956 to $2, 400
mil l ion in 1963 (1, p. 112). Since debt outstanding inc reased at 15 p e r
cent p e r annum in the s ame seven -yea r period, the implicat ion is that
the effect ive t e r m s of t r a d e were de ter iora t ing . Fig. 2 and Table IV
show the level and growth of public debt se rv ice of the se lec ted count r ies .
In 1963, as well as in 1956,amort izat ion consti tuted approximately
75 p e r cent of the total s e rv i ce payments on public and publicly guaran-
teed debt. This i s caused f r o m the l a rge propor t ion of debt that cons is t s
of medium and s h o r t - t e r m m a t u r i t i e s . Also, internat ional in te res t r a t e s
have been held to a level corresponding to i n t e r e s t r a t e s in the developing,
countr ies , plus a r i s k p remium (1, p. 113).
At the end of 1942 the average aggregate debt outstanding and d is -
bu r sed of the t h i r t y - seven countr ies amounted to about $15, 000 mill ion,
and they paid about $600 mil l ion in t e re s t and $1, 800 mill ion in repayment
TABLE III
SELECTED DEBTORS: PUBLIC DEBT OUTSTANDING 1955-1962, END OF THE YEAR
(In mi l l ions of U. S. dol lars)
Country End 1955* End 1962 Average Annual Pe rcen tage Inc rease
India 310 2936 38
B r a z i l 1380 2349 8
Argent ina (600) 2067 19
Mexico 479 1360 16
United Arab Republic (150) 968 30
Turkey (600) 935 7
I s r a e l (360) 868 13
Pak i s t an 147 829 28
Yugoslavia 332 778 13
Chile 351 742 11
Columbia 279 639 13
*A11 f igures in pa ren theses a r e crude e s t ima te s .
Source: See Table II
43
44
2. 5
2. 0
1. 5
1.0
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t S El**1*
Eas t As ia (5 countr ies)
A f r i c a (7 countr ies)
Southern Europe (3 countr ies)
South Asia & Middle Eas t (4 countries)
Lat in A m e r i c a {18 countr ies)
Fig . 2- -Growth of s e r v i c e payments on external debt-37 countr ies (thousand mil l ions of U.S. dol lar equivalents).
Sources: Dragos lav Avramovic , Internat ional Bank for Recon-s t ruc t ion and Development (IBRD), "Debt Servicing Capacity and P o s t -w a r Growth in Internat ional Indebtedness , " John Hopkins P r e s s , 1958; Dragoslav Avramovic and Ravi Gulhati, IBRD, "Debt Servicing P r o b l e m s of Low Income Countr ies 1956-1958, "John Hopkins P r e s s , 1960.
45
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46
of pr incipal in 1963, This shows that the effect ive average weighted
r a t e of i n t e re s t amounted to about 4 per cent; and the average l i fe of
outstanding and d i sbursed loans would be slightly m o r e than eight y e a r s
(1, p. 113).
The fundamental point to be noted is that the l a r g e s t propor t ion
of total s e r v i c e payments consis ts of pr incipal p a y m e n t s - - m o s t l y shor t
t e r m and medium t e r m ma tu r i t i e s . As t ime goes on, i n t e re s t payments
will become increas ingly impor tant . In the m a j o r i t y of debtor countr ies
today, the ea r ly m a t u r i t i e s a r e respons ib le for the heavy s e r v i c e flows
(1, p. 117).
Table V shows the proport ions of public debt outstanding at the
end of 1962, which is repayable over the t h r e e - y e a r per iod 1963-1965
and over the f i ve -yea r per iod 1963-1967. The data does not include
TABLE V
PER CENT OF DEBT INCURRED AS OF THE END OF 1962 REPAYABLE IN 1963-1965 AND IN 1963-1967
Region 1963-1965 1963-1967
Lat in A m e r i c a 36 55
South As ia and Middle Eas t 19 32
Eas t As ia 31 52
A f r i c a 13 20
Southern Europe 41 65
Source: See Fig. 2
47
c o m m e r i c a l a r r e a r s , obligations to the Internat ional Monetary Fund,
and o ther s i m i l a r obligations. Had this additional debt been added into
the calculat ions, the percen tages would have been much h igher . F o r
example, approximately 95% of Latin A m e r i c a ' s debt outstanding would
be repayable during the 1963-1967 per iod (1, p. 117).
Conclusions
The developing countr ies a r e the m a j o r internat ional b o r r o w e r s
of today. Any borrowing on conventional t e r m s r e su l t s in a r e t u r n flow
of in t e re s t and amor t iza t ion in fa i r ly rapid success ion . In fore ign
borrowing, debt s e rv ice payments a r e a charge on domest ic r e a l income
and savings. To pay th is , expor ts have to be expanded or m o r e funds
bor rowed .
The inflow of capital f luctuates while debt s e rv ice is contractual ly
fixed. This causes dangerous si tuat ions for the developing countr ies
(6, p. 100).
This study made no at tempt to solve the debt servic ing p rob lems
of the developing nations. It p resen ted s t a t i s t i c s and a f r amework within
which the p rob lems of debt s e rv ice financing could be analyzed. Its purpose
was to be a tool to help the developing countr ies choose the values they
wish to impose on the i r economies . The p rob lems a r e se r ious and the
solutions will r equ i r e the concer ted e f for t of both l ender s and b o r r o w e r s .
48
Through consideration of their report , the UNCTAD delegates
were given a view of the importance of concentrated cooperation. The
purpose appeared to be to encourage the nations in UNCTAD to accept
this and enter into cooperative negotiations. This in itself would have
been a ma jo r significance of UNCTAD if it had succeeded.
CHAPTER BIBLIOGRAPHY
1. Proceedings o_f the United Nations Conference on Trade and Development, Vol. V of 8 vols . , New York, 1964.
49
CHAPTER IV
TWO STUDIES REVIEWED BY THE THIRD COMMITTEE
The Third Committee looked at two other aspects of t rade as
a part of development: the formation of an International Trade Organ-
ization and Tour ism. The f i rs t section of this chapter reviews the
Soviet plan for an ITO.
The Soviet bloc t r ied to maintain their present position in world
t rade by delivering a proposal favoring both the developed and the
developing economies. The Soviet bloc's ITO proposal was to provide
permanent machinery for carrying on the ideals expressed at UNCTAD.
This proposal voiced the developing economies' demand for a permanent
institution to t ry to solve the world t rade problem. However, the Soviet
bloc also enlisted the industrialized economies support by calling for
this ITO which had the industrialized nations represented in such a Way
so as to insure that no numerical major i ty of underdeveloped nations could
exist in the ITO to pass measures objectionable to the industrialized
economies (1, p. 15).
The promotion of Tour ism also plays an important role in in te r -
national development. This paper presented the benefits derived by a
nation that at tracted tour is ts . Due to the fact that the developed countries '
citizens a re prospering so, tour ism offers an excellent opportunity for
50
51
an underdeveloped economy to rece ive capital inflow by developing
i t s r e s o u r c e s .
These two s tudies point to two ent i re ly different a r e a s of i n t e r -
national development, but both a r e dependent on the will ingness of the
developed economies to cooperate . Both a r e a s can benefit a developing
economy only if the developed countr ies r ea l i ze the i r r espons ib i l i t i e s .
Format ion of an Internat ional T rade Organizat ion
This draf t resolut ion was submit ted by the delegations of Bulgar ia ,
the Bye lo russ ian Soviet Social is t Republic, the Czechslovak Socialist
Republic, the Hungarian P e o p l e ' s Republic, the Pol i sh Peop le ' s Republic,
the Ukrainian Soviet Socialist Republic, and the Union of Soviet Social is t
Republ ics . The draf t was a proposa l to es tabl i sh an Internat ional T r a d e
Organizat ion (ITO) within the f r amework of the United Nations. The
organizat ion was to deal with internat ional t r a d e p rob lems with pa r t i cu l a r
r e f e r e n c e to the needs of development (2, p. 424).
The draf t outlined a un iversa l organizat ion with sufficient authori ty
to ensure compliance with i t s own recommendat ions and with those of the
United Nations which r e l a t e to internat ional t r a d e and development. The
organizat ion was also to be open to any country and could deal with all
quest ions of in ternat ional t r ade . As a un iversa l organizat ion, it would
have to be founded on pr inc ip les acceptable to developed and underdeveloped
count r ies . The different types of economic and social sy s t ems and the
52
different levels of development of the many countr ies would have to be
considered. The purpose of the organizat ion would be:
to do everything possible to promote the development of in ternat ional t r ade as an ins t rument of economic and soc ia l development in the i n t e r e s t s of all countr ies and peoples of the world, to promote the crea t ion of conditions based on re spec t for the pr inc ip les of equal r ights and se l f -de te rmina t ion of peoples, and to ensure that all the countr ies of the world benefi t f r o m a ra t ional internat ional division of labour on the bas i s of equal r ights (2, p. 424).
In o r d e r to accomplish i t s purpose, the organizat ion would have
to concern itself with many problems. The p rob lems brought out in
the r epo r t fo r special considerat ion were general ly in accord with the
demands of the developing countr ies . Such things as the el iminat ion
of p r ice fluctuations, the el imination by the indus t r ia l countr ies of
t a r i f f s and other obs tac les to t rade , the easing of the t e r m s for
financing internat ional t r ade , and the commerc ia l and economic aspec ts
of genera l and complete d i sa rmament were studied (2, p. 425).
Until such an Internat ional T rade Organizat ion could be es tab-
l ished, the proposal cal led fo r the Conference on Trade and Development
to be convened per iodica l ly to s e rve as the highest specia l ized agency
to deal with internat ional t r ade and development problems during the
t rans i t iona l s tages . The functions of implementing the decisions of the
Conference would be p e r f o r m e d by the Executive Council of UNCTAD.
The m e m b e r s of the Execut ive Council would be elected during the
cur ren t sess ion of UNCTAD, and would contain t h i r t y - fou r out of
53
forty-five member countries (the membership was to consist p r imar i ly
of the members of UNCTAD's General Committee). Each member
would have one vote and decisions would be made on the basis of a
major i ty of those voting (2, p. 426).
The Conference would meet once every two years to ca r ry on
the work of UNCTAD. The Conference would establish four committees
to study t rade and development problems. These committees would
deal with commodity t rade , t rade in manufactures and semi-manu-
factures , general international t rade problems, and questions of t rade
financing, invisibles, t ransi t and t ranspor t .
To ensure the pract ical implementation of the decisions of the
Conference and the Executive Council, a permanent secre tar ia t
would be established. It would be headed by a Director-General who
would be the Secre tary-General of the Conference. He would be
ass is ted by Deputy Directors-Genera l and a secre tar ia t staff that would
be selected f rom the three groups of states (2, p. 427).
The USSR on February 5, 1964, sent a memorandum to the
Secre tary-Genera l of UNCTAD reviewing its proposal and submitting
it as an official document of the Economic and Social Council. The
memo was intended to re inforce Russ ia ' s participation in establishing
an International Trade Organization (2, p. 428).
