Managing Development - Lessons of the 1970s

                       Address by Ernest Stern
                       Senior Vice President Operations
                       The World Bank
                Prepared for Delivery at the 15th Meeting of the
                Committee on Changing International Realities
                Coronado, California, October 29, 1982

                              *****
It is a pleasure to be with you this morning and I appreciate the

opportunity to review with you the impact of the developing countries

on international realities.


There are many elements in the evolution of the developing countries

to   ~   significant international economic force which are important -

the unprecedented growth in the last quarter century; the sharp

reductions in infant mortality and in illiteracy; the major improvements

ir health conditions and longevity, and the improved access to public

services.      Equally dramatic has been the growth in agricultural output,

the entry of developing countries as significant exporters of manufactured

goocs and services, and the emergence of these countries as major markets

for the industrialized countries - markets which have been more buoyant

thar- domestic ones.     These developments, and others, have changed the

importance of the developing countries on the international scene and

have given meaning to the idea of an interdependent world.        And, we are

only at the beginning of this process.


But what I woul<l like to discuss this morning is not the achievements

of the developing countries, or the     diversit~   among them, but how they
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have managed their adjustment to the changed international situation

since the mid-seventies.     I have selected this aspect of performance

for two reasons.     First, because the adjustments which the developing

countries have had to undertake, and those which still lie ahead, are

of unprecedented magnitude in so short a period.      This adjustment

process is the central feature of development strategy and decision

makL.~g   in developing countries today.   Second, because how the adjust-

ment process has been, and is being, managed highlights those features

which determine differences in the longer term economic performance

of countries.


Even though the role of the developing countries in the international

economy has grown, and this growth has affected the economies and

financial structures of the industrialized countries, there remains

in the minds of many a monolithic view of the developing world - a

simplistic division into North and South - which is misleading and

which provides a poor basis for corporate planning and decision making.

There has always been great diversity of income levels, economic

interests and capacity, history and cultural background, human and

physical resources among developing countries but it took the increase

in energy prices in 1973, and the subsequent developments in the world

economy, to focus attention on this.       Initially the shift in world

 income from industrial countries to oil producers captured attention but

as the industrial countries adjusted rapidly anc the full burden of

 the balance of payments adjustment shifted to the developing countries,
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the different impact on individual countries stood out, as did

their capacity to respond.   It made it obvious that it was a fallacy

to assume homogeneity among developing countries or even an identity

of economic interests.   What was good for one group turned out to be

neither necessarily good nor relevant for all.


The "North-South" view of the world has many roots in both the

developing and the industrial countries.    I will list only a few:


      the relative economic and political unimportance of

      developing countries in the fifties and early sixties

      when the new international institutions were shaped,

      domestic growth in the OECD countries was unprecedented

      an d the growth in international trade was principally

      anong the industrialized countries;


      the ending of the colonial period and the emergence of

      man: new nations, many with new names, particularly in

      Africa.   This explosion of sovereigns exceeded the

      educational base of most - since the teaching of foreign

      cultures had never gone far beyond the early Greeks, the

      noble Romans   and, occasionally, a bit about China;


      when attention turned to the developing countries it was

      in the con text of aid.   The massive transfer of ex.ternal

      resources, which had worked so well in the reconstruction of
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     Europe and Japan was thought to be a proper prescription for

     the developing countries as well.      Only when it did not quite

     work that way did the special problems of development become

     clear - but then the study of development, an independent but

     always slightly dubious branch of economics, suggested that

     there was a single set of issues for all developing countries;

     in the US the central economic relation with developing

     countries was seen to be aid - and the interminable debates

     on that subject lumped all developing countries together and

     pre-empted thought from the many other aspects of this relation-

      ship.     To this day there are those who call loans by the Export

      Import BanK to developing countries aid, while they would not

      drean of calling a similar loan to, say, the Netherlands for

      the purchase of aircraft - aid;


      the weakness of the developing countries put a premium on

      so:idarity - a concept which itself emerged only gradually.        But

      once developed it was seen as a major tool to obtain political

      power '    d institutional change.   For this unity, different

      economic interests were subordinated.


But starting in the late sixties this view of the world began to be seen

as a less and less useful simplification.      The initial element was the

growing   economic strength of some countries and the consequent interest

of the Western business community in particular countries as markets and

producers.    The success of some East Asian, Latin American and Southern
                               - 5 -


Euro?ean countries in becoming major exporters of manufactured goods

was an especial l y important factor.   Here was a group of countries

which had interests in the trading and financial systems closer to

those of the developed world than to those of the poorest developing

countries.    The decreasing reliance of some countries on official

aid f lows, and the graduation of such developing countries as Israel

and Spain from World Bank lending, also were signs of increasing

differentiation.    In the early seventies also, a group of twenty-five

countries with l ow per capita incomes and very limited economic infra-

structure were formally designated by the UN as the 'least-developed

coun t ries' which should be eligible for special forms of assistance.