Promotion of Tourism
This study was based on a report "Tour ism as a Factor in
54
Economic Development--Role and Importance of International Tourism"
by the late P ro fe s so r K. Krapf of the University of Berne. The following
is a summary of the relevant portions of that study (2, p. 333).
"international tourist expenditures, currently (1964) amounting
to about $8 billion a year , a r e the largest single item in world t rade
and are growing markedly as income levels r i se" (2, p. 33). Although
these expenditures presently are for the most part in the developed
countries, it is recognized that their growth and size afford opportunities
to many developing countries for improving their balance of payments
positions and promoting the growth of new domestic industr ies. The
developing countries could use foreign financial aid to take advantage
of tour ism by increasing investments in this a rea . This foreign aid
would be of the greatest help in financing the long run development of
tour ism in the localit ies that require substantial investment in t r ans -
portation facil i t ies and buildings which cannot be readily financed f rom
domestic sources . Foreign help could also come in the form of exper-
ienced personnel to develop tour ism as an industry (2, p. 33).
It is essential for any country aiming at increasing the flow of
foreign tour is ts into its country to allow tour is ts to cross its f ront iers
easily. Visas should either be abolished or granted with a minimum of
formali t ies and customs regulations should be simplified. Also, the
wealthier industrialized countries f rom which most tour is ts come must
reduce the effort in securing passpor ts . Other suggestions to increase
55
the ease of t o u r i s m were for the developed nations to hold and make
available adequate cu r rency of the developing countr ies , fo r t axes and
fees levied on tour i s t s to be reduced o r abolished, and for the f o r m a l -
i t ies regard ing moto r vehicles , a i r c r a f t , and p leasure boats to be
min imized (2, p. 333).
The Conference on Internat ional T rave l and T o u r i s m (a confe r -
ence held August -September , 1963, in Geneva) a t tempted to put these
p r inc ip les into p rac t i ce by a f f i rming the ideal that everyone has the
r ight of f r eedom of movement , including f r eedom of t r ans i t , e x p r e s s e d
in the Universa l Declara t ion of Human Rights . To achieve this , this
Conference es tabl i shed guidelines for the governmenta l regulat ion of
p a s s p o r t s , v i sas , police reg i s t ra t ion , a r r i v a l and depar ture fo rma l i t i e s ,
f r on t i e r checks, income- tax c learance , s top -ove r s , d i rect t r ans i t ,
cus toms, the application of health fo rmal i t i e s , and the faci l i ta t ion of
t r ave l by pe r sons engaged in educational, sc ient i f ic , cul tural , and
spor t ing act iv i t ies . In addition, it r ecommended the adoption of
l i be ra l cu r rency al lowances for t r ave l (2, p. 333).
T o u r i s m occupies an important place in the balance of payments
and is a potential fo rce in s t imulat ing internat ional t r ade and the reby
helping to extend and intensi fy internat ional exchange. It can also help
reduce the debts of developing count r ies . F o r example, in Mexico
and Spain in 1961, t o u r i s m made up fo r the deficit of the expor ts and
impor t s and produced a sma l l su rp lus . Other count r ies ' def ic i ts w e r e
56
also reduced. In Italy, the surplus of the tourist balance was 82. 63
per cent of the deficit of the balance of t rade; in Austria, 80. 44 per cent;
in Haiti, 25. 58 per cent; and in Thailand, 20. 00 per cent. In some other
countries, tour ism was responsible for aggravating the balance deficit.
Canada's tourist deficit was 76. 55 per cent of the deficit of the balance
of t rade (2, p. 333).
Money spent by tour is ts has a multiplier effect which helps
st imulate the economy. The United States made a study of tourism in
the Pacif ic Islands and the F a r East . They found that the tourist
multiplier, or average turnover per dollar, was between 3. 2 and 3. 5
for that region. Other studies est imated that the tourist multiplier in
highly-developed countries was over 5.5 (2, p. 335).
The special function of tour ism in the developing countries
is to exploit some economic character is t ic , such as beautiful natural
resources , a pleasant climate and exotic charm, and low prices of
food, beverages, souvenirs and services . Tourism t r ies to at tract
foreign expenditure and provide currency needed to finance imports .
Another advantage to the developing countries in building up their
tourist industry f rom the beginning is that as they do so along modern
lines, they are seeking solutions to development problems without
having to take account of vested in teres ts .
Besides using tour ism to obtain foreign exchange, developing
countries should consider it as a means of developing new industries
57
and serv ices . The tour is t industry would not only provide property
and employment in suitable a reas but would also serve as a basis for
growth of consumer t rades . This would also bring about more employ-
ment. The long t e r m prospects for tour ism a re promising. In great ly
underdeveloped areas , tour ism could become the principal activity and
source of income (2, p. 336).
The need for planning is very important. Besides the means of
transportat ion, the means of accomodation a re among the most impor-
tant fac tors in the development of tour ism. Installations should be made
for small numbers of tour is ts at the beginning.
Promotional activities a re also very important. The national
tour is t organizations should be granted the authority and resources
necessary for them to take effective action. To the extent permit ted
by the economic resources of the country, there should be a steady
growth in the number of tourist r e so r t s . The developing countries
should protect existing tourist at tractions and concentrate their effor ts
and financial resources on a few proven at tract ions before trying
unproved projects (2, p. 336).
The Conference on Travel and Tourism made some suggestions
to help the developing countries build their tourist industr ies . Among
the suggestions were establishing a program of education on the value
of tourism, banning the export of antiquities and ar t t r ea su res , giving
wide circulation to a calendar of events in the country, maintaining
58
high standards of sanitation and hygiene, and using the national tourist
office to promote tour ism by advertising, publicity of all kinds and public
relations (6, p. 336).
The Conference also suggested that the Governments provide
technical and financial ass is tance for the promotion of tourism. Govern-
ment educational and technical advisory programs plus the adoption of
special f iscal , financial, and customs measu re s in favor of the hotel
and catering inudstries would be helpful. Public land on which to build
for tour is t purposes could be made available on reasonable t e r m s (2, p. 337),
In some areas , tour ism campaigns should be car r ied out on a
regional bas is . This would necessar i ly require the cooperation of
several governments. This type of cooperation is part icularly necessary
in a reas f a r away f rom the ma jo r countries f rom which touris ts originate.
The countries could combine to train personnel for hotels, tourist offices,
t ravel agencies, etc. (2, p. 338).
CHAPTER BIBLIOGRAPHY
1. Proceedings of the United Nations Conference on Trade and Development, Vol. I. of Final Act and Report, 8 vols . , New York, 1964.
2. Proceedings of the United Nations Conference on Trade and Development, Vol. V, of Financing and Invisible 's Insti-tutional Arrangements , 8 vols . , New York, 1964.
59
CHAPTER V
OCEAN SHIPPING AND DEVELOPMENT '
The informat ion contained in this r epor t was assembled and
analyzed by the Economist Intel l igence Unit (EIU). It was submit ted
in a p re l imina ry f o r m to Ju les DeKock of the Economic Commiss ion
for Lat in Amer i ca . DeKock made his conclusions and submit ted the
r epo r t to the United Nations Conference on T rade and Development.
Because of the lack of t ime and informat ional r e co rds avai l -
able, only a few countr ies were se lec ted for th is study. The c r i t e r i a
fo r se lec t ion were that those countr ies se lec ted gave a c r o s s - s e c t i o n a l
view of the commodit ies important to developing countr ies ' t r ade .
The r epor t omit ted views by the developed o r developing countr ies .
DeKock1 s s u m m a r y and conclusion a t tempts to overcome this . T h e r e -
fore , the repor t ing of this paper will concern itself with the conclu-
s ions and s u m m a r y by DeKock, using factual data f r o m the r epor t
to substant ia te his conclusions.
Bas ic P r inc ip l e s of Ocean Shipping
T r a m p shipping does not adhere to fixed sail ing schedules; it
is f r e e to sa i l any route and does not charge fixed r a t e s . The world
f re ight marke t f o r t r a m p shipping is in genera l a single f r e e marke t
with the center at London. The shipowners and cargo in t e re s t s meet
60
61
on the Bal t ic Exchange and s t r ike ba rga ins as to the f re ight to be paid
according to the s ta te of supply and demand. Under a voyage cha r t e r ,
the r a t e is f ixed and the expor te r usually pays no other charges . It is
a lso possible to c h a r t e r fo r consecutive voyages and for the l i f t ing of
speci f ic tonnage. If f re ight r a t e s a r e r is ing, th is p rac t i ce is of specia l
impor tance to sh ippers (2, p. 276).
T r a m p s also h i r e out on t ime c h a r t e r s . The h i r e r pays no
f re ight in re la t ion to tonnage c a r r i e d or the distance covered, but pays
a r a t e of h i re pe r ton of ca r ry ing capacity. The h i r e r mus t pay for the
full capacity r e g a r d l e s s of whether or not he intends to use i t . He may
send his ships out empty or load any m a t e r i a l s not specif ical ly objected
to when the contract was signed. The h i r e r i s a lso f r e e to use any
shipping route not excluded by the contract (2, p. 215).
Open marke t f r e igh t s tend to follow a "boom and bust" cycle and
a r e pa r t i cu la r ly sensi t ive to polit ical events . Rising demand in one
commodity or one sea route often se ts off a genera l upwards sp i r a l .
F e a r i n g a shor tage of ships, i m p o r t e r s begin booking cargo space in
advance which causes r a t e s to r i s e . Cont rac ts and t ime c h a r t e r s a r e
made at high r a t e s for per iods up to five y e a r s . When over -capac i ty is
reached, c h a r t e r s a r e defaulted on and ha rd t i m e s come to the t r a m p
freight bus iness (2, p. 217).
Open m a r k e t t r a m p operat ions c h a r t e r a grea t bulk of the i r
products in th i r teen bas ic commodit ies : g ra in and seeds , o r e s , coal
62
and coke, sugar , m e t a l s / s c r a p , t i m b e r and wood products , f e r t i -
l i z e r s , phosphates, pyr i tes , sulphur, copra, cement, and espor to .
Approximately 90 pe r cent of t r a n s p o r t e d pe t ro leum is by d i rec t ly
owned t anker f lee t s of the l a rge oil companies or by t anke r s h i r ed by
them on l ong - t e rm bas i s (2, p. 276).
L i n e r operat ions a r e significantly d i f ferent . The l i ne r owner
is bound to se rv ice spec i f ic routes on adver t i sed dates . This means
that at t i m e s he must sa i l without a full cargo. The operat ional
costs a r e higher than for t r a m p s due to high technical s t andards and the
necess i ty to mainta in a ful l c rew at all t i m e s . The cargo is genera l
in na ture . The l ine r companies f o r m shipping conferences which fix
conference tar i f f r a t e s to be applied to all m e m b e r l ines , allot to each
m e m b e r a number of " sa i l ings" per yea r , and somet imes include ta r i f f
shar ing a r r a n g e m e n t s . Because of the conferences , t he re is no b a r -
gaining over r a t e s . However, the r a t e s a r e much l e s s subject to
f luctuation (6, p. 276).
In the decade f r o m 1951 to 1961 d r y - c a r g o movements doubled.
The average s ize of ships, the i r eff iciency, and new f o r m s of f re ight ing
plus a d e c r e a s e in t r a m p shipping was respons ib le . The pa t te rn of
development in oil t r a n s p o r t of specia l ized c a r r i e r s e i ther owned by the
companies or h i red for long per iods , had been copied, pa r t i cu la r ly in
the shipment of o r e s (2, p. 227).
63
Impac t and Inc idence of F r e i g h t R a t e s
The m a i n ind ica t ions of avai lable s t a t i s t i c s a r e that the
inc idence of f r e igh t c h a r g e s on the f. o. b. va lue of expo r t s v a r i e s
be tween 3 and 8 p e r cent fo r coun t r i e s expor t ing the l igh te r , high
vo lume p r i m a r y c o m m o d i t i e s . F o r the c o u n t r i e s expor t ing heavy
bulk c o m m o d i t i e s , the inc idence of f r e igh t c h a r g e s can be as high a s
20 p e r cent (2, p. 277), Tab le VI g ives s o m e indica t ion of the s i z e
of the c h a r g e s involved.
I n f o r m a t i o n is m o r e r e a d i l y ava i l ab le fo r the inc idence of
f r e igh t c h a r g e s on i m p o r t s . The In te rna t iona l M o n e t a r y Fund (IMF)
e s t i m a t e s a r ange of inc idence of be tween 4, 6 p e r cent and 13 p e r cent
in 1961, T h e r e was l i t t l e change shown o v e r a f i v e - y e a r pe r iod . The
inc idence of f r e igh t cos t s m u s t be g e n e r a l l y expec ted to v a r y with
d i s t ance f r o m s u p p l i e r s (2, p, 224).
F o r developing c o u n t r i e s a s a whole, the inc idence of f r e igh t
c h a r g e s on t h e i r i n t e rna t i ona l t r a d e was cons ide rab l e .
To t a l i m p o r t s and e x p o r t s (f, o . b . ) of developing coun t r i e s , f o r which IMF data w e r e ava i l ab le amounted in 1961 to $23, 626 and $22, 944 mi l l ion r e spec t i ve ly . To ta l f r e igh t c h a r g e s on i m p o r t s . . , amounted to $2327 mi l l i on and to ta l f r e igh t c h a r g e s on expor t s m a y be e s t i m a t e d at $2750 mi l l ion (2, p, 277),
A rough e s t i m a t e of al l developing coun t r i e s would show that to ta l
f r e igh t c h a r g e s on t h e i r t r a d e would be c lo se to $600, 000 mi l l ion in
1961 <2, p. 225).
TABLE VI
FREIGHT CHARGES AS A PERCENTAGE OF THE F . O. B. VALUE OF EXPORTS FROM SEVEN DEVELOPING COUNTRIES
Country 1958 1959 19 60 1961 1962
B r a z i l a 4 . 5 5 .7 5. 5 5 .7 5. 9
Ceylon*5 - - - 5. 3 5. 5
L i b e r i a 0 16. 1 16. 4 15. 3 18. 5 h-1
CD
O
Malaya d 4. 9 4. 2
c-•
CO
4. 9 5. 8
Maur i t i u s e 7. 5 7. 6 7. 1 7. 5 7. 5
f
Morocco - - - - 23. 0
Sudan® 3. 2 4 .0 4. 1 3. 0 -
No available data
a Coffee only; over 50 pe r cent of the value of total expor ts .
b Tea only; over 60 p e r cent of the value of total expor ts .
c I ron o re and rubber only; 80 pe r cent of the value of total expor ts .
d Rubber only; over 50 pe r cent of the value of total expor ts .
e Sugar only; 95 pe r cent of the value of total expor ts .
f Phosphates , c i t rus f ru i t s , o ther foodstuffs , other o r e s , and misce l laneous animal or vegetable products; 90 per cent of the value of total expor ts
g Cotton, ground nuts, s e same , gum and dura; 90 per cent of total expor ts .
Source: F re igh t Investigation Bureau, Bombay, Government of T n r l i a 1 1
65
The Development of Merchant Mar ines
World merchan t shipping has i nc r ea sed by 54 pe r cent in the
ten y e a r s 1952-1962, while during the s ame per iod of t ime the m e r -
chants f lee ts of developing count r ies expanded by 73 per cent. The
growth of the total world merchan t mar ine t r a d e during the per iod
1957-1962 was 27 p e r cent, while the underdeveloped wor ld ' s merchan t
f leet i nc reased by about 51 per cent. Despite th is i nc rease in t he i r
f leet , the tonnage shipped by the developing countr ies hardly i nc r ea sed
(5. 06 p e r cent in 1952 to 5. 69 per cent in 1962) (2, p. 235).
The es tabl ishment of the national merchan t m a r i n e s has been
promoted by developing count r ies on var ious grounds. In s eve ra l
r e s p e c t s the i r mot ives a re the s ame as those which promoted developed
count r ies to develop the i r merchan t m a r i n e s in the past .
F o r instance, pe rhaps the p r i m a r y r eason for establ ishing
national merchant m a r i n e s was for economic independence and secur i ty ,
o r national defense. Countr ies whose national economies a r e heavily
dependent on regu la r m a r i t i m e se rv i ce s have developed the i r merchant
m a r i n e s so that the i r dependence on foreign shipping in t imes of war or
o ther emergenc i e s will be l e s s e n e d (2, p. 235).
The governments of developing count r ies have taken direct action
to promote the merchant m a r i n e s . They have used legis la t ion and p a r -
t icipat ion in exist ing companies in o r d e r to es tabl ish the i r own f leet .
National merchan t m a r i n e s have also been encouraged to develop through
66
such techniques as " f lag waving." This includes all m e a s u r e s adopted
by developing governments of which the di rect or indirect effect is to
bestow upon or grant a p re fe ren t i a l t r ea tmen t to ships of the national
f lag as compared with fore ign- f lag ships (2, p. 241).
Subsidies have also been used to promote merchan t m a r i n e s .
These subs id ies take many f o r m s ; d i rec t o r indirect g ran t s , inf lated
shipping payments , s ta te-owned f lee ts , and t ax- reduc t ions and other
f i sca l pr iv i leges a r e examples (2, p. 243).
The techniques were l ea rned by the developing countr ies f r o m
the developed countr ies which s t i l l p rac t ice them. They a r e p r i m a r i l y
devices f o r the promotion and protect ion of the merchan t m a r i n e s in
much the s a m e way as t a r i f f s a r e used to protec t domest ic indus t r i e s .
Data on f re ight payments in the balance of payments indicate
that the f u r t h e r expansion of the developing countr ies merchan t m a r i n e s
of fe r advantages. The merchan t m a r i n e helps a growing economy
through subst i tut ion of impor t s and the i nc r ea se of exports of t r anspo r t
s e r v i c e s . T h e r e w e r e no data available, however, f o r the adequate
determinat ion of prof i tabi l i ty or cos ts of developing a merchan t m a r i n e
se rv ice (2, p. 279).
M e a s u r e s to Reduce Costs in Ocean Shipping
Genera l ly , t r anspo r t costs make only a re la t ive ly sma l l p ro -
port ion of the del ivered p r i c e s of goods enter ing internat ional t r ade .
F re igh t r a t e s t hemse lves a r e but one par t of total t r an spo r t cos t s .
67
The cos t s i n c u r r e d on impor t s should rece ive most reduction
attention. P o r t expenses and costs re la ted to cargo handling make up
an increas ing propor t ion of total operat ing cos ts . The high incidence
of ship cos ts while in por t a r e due to port dues, pilotage and towage
charge, plus the high cost of tu rn around se rv i ce . It has been e s t i -
ma ted that some 60 pe r cent of a cargo l i n e r ' s yea r i s spent in port
e i ther waiting to ber th or actually alongside being loaded or unloaded
(2, p. 259).
In considering the genera l problem of reducing the incidence
of costs of ship congestion a r i s ing in por t s of developing countr ies ,
the bas ic problem is ensur ing that the growing and changing needs of
t r a f f i c using the por t s a r e me t . A developing country may wait until
the need for expansion a r i s e s o r expand in anticipation of demand. E i the r
way, the use of fore ign capital a s s i s t ance will be n e c e s s a r y .
The numerous cal ls on l imi ted capital funds, inadequate fac i l i t ies for forecas t ing fu ture port t r a f f i c as well as genera l uncertainty as to fu ture port needs, all tend to make even go-ahead port managements in developing countr ies wait f o r definite evidence of the need fo r extended or improved port fac i l i t ies before taking any action (2, p. 281).
The method of financing improvements in port i n f r a s t r u c t u r e
v a r i e s f r o m country to country and often f r o m port to port within a
country. The u s e r s usually b e a r the long- run costs ; somet imes it is
the State that b e a r s the incidence of the capital charges involved (2,
p. 281).
68
The lack of adequately t r a ined personnel fo r the por t s , both
manager i a l and adminis t ra t ive , a lso l eads to g r e a t e r cos t s . The
United Nations technical a s s i s t ance organizat ions could help improve
the knowledge and p rac t i ce of por t operat ion. The improvement of
cargo handling techniques and be t t e r t ra in ing in this a r e a would also
reduce por t costs (2, p. 262).
Conclusion
DeKock's conclusions were in the f o r m of recommendat ions as
to what should be done to solve the different p rob lems confronting ocean
shipping in the developing countr ies . However UNCTAD's final Act only
cal led fo r in t e r -governmenta l p rocedures (the establ ishing of commit tees)
to be used in studying this problem (1, p. 13). DeKock's proposals were
put aside until f u r t h e r s tudies were made . This s e e m s to be the bas ic
pa t t e rn of what happened to proposa ls at UNCTAD. Because this was the
f i r s t t ime any such Conference had been held, the procedure for handling
spec i f ic p roposa ls had not been worked out. The re fo re , most suggest ions
were pigeon-holed until the next Conference . This gave UNCTAD the
opportunity to r e - e x a m i n e the proposa ls whenever the need a rose .
Ocean shipping was shown to be a p rob lem of increas ing im-
por tance to the developing economies . Some definite action must be taken
in the nea r fu ture o r the export capacity of the poor nations will su f fe r
a decline. The impor tance of this a r e a to development can be seen by the
69
fact that without exports, a developing economy cannot pay its debt
servicing burden, accumulate any capital inflow, or hope to successfully
engage in international t rade . This topics receiving the attention it did
i s evidence of its growing relevance to the whole problem of development.
CHAPTER BIBLIOGRAPHY
1. Proceedings of the United Nations Conference on Trade and Development, Vol. I of Final Act and Report, 8 vols . , New York, 1964.
2. Proceedings of the United Nations Conference on Trade and Development, Vol. V of Financing and Invisible's Institutional Arrangements , 8 vols . , New York, 1964.