India was not included in this - group despite its low per capita income

becau se it was rightly judged to have other economic characteristics

which were comparable with higher per capita income countries.     The

categ orisation of LDCs into different groups by economic character-

istics, rather t h an simply by per capita incomes or geography, became

an i n creasingly common practice.


Thus, while there had been increasing awareness of the diversity of

the Third World even before the oil price rise of end 1973, that event

signalled a quantum change.    This was not just a matter of the immediate

effect of the oil price rise in terms of which countries gained and

whick lost.    The substantial rise in the relative price of energy

created a need f or all countries, developed and less developed, oil

exporters and i mp orters, to adjust the structure of their economies to
                                                                               I


                                 - 6 -




what was understood to be a permanent shift.   The magnitude of the change

and the urgency of the adjustment has imposed a severe test on the

managerial capacity of all countries, but particularly the LDCs, a test

which they have met in different ways and with different degrees of

success.   How different countries have faced the challenges of structural

adjustment and what has determined the relative ·success or failure of

their responses contains important lessons for the developing countries,

for institutions like the World Bank, and certainly for the leaders of

the banking and business communities of this country.


I propose to look at the adjustment experience of four groups of LDCs.

The first comprises the middle and upper income semi-industrial countries

of East Asia, Latin America and those surrounding the Mediterranean,

such as Korea, Brazil, Turkey, the Philippines, Colombia and Portugal.

These are countries which have a significant industrial base and some

exports of manufactured goods.    The second group is an arbitrary one

linking the two Asian giants, China and India.    The third category is

 the countries of sub-Saharan Africa; and the fourth is the oil-exporting

 developing countries such as Indonesia, Nigeria. Egypt and Mexico.   These

groups provide a good basis for evaluating different experiences of

developing countries in the management of major structural changes although

there are, of course, many other countries with broadly similar experiences.
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The semi-industrial countries have adjusted to the oil price rises

witc a remarkable degree of success.       While growth rates were slightly

below the decade of the sixties, gross domestic product grew at a

very respectable 7.5 percent per annum in East Asia between 1973 and

1980, and 5.4 percent in Latin America.       By contrast the industrial

market economies only grew at 2.5 percent over that same period.       What

makes this even more impressive is that the direct income loss due to

~igher     energy prices and consequent changes in the semi-industrial

cour.tries was the highest among developing countries.      In East Asia in

particular, each round of price increases produced a cut of nearly 2

percent in national income.       How was this success achieved?   Three

::actors played a key role:       first, a large amount of foreign borrowing

perrr:.itted the financing of imports needed for high rates of investment;

seco~d,     the outward orientation of these economies was maintained, so

that the continued export of manufactures provided the impetus for
-    .
=urt~er
                    1/
            growth ;-    third, there was a measure of fiscal discipline which

k ept the growth of consumption and imports at manageable levels.




1/       The share of LDC exports in the manufactured goods imports of
         industria: countries rose from 7 percent in 1970 to 13 percent
         in 1980.
,


    ·.

                                          - 8 -



         Carrying out a major structural adjustment program is likely to

         require additional imports in the early years, given the need for

         investment in new lines of production.     Since very few developing

         countries are     major producers of capital goods, their investment

         tends to be import-intensive.     In order to finance this investment there

         must either be an increase in domestic savings or in capital inflows

         from abroad during the period until these investments result in

         additional output and exports.     While some increase in domestic savings

         is an indispensible part of the adjustment, there are limits to the

         cuts in consumption which any responsive government can carry out in

         the short term.     For this reason, structural adjustment almost

         invariably requires a temporary increase in foreign borrowing.      It was

         fortunate that these increased borrowing needs came at a time of

         substantial international liquidity due to the surpluses of the high-

         income oil exporters.     There have inevitably been questions as to

         whether countries like Brazil and Korea have been wise to push up their

         borrowing to such high levels and whether commercial banks have been

         well-advised in enabling them to do so.     That judgement must rest on

         the uses to which those resources have been put.     By and large Korea ana

         Brazil have used the time which their borrowing has bought to invest

         in new lines of production which they see as providing the basis of their

         continued growth in the eighties.