70
CHAPTER VI
FINANCING AN EXPANSION OF INTERNATIONAL TRADE
Although developed countr ies have i nc reased the i r contributions
to the developing economies f r o m $2. 6 billion to $6 billion over the
per iod 1951-1955 to 1960-1962 (3, p. 3), the need of the developing
countr ies for fore ign capital was of m a j o r impor tance at UNCTAD.
Fore ign capital was needed to make up for the low levels of domest ic
saving of the underdeveloped countr ies . Also, foreign capital was
needed so the developing countr ies could take advantage of native ex-
port indus t r ies and in the expansion and modernizat ion of exist ing
product ive fac i l i t ies . The long run goals of a developing country would
probably cause some disrupt ions in the shor t run t r ade pa t te rns .
The re fo re , fore ign capital would be needed to subsidize th is loss .
Conequently, fore ign capital has been one of the main financing tools of
the developing countr ies .
T rends in the Flow of L o n g - T e r m Exte rna l Finance
to the Developing Countr ies
As s ta ted above, the amount of fore ign capital contributed to the
developing countr ies has inc reased ; but the t r ends have changed. Table
VII shows that the composit ion of these contributions has changed. P r i v a t e
capital has played a minor ro le in developing economies ' financing s ince
71
TABLE VII
NET FLOW* OF LONG-TERM CAPITAL, AND OFFICIAL DONATIONS FROM DEVELOPED MARKET ECONOMIES
AND M U L T I L A T E R A L AGENCIES TO DEVELOPING COUNTRIES
(In bi l l ions of dol lars)
1951- 1956- 1960-I tem 1955 1959 . 1962
NV
Total""" -2 . 6 -4 . 7 - 6 . 0 Bi la te r ia l flow
Total -2 . 5 -4 . 5 -5 . 7-P r iva t e capital - 0 . 7 - 1 . 4 -1 . 2
Recorded re inves ted earnings of a f f i l ia tes of fore ign e n t e r p r i s e s ( -0 .4 ) ( -0 .5 ) ( -0 . 5)
Off ic ia l donations -1 . 1 -2 . 1 -2 . 6. Off ic ia l capital -0 . 8 - 1 . 0 -1 . 9 Total off icial of which: - 1 . 9 -3 . 1 -4 . 5
United States Agr icu l tu ra l surp lus sa les - -0 . 6 -0 . 9
Flow f r o m mul t i l a t e ra l lending agencies -0 . 1 -0 . 2 -0 . 3
Source: Bureau of Genera l Economic R e s e a r c h and Po l i c i e s of the United Nations Sec re t a r i a t , based on data f r o m Internat ional Monetary fund, "Balance of Payment s Yearbook" (Washington, D. C . ) , f r o m a special ques t ionnaire i ssued jointly by the United Nations Sec re t a r i a t and the Internat ional Monetary fund; and f r o m Organiza t ion . for Economic Cooperat ion and Development, "The Flow of Financia l Resou rce s to L e s s Developed Countr ies" (Pa r i s ) .
"Net flow" r e f e r s to the balance of a l l payments and all r ece ip t s of l o n g - t e r m off icial and pr ivate capi ta l .
Minus s igns indicate net outflow of funds f r o m developed m a r k e t s .
72
' 73
the mid-1950 ' s . Also, the t r end s eemed to be in m o r e loans instead
of direct contributions to the underdeveloped countr ies , accompanied
by m o r e funds being supplied by mul t i l a t e ra l agencies (3, p. 6).
The i nc reased amount of flow of official r e s o u r c e s to the
developing countr ies r e f l e c t s an i nc r ea se in off icial donations f r o m the
m a j o r donor nations. Table VIII shows the net off icial flow to the
developing nations f r o m the m a j o r donors. Care fu l examination will
r evea l that the United Kingdom and F r a n c e , even though increas ing
the i r contributions, have fai led to keep pace with the other countr ies
and that the combined s h a r e of donors o ther than the U. S. has not in-
c r e a s e d since the per iod 1950-1955.
The inc rease in loans was accompanied by an easing of t e r m s
and the propor t ion of loans payable in local cu r r enc i e s inc reased over
the twenty-year per iod. The U. S. a lso showed a t r end to shif t to
longer t e r m financing. These conditions made m o r e money available
at cheaper r a t e s with a longer per iod of t ime to pay (3, p. 7).
The flow of pr iva te capital to the underdeveloped countr ies was
compr i sed of th ree ca tegor ies of t r ansac t ions : d i rect investment ,
secur i ty i s sue s in the capital m a r k e t s of the developing countr ies and
lending opera t ions . Direc t investment was the predominant fo rm, and in
recent y e a r s a re la t ive ly l a rge propor t ion has been financed through the
re inves tment of p ro f i t s . Publ ic i s sue s in the capital m a r k e t s of Wes te rn
Europe and the United States were f o r m e r l y an important source of
TABLE VIII
NET OFFICIAL FLOW FROM NORTH AMERICA, WESTERN EUROPE AND JAPAN AND FROM MULTILATERAL AGENCIES
TO DEVELOPING COUNTRIES
(In percentages of total outflow)
Country 1950-1955*
1956-1959
1960-1962
United States 54 55 57
France (24) 20 16
United Kingdom 9 6 7
Germany (Republic of) 2 4 6
Italy 2 2 1
Japan 1 4 3
Other countries (2) 3 4
Multilateral agencies 5 6 6
Total 100 100 100
Source: Bureau of General Economic Research and Policies of the United Nations Secretar ia t , based on data f rom Organization for Economic Co-operation and Development, "The Flow of Financial Resources to Less Developed Countries, 1961" and "1963 Review of Development Assistance Ef fo r t s and Policies of the Members of the Development Assis tance Committee (Pa r i s ) . "
^Est imate based on incomplete data.
74
75
fore ign funds for many of the l a r g e r developing countr ies , but played only
a minor ro le a f t e r 1945. Additionally, the developed countr ies contr ibuted
substant ia l sums to mul t i l a t e ra l lending insti tutions and to the technical
a s s i s t ance and re l ief act ivi t ies of the United Nations and i t s specia l ized
agencies . The Internat ional Bank for Reconst ruct ion and Development
(IBRD) has been the main agency. With the es tabl ishment of new
agencies , the amount of development capital has been increas ing . Cap-
i ta l was supplied by the mul t i l a t e ra l agencies on t e r m s which ranged
f r o m the equivalent of the agency 's own borrowing cost plus a com-
m i s s i o n (the IBRD loans and par t of the loans granted by the In te r -
A m e r i c a n Development Bank [iDB] ), to loans charging t h r e e - f o u r t h s
of one per cent in te res t (as by the Internat ional Development Associa t ion
£ lDAj ), down to the s imple donations of the European Development Fund
of the European Economic Community (EEC) (3, p. 9).
The Distr ibut ion of Flows to the
Developing Countr ies
The distr ibution of the United Nations funds was another r eason
fo r concern at UNCTAD. In 1960-1962, one- th i rd of the net flow of
long t e r m funds f r o m all sou rces was di rec ted to the developing countr ies
of the F a r Eas t , a l i t t le l e s s than one- th i rd to Af r ica , one-f i f th to Lat in
Amer i ca , and the r e s t to wes t e rn As ia (3, p. 9). Table IX shows the
breakdown of fund-rece iv ing nations.
76
The regional dis tr ibut ion of fund flows shows to have shif ted
since 1956-1959 in favor of the F a r Eas t at the expense of Lat in
A m e r i c a . The F a r Eas t rece ived a higher propor t ion of the r i s ing
volume of off icial loans accompanied by an i nc r ea se in pr ivate capital
f lows. Lat in A m e r i c a ' s propor t ion declined because of i ts dependence
on pr iva te capital as i t s p r i m a r y source of funds. As pr ivate capital
f lows have decreased , Lat in A m e r i c a ' s sha re of funds has consequently
dec reased . This was accompanied by a shif t in pr ivate capital flows
to the F a r Eas t and West Asia . The resu l t of these shi f ts was to have
f i f teen countr ies receiving t h r e e - f o u r t h s of the total flow of l ong - t e rm
funds and f a r m o r e than the net r ece ip t s of pr ivate long t e r m capital
of the developing countr ies as a group (3, p. 10).
Bes ides being unevenly dis t r ibuted among the rec ip ien ts ,
l o n g - t e r m funds to individual countr ies were subject to y e a r - t o - y e a r
f luctuation. These f luctuations were due to two fac to r s : the instabi l i ty
of flows of pr iva te capital f r o m the developed capital exporting count r ies '
and the discontinuous c h a r a c t e r of financing operat ions of the public
s ec to r . Off ic ia l aid p r o g r a m s a r e under the sepa ra t e donor countr ies
l eg i s l a tu re s and may exper ience wide f luctuat ions. F u r t h e r m o r e , the
p rac t i ce of tying a s s i s t ance to speci f ic p ro j ec t s tends to give r i s e to
var ia t ions in annual d i sbu r semen t s . This i s significant because many
donor countr ies give p r e f e r e n c e to l a r g e r p ro j ec t s involving l a r g e impor t s
of equipment when grant ing loans (3, p. 11).
77
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Expor t Receipts
Export r ece ip t s were an a r ea of concern at the Conference . The
growth of such rece ip t s were slowed because of declines in p r i c e s of
many m a j o r export commodi t ies . In addition to l o s s e s of ex te rna l
purchas ing power resu l t ing f r o m the unfavorable course of export p r i ce s ,
the capacity of the developing count r ies to f inance impor t s has a lso been
diminished by i n c r e a s e s in impor t p r i c e s (3, p. 11).
The de te r iora t ion in t r ade t e r m s was g r e a t e r fo r the Lat in
A m e r i c a n countr ies than the other developing countr ies , and i ts impact
on ex te rna l purchas ing power was much l a r g e r . Although this region
accounted fo r only one- th i rd of the export r ece ip t s of the developing
countr ies , i ts t e r m s - o f - t r a d e loss was equivalent to three , - four ths of
the lo s s i ncu r r ed by all developing reg ions . The inflow of capital and
off ic ia l donations was not able to compensate fot the l o s s . Viewed in
th is light, "it i s c lea r that , if the recen t t r ends in the t e r m s of t r a d e
were to continue, the additional aid contribution, which would be
r e q u i r e d to mainta in at al l t i m e s the external purchas ing power of the
developing countr ies , would have to be indeed l a rge , in re la t ion to the
p resen t flow of aid" (3, p. 13).
The rec ip ien ts of fore ign capital , though helped, were under -
going a subs tant ia l cost . This cost was in the f o r m of i n c r e a s e s in
the ex terna l debt and debt s e rv ice payments which placed an inc reas ing
burden on the i r fo re ign exchange r e s o u r c e s . "Net in te res t and dividend
79
payments by the developing countr ies . . . were approximately $0. 9
billion l a r g e r in 1960-1962 than in 1951-1955" (3, p. 13). The p ro -
portion of export r ece ip t s requ i red to t r a n s f e r such income payments
also inc reased f rom 10 p e r cent to 13 per cent. The ra t io of dividend
and in te res t payments to the exports of those developing count r ies
that had no pe t ro leum exports i nc reased m o r e sharp ly than average
(3, p. 14).
The Flow of L o n g - T e r m Funds in Relation to
Development Ta rge t s and the
Recipients ' Needs
The Genera l Assembly in resolu t ion 1522 (XV), set as a t a rge t
fo r the t r a n s f e r of r e s o u r c e s to the developing countr ies 1 pe r cent of
the combined g r o s s domest ic product of the economically advanced
countr ies . The s ize of individual contributions was not to be uniform.
Some of the s m a l l e r donor countr ies gave as l i t t le as 0, 1 per cent of
the i r g r o s s domest ic product while o thers , such as F rance , gave 1, 5
p e r cent (3, p. 15).
The s h a r e of r e s o u r c e s t r a n s f e r r e d to the underdeveloped
countr ies reached a peak in 1961, Official aid and pr ivate capital
flows fel l off slightly in 1962 while the domest ic product of the donor
countr ies i nc reased on the average of 5 pe r cent. There fo re , the ra t io
of net contributions to g r o s s domest ic product has fal len. This decline
80
has been the consequence of a growing lag between commitments and
d i sbursements ,
According to data published by the Organizat ion for Economic Co-opera t ion and Development, the combined aid commitments of the United States and eight o ther donor countr ies and mul t i -l a t e r a l agencies exceeded g r o s s d i sbursements by over $1. 9 billion in 1961 and by $2. 3 billion in 1962 (3, p. 15),
The new b i l a te ra l commitments i nc reased by l i t t le m o r e than 3 per cent
f r o m 1961 to 1962, while commitments of mul t i l a t e ra l agencies leveled
off. The resu l t of these actions is that d i sbursements can be expected
to acce l e r a t e in the future because of the e a r l i e r commitments , but.
once these commitments a r e met, the expansion of aid may slow down
unless there is a r i s e in new commitments .
Aid Pol ic ies , Insti tutions and P r o c e d u r e s
Insti tutional F r a m e w o r k
Most developed countr ies have had aid p rog rams of one f o r m
o r another for some t ime . T h e r e f o r e the insti tutional mach inery used
to admin i s te r these p r o g r a m s is genera l ly of long standing. In a number
of ins tances , aid has been given to countr ies that have s t rong political
o r mi l i t a ry t ies with the donors; and such aid has usually been admin is te red
by var ious governmental depar tments . Some developed countr ies have
a lso provided loans to countr ies with which they have no specia l l inks
through off icial export financing agencies , such as the Expor t - Impor t
Bank of the United States . These agencies have usual ly come into
81
being at different t imes to serve different purposes. Efforts have been
made to adapt these agencies to modern needs. Despite this, there is
one serious defect which is "fragmentat ion of responsibility for the
administration of aid programs among severa l government agencies or
departments" (3, p. 19).
The volume of aid operations has grown and, as the idea of
development aid to the underdeveloped countries was accepted, the •
weakness of the existing institutional f ramework became more apparent.
Governments have t r ied to coordinate and centralize aid machinery,
but p rogress has been slow. For example, the United States, where
the Agency for International Development (AID) was established in 1961
for the explicit purpose of administering bi lateral aid, centralization
is still incomplete. In France and the United Kingdom the adminis-
tration of bi lateral ass is tance programs is still divided between the
minis t r ies of external af fa i rs , the departments responsible for dependent
t e r r i t o r i e s and assor ted countries and other agencies (3, p. 19).
Bi la teral aid programs are usually financed through the national
budgets of donor countries and the level of aid is determined annually.
The need to seek annp.al legislative authority for the aid programs is
cumbersome and slow. Long-term programs are l imited due to the
unknown circumstances of the future.
In o rder to overcome this difficulty, some governments have
been granted authority to make mul t i -year aid commitments. For
82
example, the Federa l Republic of Germany can make legally binding
advance commitments to individual recipients over a period of severa l
years . France has adopted a th ree -yea r financing program for overseas
departments and t e r r i t o r i e s and has begun to maintain a specified level
of aid to Algeria. Assis tance is also available through permanent lending
agencies whose funds are provided by several donor countries and do not
depend on annual budgetary appropriations, but the t e rms are l e s s favor-
able. For this reason many developing countries a re reluctant to use
these agencies (3, p. 19).
Accompanying this attempt to improve the domestic lending
machinery in the developed countries, there has been some development
in the international field. Several new mult i lateral agencies have been
established. Joining the IBRD and the IFC are the United States Special
Fund, the International Development Association, the World Food
Programme, the European Development Fund of the EEC, and the
In ter -American Development Bank (3, p. 20).
Multilateral lending institutions usually take a longer t e rm
view in planning their loan operations than do bi lateral assistance agencies.
For agencies which are able to finance their loans through the capital
market there is no problem of uncertainty regarding the future availa-
bility of funds. Agencies which operate on the basis of capital subscriptions
that need to be periodically replenished have no assurance that the level
of subscriptions will be maintained in la te r years . Thus, although
83
mul t i l a t e ra l lending inst i tut ions have a somewhat longer t ime horizon
than the b i l a t e ra l agencies , both have p rob lems that r e su l t in diff icul t ies
in l ong - t e rm aid planning (3, p. 20).
C r i t e r i a for Ass i s t ance Allocation
The re a r e many p re r equ i s i t e s which the developing countr ies
mus t mee t before rece iv ing aid f rom the donor countr ies . Usually
specia l poli t ical and economic t i es de te rmine the scope of a s s i s t ance .
Within th is context, aid i s given to the country that i s most poverty
s t r i cken or that will benefit mos t f r o m the aid. Some countr ies
rece ive aid due to a specia l re la t ionship with a developed country.
F o r m e r t e r r i t o r i e s and colonies a r e commonly given weighted consid-
era t ion in m a t t e r s of we l fa re aid. Other donors look to the s h o r t - r u n
development impact of aid on an economy befo re grant ing aid. Also,
a well developed plan of operat ion is r equ i r ed be fo re any money is
loaned. When a developing country asks aid of many indust r ia l ized
countr ies , the donors use the development plan as a means of allocating
funds f r o m each country to the rec ip ient . Another c r i t e r ion for receiving
aid is that p ro j ec t s in such f ields as communicat ion and power be given
high pr io r i ty . Also, donors r e s t r i c t aid to indus t r i es of the impor t -
substi tut ing var ie ty in o r d e r to al leviate the ba lance -o f -payments
posi t ion of the rec ip ient country. The donor countr ies often have to
take the ini t iat ive and encourage rec ip ien ts to p r e p a r e m o r e p ro j ec t s
84
for the export sec to r in the light of new export opportunit ies that may
a r i s e (3, p. 21). The p r e r equ i s i t e s a r e designed to a s s i s t the devel-
oping count r ies in using the i r aid.
Res t r i c t ions on Ass i s t ance
Bes ides these p re requ i s i t e s , developed countr ies also place
r e s t r i c t i o n s orf the use of the i r aid contributions. These r e s t r i c t i ons
fa l l into two broad ca tegor ies : r e s t r i c t i o n s with r e spec t to the purpose
fo r which a s s i s t ance may be used, and the l imita t ion of a id-f inanced
impor t s to p rocuremen t s in the donor country. The two may be
combined.
F i r s t , donor count r ies may r e s t r i c t the use of aid contributions
to the financing of speci f ic p ro j ec t s or they may provide ass i s t ance for
genera l developmental purposes . In e i ther case, they l imit the i r
contributions to the financing of identifiable impor t s or they may p ro -
vide fore ign exchange r e s o u r c e s to cover i m p o r t s as well as local
expendi tures of a p ro jec t . Specific pro jec t financing involves close
cooperat ion between the donor and recipient country, i t s r e su l t s can
be readi ly identif ied and evaluated, and it fac i l i t a tes the coordination
of technical and f inancial a s s i s t ance .
The recipient country is at some disadvantage in using aid
f r o m the speci f ic p ro jec t contributions, especia l ly if i ts investment
policy is based on an o v e r - a l l plan. While some m a j o r p ro jec t s can
85
be effect ively c a r r i e d out in isolat ion, t he re a r e many that r e q u i r e the
execution of complementary or otherwise re la ted p ro jec t s in o r d e r to
yield the best r e su l t s . In such cases , the need to finance each pro jec t
individually, possibly with m o r e than one donor, makes t iming and
coordination a problem. Also when a project only covers the di rect
import r equ i r emen t s the recipient may have to find supplementary fore ign
exchange r e s o u r c e s to meet the additional impor t r equ i r emen t s a r i s ing
f r o m the inc reased income genera ted by the domest ic investment
expendi ture . Consequently, the p rac t i ce of l imit ing projec t a s s i s t ance
to direct impor t r equ i r emen t s has tended to encourage the execution
of p ro jec t s with a re la t ive ly l a rge impor t component at the expense of
many equally important p ro j ec t s which involve re la t ive ly l a rge local
expendi tures (3, p. 21).
Secondly, most donor countr ies r e s t r i c t at l eas t par t of t he i r
b i l a t e ra l aid contributions to pu rchases of the i r own products . Reasons
given for applying such r e s t r i c t i o n s include ba lance-of -payments
diff icul t ies or the exis tence of idle capacity or unemployment in the
donor country. Other f a c t o r s causing aid tying a r e a des i r e to promote
domest ic expor ts and to compensate expor t e r s for the lo s s of sa les
in t rad i t ional m a r k e t s which may have r e su l t ed f r o m procurement
r e s t r i c t i o n s of o ther donor countr ies (3, p. 22).
The recipient countr ies a r e hur t economical ly by this type of
r e s t r i c t i o n . The h a r m comes f r o m the fact that such r e s t r i c t i o n s
86
reduce competition between potential suppliers and may render impossible
the procurement of imports f rom the optimum source of supply. These
res t r ic t ions involve not only higher costs, hence a l a rge r loan to be
serviced, but also the purchase of equipment manufactured in the donor
country which may not fully meet the recipient ' s requirements . Also,
the availability of aid may encourage the execution of those projects
for which suitable equipment can be readily obtained in the donor country,
even if the recipient ' s development plan did not assign the highest pr ior i ty
to such projects (3, p. 23).
It was est imated that in 1961, over two-fif ths of bi lateral aid
contributions were formally tied. Realizing this and the harmful aspects
of such res t r ic t ions , the ma jo r donor countries have to a large extent
agreed that the pract ice should be discontinued as soon as the difficulties
which have led to the introduction of such res t r ic t ions are eliminated
(3, p. 23).
International Co-ordinationof Aid
Due to the increasing number of aid programs, donor countries,
and recipients of these loans, there has ar isen a need for a co-ordinating
body. Administrative resources in recipient countries are l imited and the
need to deal with each donor separately places a very considerable s train
on these resources . Each application for funds usually involves a close
examination of the developing countries ' development plans, p rograms
and resources and, if several donors a re involved, there is duplication
87
of work and t ime . The co-ordinat ion of the p ro jec t s of severa l donors
a lso makes heavy demands on the r ec ip ien t ' s adminis t ra t ive personnel .