         But there is another side to the coin.     Borrowing for changes in the

         productive structure, such as that undertaken by Brazil and Korea,

         can be contrasted with the kind of borrowing undertaken by Turkey in
                                - 9 -


the late seventies.   There the objective was to maintain consumption

level s while propping up an inappropriate industrial structure rather

than reorienting production.    Turkey postponed structural adjustment

until it could no longer afford the level of imports needed to sustain

normal economic activity.    The subsequent adjustment has been more

painf ul, both politically and economically, than if the initial policy

responses had been more appropriate.    What Brazil and Korea did was

to maintain the outward orientation of their economies; production, whether

for the domestic market or exports      was subjected to the tests of

international competition.     Turkey, by contrast, maintained high levels

of protection, insulating its productive structure and particularly its

highl y inefficient state enterprises from competition by foreign

produ cers.   Where Brazil and Korea also kept their domestic expenditures

under control during the period, Turkey was forced into ever larger

deficits to maintain consumer subsidies and cover the operating losses

of pub l ic enterprises.   The consequence was the virtual breakdown of

the Turkish economy in the late seventies.


And y et the Turkish recovery in the last two years has been almost as

impressive as the previous failures.     The ability to increase exports

substantially during a period of virtually flat levels of world trade,

belies the earlier export pessimism and lack of confidence in the

capacities of Turkish exporters, while the determination to bring the budget

deficit under control in the face of the political difficulty of

squeezing the incomes of urban consumers is equally impressive.
                                  - 10 -



What one sees in the successful cases is a substantial capacity to

manage the economy and a sufficiently diversified economic structure

to produce the necessary responses when the right signals are given.

But in the real world the right signals are not always given at

the right time, particularly when there is political       weakness~as   in

Turkey in the mid-seventies.       But the semi-industrial countries are

a self-selected group of successful developing countries.        They have

ach~eved   high rates of growth and become a factor in world markets for

man~factures   as a consequence of their economic management capacities.

TYlenty years ago many of them had the same stock of physical capital

and natural resources as other developing countries which remain at

muct- lower income levels today.      Over the long term there are grounds

for considerable optimism as to their continued success.


The second category, China and India, are worth citing because the

rel~tive   success of their growth efforts in the recent past has gone

largely unnoticed.    Both countries have had higher growth rates in

the period since 1973 than in the decade preceding.         In China's case

it has not been a matter of adjusting to the oil price increases, but

it has been an   adjust~. ent   process all the same.   What has been taking

place are the first tentative steps to open the economy to the benefits

deriving from international specialisation, and to permit a somewhat

greater use of market forces and price incentives than had been the

case in the past.     Perhaps most striking of all has been the allocation

 of 15 percent of the farm area for private plots.        Given the extremely
                              - 11 -


closed character of the Chinese economy over the two decades prior

to this, the reform program still has a long way to go, but the measures

taken so far are impressive in their scope and their relative success

should give the authorities confidence to continue and broaden them.


India has also taken significant steps to reduce controls on economic

activity which contributed to sluggish growth through the late sixties

and early seventies.   Particularly important steps have been the

recent decision to allow firms to expand output by 30 percent beyond

their previous peak production level without requiring a special license

for the purpose and the liberalization of imports by reducing barriers

based on the presumed availability of equivalent domestic products.

Those of us whose association with Indian economic policy goes back some

way are aware of the revolution in thinking which these changes represent.

In many other respects also policy has moved towards greater reliance

on market forces and more extensive use of appropriate pricing signals

agricultural policy is a case in point.   The result has been some

increase in the efficiency of investment and better utilisation of the

existing productive capacities.


This is not to argue that both China and India do not have a considerable

way to go in terms of economic reform and adjustment, but the process is

under way and the results so far are heartening.   It is demonstrating

that these large, partially industrialized but very poor countries, with

difficult decision making processes, can nonetheless muster the management
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capa~ity     to realign their economies by adjusting incentive structures,

by i::lcreasing competition, and by decentralizing economic decisions.


The l ow-income countries of sub-Saharan Africa are perhaps the gravest

disa?pointment.      Growth in GDP declined from an average 3.8 percent

frorr 1960-73, to only 1.3 percent from 1973-80.     In its recent study

'Accelerated Development in Sub-Saharan Africa," the Bank attempted to

explain the failures in this area and to suggest the kinds of steps

that are needed to arrest the decline.      Some of the factors are apparent

the 2ountries which did worst of all were often those with extreme

political instability -- such as Uganda and Chad        but in many others

political instability has slowed the development of managerial and

institutional capacity, or forced governments to orient policies towards

p o li~ically   powerful interest groups rather than the national need.


B~t   eve~   where there has been political continuity too many governments

have pursued approaches which are not in the best interest of rapid

development.      For instance, African leaders during the 60's and 70's saw

agriculture as consisting of two entirely separate components:       one,

the export-oriented, highly conunercialized estate-type sector; the other,

subsistence-oriented and family-based.      The latter was identified with

backward peasants, low levels of technology; the former with subservience

to cistant and anonymous world market forces.      By contrast, industrialization

was the symbol of modernity, technological advance and self-reliance.