Also, the lack of consis tency in the c r i t e r i a employed by donors in
se lect ing p ro j ec t s and determining t e r m s of aid may lead to wasted
e f fo r t . F o r these r e a s o n s , the underdeveloped nations have urged that
aid be channeled through a cen t ra l co-ordinat ing agency (3, p. 24).
T h e r e have been two types of a r r a n g e m e n t s made to deal with
the internat ional co-ordinat ion of aid. The f i r s t consis ts of e f fo r t s by
the donor countr ies to ha rmonize national aid pol icies and p rac t i ces .
"The Development Ass i s t ance Commit tee (DAC) of the Organizat ion fo r
Economic Co-opera t ion and Development, on which the m a j o r donor
count r ies a r e r ep re sen ted , has been set up as the chief ins t rument fo r
in ternat ional co-ordinat ion of aid pol icies" (3, p. 24). The DAC has
provided a fo rum fo r the discuss ion of p rob lems of common concern
to aid donors . In the forum, donor count r ies a r e able to scru t in ize
each o thers pol icies and to s ea rch jointly fo r acceptable solutions to
c r i t i ca l i s sues . On the operat ional side, the DAC has es tabl i shed co-
ordinat ing groups for some individual l e s s developed countr ies . These
groups have helped rec ip ien ts in a var ie ty of ways to insure that continued
aid contribut ions a r e r e l a t ed to the i r overa l l needs and capaci t ies
(3, p. 24).
Secondly, donor count r ies have co-ord ina ted some of the i r aid
contributions under the so -ca l l ed consor t ia in which seve ra l donors
88
co-opera te in the financing of a pa r t i cu l a r pro jec t o r p rog ram in an
individual recipient country. These groups jointly examine the f inancial
r e q u i r e m e n t s and plans of rec ip ien ts then seek to mee t them under the i r
s e p a r a t e aid p r o g r a m s . The re is no fo rma l mach inery for centra l iz ing
contr ibut ions and each donor m e m b e r negotiates the t e r m s of his
contribution di rect ly with the rec ip ient . Consor t ium financing began
as an ad hoc a r r angemen t to consider the provis ion of additional
r e s o u r c e s for India 's development plan during a s eve re ba lance -o f -
payments c r i s i s . A second consor t ium was set up fo r Pak is tan . These
two (under the IBRD) have been joined by two under the OECD. The
exper iences of consor t ia have demons t ra ted the benef i ts of joint exam-
ination of the r ec ip i en t ' s development plan and pol ic ies . This has enabled
the donor to al locate his contributions in such a way as to join with
other donors in meet ing the r ec ip i en t ' s overa l l needs. (3, p. 25).
Although e f fo r t s under taken by the DAC and other internat ional
organizat ions have produced tangible r e su l t s , the internat ional co-ord in -
ation of external a s s i s t ance is f a r f r o m being completed.
A common approach on c r i t e r i a in methods, col laborat ion in the study of r ec ip ien t ' s plans and policies , the es tabl ishment of m o r e consis tent t e r m s and conditions and joint action with a view to l ibera l iz ing p rocurement p rocedu re s would contribute towards increas ing the e f fec t iveness of the aid effor t (3, p. 25).
89
Measures to Increase the Flow of External
Finance and to Improve its T e r m s
Aid makes demands on government budgets and domestic output
in donor countries and it is a potential charge on their balance of pay-
ments . As long as this aid came f rom idle resources the donor countries
were unaffected. However, in the last few years the industrialized
countries have been operating at close to full employment and the impact
of foreign aid on domestic economies is no longer minimal. Therefore
any fur ther increase in aid would result in a g rea te r impact on domestic
consumption and/or investment. Also, several donor countries have
begun to experience balance-of-payments difficulties recently causing
them to become cautious when granting new aid appropriations.
Because of these recent t rends, there is a need to find new ways
to increase aid. The need for action to accelerate the flow will be
g rea te r if a scheme for the compensation of losses of donor countries
resulting f rom long t e rm deterioration of t e r m s of t rade is initiated.
Various proposals have been put forward for the utilization of surpluses
for development aid. The World Food P rog ramme established under
the General Assembly Resolution 1714 (XVI) is one effort to utilize
food surpluses for economic development. In this plan both developed
and underdeveloped countries participated as donors (3, p. 27).
The United Kingdom initiated a program in 1962 for the utilization
of idle capacity. The plan was to make available loans for development
90
f rom those specif ied Br i t i sh indus t r ies which posses sed idle capacity.
Despite the fact that t hese contributions were t ied to exports , they
might make a valuable contribution to development financing, especia l ly
since it would pe rmi t g r e a t e r f lexibil i ty.
If mi l i t a ry expenditures were cut world-wide, the amount of
expendi tures left over would provide development loans. F o r example,
mi l i t a ry budget expenditures of the m a j o r donor countr ies in 1957-1959
were within the range of 4 to 10 per cent of t he i r g ro s s national products .
If only 10 pe r cent of budgetary defense expenditures was t r a n s f e r r e d
to economic aid, t he re would be m o r e than a doubling of the present
flow of aid to developing countr ies {3, p. 27).
Development aid has only recent ly been accepted as a fea ture
of in ternat ional economic re la t ions . The above p r o g r a m s have helped
the donor countr ies to accept th is new role while at the same t ime
effect ively ass i s t ing the growth of the developing economies.
The P r o b l e m of the Debt Service Burden of
Developing Countr ies
An es t ima te of the IBRD showed that the outstanding external
public debt and publicly guaranteed debt of developing countr ies totaled
over $24 bil l ion at the end of 1962 of which $17 billion had actually been
d isbursed . The servic ing of that debt involved annual payments of approxi-
mate ly $900 mil l ion for i n t e re s t and $2. 1 bill ion because of amor t iza t ion . The
91
total "debt s e rv i ce burden" of $3. 0 bil l ion was equivalent to over 10 p e r
cent of export r ece ip t s in 1962. Developing countr ies additionally had
to make provis ions for the financing of income payments on pr iva te
direct fore ign inves tment . F o r the developing countr ies as a whol e,
payments of direct fore ign investment income (including re inves ted
earnings) were twice as l a rge as in te res t payments in 1961, and fo r
some regions (Latin Amer ica) they were much l a r g e r . Such equity
income is var iable and s ince a great propor t ion of d i rect fore ign
investment is in export indus t r ies , income tends to vary with export
r ece ip t s . Lat in A m e r i c a i s the only region where adequate s t a t i s t i c s
have been kept. This data ve r i f i e s the IBRD's findings. In all but
two y e a r s between 1951 and 1960, changes in di rect foreign investment
income were in the same direct ion as those in export r ece ip t s . On the
o ther hand, payments of o ther income, p r i m a r i l y in te res t payments ,
r o s e without in te r rupt ion as the external fixed in te res t debt inc reased .
The conclusion of th is r epo r t was that
If the propor t ion of fore ign di rect investment flowing into s e c t o r s cater ing to the domest ic marke t i nc reases , the link between export r ece ip t s and dividend t r a n s f e r s may become weaker and the burden of t r a n s f e r r i n g such income may i nc r ea se considerably m o r e than in the past decade (3, p. 28).
In y e a r s to come the burden of se rv ic ing public and publicly
guaranteed debt will cer ta in ly i nc rea se . The ra t e of d i sbursements
of long t e r m loans have f requent ly been granted g race per iods up to
92
five y e a r s . The flow of repayments will then inc rease as these g race
per iods come to an end. A number of developing countr ies have re l i ed
on shor t t e r m cred i t s to f inance impor t s in the las t few yea r s , and for
these countr ies debt repayment is expected to r i s e sharply in the next
f ive y e a r s . Another IBRD survey showed that th i r teen developing
countr ies , which account for a lmost half of the total outstanding debt,
will be repaying over the next five y e a r s two-f i f ths or more of the i r
public external debt. In addition to the long t e r m debt (debt repayable
over per iods exceeding one year ) the developing countr ies have l a rge
outstanding shor t t e r m l iabi l i t ies which mus t be set t led within a
y e a r (3, p. 29).
The problem of easing the burden of servic ing external debt
is complex. Both shor t and long t e r m debt burdens must be re l ieved.
A lengthening of g race per iods to give the developing countr ies a
chance to "catch the i r b rea th" during which old debts may be repaid
is one suggested remedy. This action accompanied by a reduction in
in te res t r a t e s plus lengthening matur i ty dates will improve the com-
position and reduce the average annual serv ic ing cost of the public
debt (3, p. 29).
Internat ional Compensatory Financing
The t e r m s of t r ade of developing countr ies re f lec t that exports
consis t , for the mos t par t , of p r i m a r y commodi t ies . Most impor t s
of developing countr ies a r e manufac tured goods. The p r i ces of p r i m a r y
93
commodit ies a r e f a r m o r e subject to change than those of manufac tured
goods so that the re la t ionship between the two shows sha rp s h o r t - t e r m
fluctuations as well as considerable l ong - t e rm changes. Because most
underdeveloped countr ies genera l ly depend to a high degree on a sma l l
number of p r i m a r y commodi t ies for the bulk of the i r earnings , any
pr ice fluctuation tends to become m o r e pronounced for any single
underdeveloped country. Fac ing a re la t ively ine las t ic demand and
increas ing competit ion f rom domest ic production in the main consum-
ing countr ies and subject to a r a t e of growth in f inal consumption
lower than that of most o ther components of the total product in the
pr incipal m a r k e t s , p r i m a r y commodit ies consti tute a difficult f ield
in which an exporting country can make balancing ad jus tments . The
composit ion of the expor ts of mos t developing countr ies is too con-
cent ra ted in a few commodit ies to pe rmi t marg ina l ad jus tments
(3, p. 53).
Cons idered Solutions
To offset this , in ternat ional action might consist of providing
some fo rm of ex post facto compensation. One type of compensa-
tion would be an insurance scheme. The insurance fund f r o m which
indemnit ies were paid would be built up f r o m p remium income.
Because export p r i c e s do not always move in the same direct ion
among the p r i m a r y export ing countr ies , the sy s t em would not work
unless t h e r e was adequate par t ic ipat ion by countr ies in which the
94
chance of significant deterioration in the t e rms of t rade was relatively
small , i. e . , there must be some countries that do not experience any
decrease in the t e r m s of t rade. The industrial countries with diver-
sified export s t ruc tures would have to contribute regular premiums
but submit claims only i r regular ly . This type of scheme would have
many character is t ics of a social insurance program (3, p. 55).
Another type of compensation would be a " t e rms of t rade
pool" into which countries paid any gains that might have accrued
to them from a favorable movement in external pr ices , and f rom
which the countries that had sustained losses f rom external price
movements would draw compensatory amounts. Such a pool would
probably need to be backed up by a rese rve or capital fund to be
drawn on if claims exceeded payments (3, p. 55).
A different scheme would involve the creation of a "compen-
sation fund" f rom general contributions of developed countries.
The donations would be based on national income or some other
taxable capacity. Developing countries would be paid if they experi-
enced a deterioration in the t e rms of t rade. This type of fund would
be "to maintain the total purchasing power of the external resources
accruing to developing countries through their repor ts" (3, p. 56). !
The Secretary-General of UNCTAD said:
The amount of compensation to be received by each exporting country would be determined af ter consideration of the effect that the deterioration has had on its investment
95
r e s o u r c e s and balance of payments , so that the country can rece ive whatever additional r e s o u r c e s it needs to continue i ts economic development plan without d i s turbances (2, p. 61).
Whatever the method of building the fund, i t s succes s depends
on the wil l ingness of the countr ies to accept that method. The devel-
oped nations a r e the hub of the schemes because the i r contributions
would undoubtedly sus ta in any fund. Without the i r full cooperation,
any p r o g r a m could not obtain the n e c e s s a r y funds.
The above proposa l s were rece ived by UNCTAD. It is s ignif i -
cant to note that the only action was a recommendat ion for the United
Nations, UNCTAD, and the nations of the world to study the problem
of compensa tory financing. Af te r analysis of the p rob lem and the
proposed solutions, pape r s should again be submit ted at a l a t e r
meet ing of UNCTAD (1, p. 54). This again demons t ra tes the influ-
ence of the indus t r ia l ized nations at UNCTAD. No p r o g r a m of com-
pensa tory financing was possible without the i r acceptance. Rea l -
izing the re luc tance of the developed countr ies to accept such a
plan in 1964, the developing countr ies set t led for the above r e c o m -
mendation, hoping that as t ime passed , the atti tude of the developed
countr ies would change.
P ro tec t ion Against Risks in Export F inance
A complement to the introduction of m e a s u r e s for l ibera l
export credi t fac i l i t ies is the provis ion of insurance against r i s k s
for export c red i t . In mos t indus t r ia l ized countr ies , a well-developed
96
credit insurance system has become an integral part of the mechanism
-of export finance. This has been part icular ly true of the medium-term
variety. Insurance has become a condition itself for receiving any
accomodation in export finances. The t e r m s of the insurance policy
largely determine the nature and cost of credit granted. The premium
charges are a cost item of export credit but they are usually l ess than
the high compensation for r i sk that would otherwise be implicit in
the interest cost of the credit (3, p. 41).
Export finance involves commercial r isks and political and
t r ans fe r r i sks . General political r i sks affect the whole country
or export sector , where ordinary commercial r i sks relate to an
individual transaction.
Commercial r i sks are those dealing with the probable default
of the importer , which can occur even before the acceptance of the
goods if the buyer re fuses to accept delivery. This r isk is not usu-
ally too great in the case of traditional exports. The most severe
r i sks a re those of non-payment a f te r the acceptance of the good
because of insolvency of the buyer, or protracted defaults on pay-
ments by him. The insurance institutions generally pay claims on
the basis of protracted default although they may ask the exporter
to share some of the costs (3, p. 41).
There is also another kind of export r isk—called economic
r isk--which is connected with t r ans fe r r isk , but may affect individual
97
t ransac t ions . F o r instance, if costs of production a r e on the i nc rease
and the exchange r a t e does not change to re f lec t the inc rease in
domest ic p r i ce s , and if the export contract quotes a f i r m pr ice in
a s table cur rency , then fo r some exports t he re will be a heavy loss
(3, p. 41).
Pol i t ica l and t r a n s f e r r i s k s affect payments due all the expor t -
e r s f r o m the buyers of a given country because of delay or prevention
of t r a n s f e r of payments . This could a r i s e f r o m a shor tage of foreign
exchange, economic diff icul t ies in the buyers ' country, the impos i -
tion of impor t r e s t r i c t i ons o r embargoes o r export prohibit ions, o r
d i s a s t e r s of na ture . A contract with a fore ign government is also
cons idered a polit ical r i sk (3, p. 42).
In the case of poli t ical and t r a n s f e r r i s k s , it is a common
rule to let the government play an active role even in the develop-
ing countr ies . L o s s e s o r f inancial s t r a in of such l a rge propor t ions
involving r i s k s of this kind a r e capable of being insured only with
government backing. Commerc i a l r i s k s a r e insured mainly by
pr ivate inst i tut ions.
In the developing countr ies , m e c h a n i s m s for insurance of
export credi t r i s k s have not developed to any l a rge extent. In the few
countr ies where they a r e available, they a r e l imi ted most ly to sho r t -
t e r m credi t and a lmost always control led o r opera ted by the s ta te .
As the developing count r ies expand the i r expor ts of manufac tu res ,
98
including capital goods and consumer durables which have to be
f inanced by medium or l o n g - t e r m export c red i t s , the need for i n s u r -
ance sy s t ems will i nc r ea se . Because of the amount of r i s k involved
mos t pr iva te insurance companies will be unwilling to underwri te
the r i s k s . Consequently the state will have to cover both polit ical
and commerc i a l r i s k s (3, p. 42).
The growth of expor t - c r ed i t insurance in the developing
count r ies can be ve ry important . The backing of the national i n su r -
ance agency improves the quality of the credi t document, making
internat ional financing as well as national financing possible . " F u r -
the r , with this support of the national insurance agency to the quality
of export credi t i n s t rumen t s in i ts portfolio, the internat ional r e f inanc-
ing organ would find it much e a s i e r to mobi l ize the n e c e s s a r y f inancial
r e s o u r c e s " (3, p. 44).
CHAPTER BIBLIOGRAPHY
1. P roceed ings of the United Nations Conference on Trade and Devel-opment, Vol. I of F ina l Act and Report , 8 vo l s . , New York, 1964.
2. P roceed ings of the United Nations Conference on Trade and Devel-opment, Vol. II of Pol icy Sta tements , 8 vo l s , , New York, 1964.
3. P roceed ings of the United Nations Conference on Trade and Devel-opment, Vol. V of Financing and Invisibles Insti tutional A r r a n g e -ments , 8 vo l s . , New York, 1964.
99
CHAPTER VII
DEVELOPMENT THROUGH PRIVATE DEVELOPMENT
FINANCE COMPANIES
I n d u s t r i a l i z a t i o n i s one of the e s s e n t i a l s t eps in achieving
e c o n o m i c growth and deve lopment . The development of c o n t r a c t s
and c o - o p e r a t i o n with f o r e i g n f i r m s can be he lpful in s t a r t i n g the
p r o c e s s of i n d u s t r i a l i z a t i o n and keeping a b r e a s t of new advances .
However , only a few l a r g e - s c a l e i n d u s t r i e s in developing c o u n t r i e s
can hope to a t t r a c t f o r e i g n cap i ta l and m a n a g e m e n t d i r ec t ly . The
s m a l l and m e d i u m - s i z e i n d u s t r i e s m u s t depend on d o m e s t i c f inance .
In an a t t empt to i n c r e a s e the supply of ava i lab le funds, m a n a -
g e r i a l "know how, " and cap i ta l equipment f r o m the developed coun-
t r i e s , m o s t developing c o u n t r i e s have e s t a b l i s h e d development banks .
T h e s e a r e ins t i tu t ions which have the ob jec t ive "of providing m e d i u m
and l o n g - t e r m funds f o r p roduc t ive i n v e s t m e n t s and, usual ly , a l so
t echn ica l advice needed to f o r m u l a t e and to c a r r y out such i nves t -
m e n t s , " (2, p. 340). T h e s e banks m a y be p r i v a t e l y o r g o v e r n m e n -
ta l ly owned and can o p e r a t e in e i t h e r p r i v a t e o r publ ic s e c t o r s , o r
both s e c t o r s . The Wor ld Bank and I F C have he lped p romote the
e s t a b l i s h m e n t of one type of development bank, the p r i v a t e deve lop-
men t f inance company.
100
101
The development f inance companies which have been promoted
by the World Bank and IFC a r e pr iva te or predominate ly pr iva te inst i tu-
t ions designed to encourage indust r ia l and other bus iness pr inc ip les
which a r e conducive to sound economic growth in underdeveloped coun-
t r i e s . These companies p e r f o r m a valuable function by identifying
p romis ing f ields for investment and helping to br ing together the fac -
t o r s of production. They become an active par t of a developing country
and a r e able to help mobi l ize domest ic savings and channel them into
productive act iv i t ies . They also can become the means through which
fore ign and internat ional capital and ski l l s can flow into the developing
economy. This new capital can in tu rn be put into indus t r ies too sma l l
to a t t rac t fore ign capital and technology direct ly.
Because they a r e t hemse lves pr ivate , t hese finance companies have a unique role in helping the growth of the pr ivate sec tor , where p rob lems of s t imulat ing healthy growth a r e often pa r t i cu -l a r l y in t rac table (2, p. 340).
The pr incipal a ims of development f inance companies a r e
(a) to supply l ong - t e rm capital , which will be pa r t i cu la r ly useful if
par t of it is in fore ign capital ; (b) to supply exper ienced management
which p o s s e s s e s both a world-wide acquaintance with modern inves t -
ment techniques and a knowledge of national conditions. Thus, the
company will be providing men capable of object ively appra is ing m a r -
ket opportunit ies , ma rke t poss ibi l i t ies , and bus iness r i s k s . The
company will also be of a s s i s t ance to cl ients wishing to obtain techni-
cal and manager i a l aid; finally, (c) providing cont rac ts with fore ign
102
bus iness and investment inst i tut ions and internat ional f inancial and
technical a s s i s t ance agencies , which a r e indispensable in r ec r ea t i ng
outside capital and know-how (2, p. 341),
Supplying Capital
The o rgan i ze r s of a development finance company must plan the
capital s t r u c t u r e of the company in such a way that inves tors in i ts
s h a r e s will feel that the i r capital i s sa fe f r o m eros ion and that in the
not too distant fu ture they will begin to rece ive some r e tu rn on the i r
inves tment . This means that the company mus t genera te a suff ic ient ly
high level of net earn ings to be able to cover the cost of adequate manage-
ment and staff , the building of adequate r e s e r v e s , taxes , and as soon
as poss ib le a modera te r e t u r n to s tockholders . To do this, the com-
pany mus t r ea l i ze that a par t of i ts r e s o u r c e s have to be obta ined f r o m
bor rowed funds, which can be lent at a higher r a t e than the company
pays. Thus, " l everage" will be provided to enhance the r e t u r n on
equity. In prac t ice , the d i f ference between the in te res t r a t e which
the company can charge i ts b o r r o w e r s and the r a t e it must pay to i t s
capital s o u r c e s is not enough to es tabl ish the company soundly. T h e r e -
fo re mos t development finance companies have had to obtain specia l
governmenta l ass i s tance ,
In the f o r m of so -ca l l ed " q u a s i - e q u i t y " - - a long t e r m loan {typi-cally 30 y e a r s with a 15 y e a r grace) , i n t e r e s t - f r e e or with a very low r a t e of in te res t , which will be subordinated to the sha re capital in case the company has to be dissolved (2, p. 341).
103
Preferent ia l tax t rea tments and guarantees of foreign loans are
other forms of government support. Some developing governments have
entrusted their developing finance companies with the management of
special public investment funds, for which a managing agency fee is
paid (2, p. 342),
The investment policies of a development finance company are
designed to aid development and make a profit . It has to appraise a
project carefully to be able to ensure security as well as economic
growth. Various factors have to be balanced. Thus, the requirements
of a new enterpr i se might call for substantial equity capital. Most
development finance companies are willing to make equity investments
if they do not have to assume managerial responsibility. On the other
hand, they would be unwise to hold in their portfolios equities amount-
ing to more than their paid up capital and f r ee r e se rves . The duration
of loans must be long enough to allow easy repayment, but must be
related to the duration of the finance company's borrowings (2, p. 342).
Supplying Management and Recreating Capital
The development finance company's role as a technical advisor
and manager is one of its most important functions. The company's
operational staff should be able to provide guidance to prospective clients
in preparing their plans for establishing or expanding their business.
If the company cannot provide the technical assis tance called for, it
should be able to put i ts clients in touch with experts famil iar with thei r
104
p rob lems . The company, in i ts capaci ty of providing capital and technical
a s s i s t ance , can s c r e e n p ro j ec t s so as to r ecommend those that will do
most to f u r t he r the economic growth of the developing country (2, p. 343).
Promot ion of the capital m a r k e t is of impor tance to a development
f inance company. This can be done by encouraging domest ic inves to rs
to buy s h a r e s in the company, by the company sel l ing f r o m i ts own por t -
folio s ecu r i t i e s of e n t e r p r i s e s that have pas sed ini t ial diff icul t ies and
have become success fu l , and by the company 's underwri t ing of public
i s sue s of s h a r e s of e n t e r p r i s e s that it a s s i s t s . The managements can
encourage the flow of pr iva te savings into productive investment , too.
Ass i s t ance to secur i t i e s exchanges and advice to governments on the
a t t r ac t iveness of investment in cer ta in productive e n t e r p r i s e s a r e a
few of the possible methods (2, p. 343).
Es tabl ishing a Finance Company
The re must be t h r ee conditions p resen t in a country before the
World Bank or IFC would recommend the es tabl i shment of a develop-
ment finance company. F i r s t , the development of a s t rong pr ivate
s ec to r must not be inconsis tent with the nat ion 's over all a ims; _i_. e_.,
it would be point less to es tabl ish a pr iva te finance company in a coun-
t r y whose main goal was soc ia l i sm. Second, t h e r e mus t be a need for
medium and l ong - t e rm loans . This impl ies that the company must
have some manager i a l and en t r ep reneur i a l ta lent , a reasonably broad
marke t , some natural r e s o u r c e s and a f a i r ly l a r g e volume of pr iva te
105
industrial and other productive investments which could go forward when
financial assis tance was made available. Finally, there must be a
clearly defined gap in the capital market which this institution will be
able to fill. If financial ass is tance is already available, no good would
come of the establishment of a development finance company (2, p. 343).
The World Bank, International Development Association (IDA)
and IFC have extended financial assis tance to fifteen development fi-
nance companies in fourteen different countries.
The World Bank has extended twenty-one lines of credit to ten institutions, totaling the equivalent of $234 million. Two IDA credits of $5 million each have also been granted. IFC has made ten equity investments in as many institutions for a total investment of $15 million. In the case of six companies, the World Bank and IFC have acted jointly: the fo rmer supplying the loan capital, the la t ter equity (2, p. 344).
Table X shows the distribution of this assis tance by country and type.
This does not measure the full assis tance given by the three
organizations. When making an investment, the IFC has usually brought
together a number of foreign investors to participate with it in the share
capital. The World Bank also gives ass is tance beyond providing capi-
tal . It helps to draft the char ter or Art ic les of Association, gives
advice on investment policy, and locates top management as well as
bringing other sponsors together. Technical assis tance is provided
by the World Bank and IFC af ter a company has been recognized or
established. Sometimes the IFC is even asked to appoint shareholders .
Additionally, the World Bank operates the Economic Development Institute,
106
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107
a college for senior officials involved with economic development, to
which the staff of development finance companies have been invited
(2, p. 345).
Pr ivate capital f rom abroad was one of the major considerations
toward solving the capital inflow problem of developing countries.
Pr ivate capital seems to be an excellent way for a developing country
to build up its capital r e sources . However, the main problem is going
to be in attracting this private capital. This problem was mentioned
but no sat isfactory solutions were found. Perhaps , a solution will
emerge in other UNCTAD meetings for this appears to be an excellent
way to develop an economy.
CHAPTER BIBLIOGRAPHY
1. Proceed ings of the United Nations Conference on Trade and Develop-ment , Vol. I of F ina l Act and Report , 8 vo l s . , New York, 1964.
2. P roceed ings of the United Nations Conference on Trade and Develop-ment, Vol. V of Financing and Invis ib le ' s Insti tutional A r r a n g e -men t s , 8 v o l s . , New York, 1964.
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CHAPTER VIII
CONCLUSION
In i ts d iscuss ion of t r ade as an aspect of development, the Thi rd
Commit tee of UNCTAD held s ix ty- four meet ings (4) in which it focused
on the following:
F i r s t , the genera l t a r g e t s on which the internat ional community might focus in dealing with the p rob lems of development through t r a d e and internat ional cooperation in genera l were appra ised . Second, a number of pr inciples and c r i t e r i a a imed at providing const ruct ive guidelines for policies in the var ious a r e a s of in t e r -national financial and technical co-opera t ion were formulated; and th i rd , s eve ra l speci f ic m e a s u r e s bear ing on the broad issue be fo re the Commit tee were e laborated (3, p. 207-208).
Af t e r the above actions had been taken, the Th i rd Commit tee
submit ted a draf t resolu t ion to UNCTAD containing i ts four main r e c o m -
mendat ions . Recognizing the unsa t i s fac to ry c h a r a c t e r of actual growth
r a t e s in developing countr ies , the Commit tee f i r s t recommended that the
responsibi l i ty of providing r e s o u r c e s for the development of the under-
developed countr ies be jointly sha r ed by developed and underdeveloped
economies . Secondly, all competent internat ional bodies should examine
the economies and development plans of individual countr ies to de termine
the possibi l i ty of higher growth r a t e s and to suggest the m e a s u r e s to
achieve them. Third , the impor t capacity resul t ing f rom the combined
total of export p roceeds and capital inflow available to developing
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countr ies should r i s e suff ic ient ly and the m e a s u r e s taken by the devel-
oping countr ies should be high enough to achieve these higher r a t e s
of growth. Final ly, each economical ly advanced country should t r y
to supply f inancial r e s o u r c e s to the developing economies of a min imum
net amount approaching as nea r ly as poss ible to 1 per cent of i t s national
income (3, p. 178).
The recommendat ions of the Th i rd Commit tee were studied, as
were all o ther Commit tees ' , and a Final Act and Report p repared . The
Final Act called for an agreement on the impor tance of the p rob lems of
in ternat ional development. The recognit ion of the need for g r e a t e r
e f fo r t s by both developed and developing countr ies to divide the respon-
s ib i l i t ies of development was mentioned. Final ly, f u r the r study was
recommended in some a r e a s as a means of finding solutions on which
both developed and developing economies could agree .
This contribution to fu ture meet ings was notable. However, much
m o r e could have been accompl ished if the suspicions and misgivings
of both the developing and the developed countr ies had been laid as ide .
F o r example, B a r b a r a Ward pointed out that the developing nations
felt that t he i r old e n e m y - - c o l o n i a l i s m - - h a d been joined by the United
States and the united Wes te rn world (5, p. 128). The industr ia l ized
Wes te rn nations, in the minor i ty at the Conference, were reluctant
to grant speci f ic m e a s u r e s , and when some m e a s u r e s were approved,
fi l led them with r e s e r v a t i o n s so they lost par t , if not all, of t he i r fo rce
(6, p. 24).
Ill
Another limitation to UNCTAD was its failure to adopt any specific
procedures for helping the development of the developing countries.
There were guidelines and targets set up but no definite actions. Admit-
tedly, this was only the f i r s t of a hoped-for se r i e s of conferences to
t ry to improve the world t rade situation. However, it would seem more
significant to any future meetings if some concrete action had been
initiated at the 1964 UNCTAD. Fo r example, UNCTAD might have
adopted the t r ans fe r r ing of 1 per cent of the combined gross domestic
product of economically advanced countries to the developing countries
as mentioned in Chapter VI. Instead, the decision to reach such a t a r -
get was left up to the individual nations whose aid programs are usually
governed more by political expediency than by economic necessity
(2, p. 265).
A final limitation of UNCTAD was its failure to upe properly the
r e sea rch presented. The s tat is t ics presented by Dr. Prebisch showed
a tendency for the t rade gap to increase every year . Even though there
is some economic growth occurring, it is not advancing at a fast enough
rate to fill this t rade gap. The avenues of borrowed funds were examined
and shown to be lacking as an efficient means for poor countries to
implement economic growth. Also the international t e rms of trade
were assessed and found to be adverse to the developing economies.
Thus the developing countries ' debt continued to increase.
Because of this fai lure to solve the t rade problem, the situation
is worsening. If no effective solution can be found, the result will be
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a block in the economic development of international t rade. The eco-
nomic growth of the individual countries would then decline, and, if
allowed to fall too far , the resul t would be depression. Another possi-
ble result could be war between the "have" and the "have-not" nations.
Although UNCTAD failed to a r r ive at any solid conclusion on
how to solve the international t rade problem, it nevertheless made
two notable contributions. The f i rs t l ies in the fact that the conference
could be held, that it could proceed and be concluded without any ma jo r
disruptions (1, p. 126). This is especially significant when reviewed
in the perspective of the different positions of the developed, developing,
and Soviet bloc economies. Secondly, the establishment of permanent
machinery to ca r ry on the work s tar ted provides a hopeful beginning.
The Conference ended with the hope that the future meetings would take
up the study of international t rade problems where the 1964 UNCTAD
stopped and would reach some significant solutions before the t rade
problems become acute.
CHAPTER BIBLIOGRAPHY
1. Hagras, Kamal M. United Nations Conference on Trade and Development, New York, Freder ick A. P raege r , 1965.
2. Lerche, Charles O. and Said, Abdul A. Concepts of International Polit ics, New Jersey , 1964.
3. Proceedings of the United Nations Conference on Trade and Development, Vol. 1 of Final Act and Report, 8 vols . , New York, 1964.
4. United Nations Conference on Trade and Development, Summary Records of the Thirty-Six Plenary Meetings, Series 2, of Ser ies 1-64, New York, 1964.
5. Ward, Barbara , The Rich Nations and the Poor Nations, New York, W. W. Norton and Co., Inc. , 1962.
6. The Year Book of World Affai rs 1965, New York, 1965.
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