The result has been a tilting of incentives in favor of industry, the

neg:ect of infrastructure and services in rural areas, the lack of

enp ~ asis   on agricultural research, particularly on food crops.   Africa's
                                 - 13 -


poor economic performance throughout the 1970's is largely the result

of low growth in agriculture - even though development assistance directed

at agriculture and rural development increased.   Not only was this

neglect of agriculture inconsistent with its comparative advantage and

led to an increased dependence on food importance, but it meant the

neglect of the vast majority of the population who live in rural areas

and whose prospects for a better life depend on increasing agricultural

productivity.


Agricultural policy is not the only source of major distortions.

Subsidies, particularly for urban inhabitants - the relatively well-off

minority - are as prevalent as unprofitable public enterprises; wage

rates in the modern sector have been allowed to rise to unrealistic

levels; and exchange rates adjustments too often unreasonably delayed.


I would like to be able to say that the correction of these policy

dis~ortions   would be enough to promote the kind of growth which sub-

Saharan Africa needs.    It is a necessary condition, but not a sufficient

one.   Perhaps the relative success of some African countries in the

sixties and early seventies - countries such as the Ivory Coast, Kenya

and Malawi - led us to under-estimate the effort needed and the time

it would take for sub-Saharan Africa to build up the base of institutions

anc skilled manpower for development, and the sustained inflow of

concessional resources which that was likely to require.    Unfortunately,

although there is an increasing willingness among African countries to

undertake policy changes,the prospects are poor for obtaining the needed
                                  - 14 -


flow of assistance necessary to support such changes.      A number of

African countries, such as those mentioned above, continue to be

we~l-managed     and to provide appropriate incentives to their producers,

yet   ~he   impact of the oil price increases, the slowdown in economic

growth worldwide and the consequent weakening of the prices of primary

colJIIlodities has created a very difficult situation even for the well-

rnanaged economies -- it has created an almost impossible situation

=a~   ~he   others.



Finally, let me turn to the oil-exµortirrz developing countries

whic~,      in some ways, have had the most difficult adjustment problem

of all with the sudden windfall of large additional resources.       In

men~    cases they have not succeeded in holding the tiger of increased

government revenues and popular expectations by the tail.       Governments

hcvE regarded the additional resources as providing an opportunity to

rci~e    sharply the levels of investment.    Ministries compete to undertake

new and visible projects and the control mechanisms become weaker and

wea~er.       The expansion of large capital-intensive projects strains

the available infrastructure--ports, roads, power facilities--so that

the cost of implementing the projects rises and governments soon find

that they succeed only in spending the money and not in carrying out

the proposed investment program.       The solution is often seen as more

sr- e~ding    rather than less and this is unfortunately often encouraged by

foreign lenders who are eager for a share of what they see as a
                                 - 15 -




potentially lucrative longer-term market . . The exchange rate usually

is not adjusted for the higher inflation rate creating further long-term

adjustment problems.   This is accompanied by a reluctance to charge

economic prices for a wide range of consumer goods--food, electricity,

water, transport, interest on housing--which leads to heavy burdens on

the budget, fueling further the inflationary pressures already

associated with the rapid expansion of the investment program.       These

subsidies are a response to public expectations to share quickly in

the country's new wealth.    As a consequence these subsidies are politically

even more difficult to reduce or eliminate than usual, generating great

social and political strains when the adjustments are finally made.


Overall it is noteworthy that despite their additional investments,

the oil-exporting developing countries grew by less after 1973 (4.4

percent) than in the preceding decade (6.4 percent), and by far less

than the semi-industrial countries.


But there also are examples of prudent use of the additional income

 from petroleum exports.    Indonesia is a case in point where the

 Government has taken care to insure that the exchange rate is set at

 levels which encourage domestic producers, while    the public sector's

 tax base does not become totally reliant on the revenues from petroleum.

 The result has been a doubling of the growth rate of GDP in the seventies

 as compared to the sixties.    Let me add Cameroon, Malaysia and Tunisia

 to this group of countries which have made effective use of increased

 oil revenues.
.   '

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        Let me now sunnnarize what I see as the major lessons fromt he adjustment

        experiences of these and other developing countries in the period

        since 1973.       The first is the   availab~li~i-~!equate    flows of external

        resources either through aid or foreign borrowing on commercial terms

        to finance the transition.         The new investments that are required will

        take time before they yield returns and in the interim additional

        inflows will be needed to sustain growth rates.         In the seventies these

        resources were readily available as aid flows increased rapidly and

        as the commercial banks were able to channel capital surplusses to

        developing countries.         This contributed to the many instances of successful

        adjustment.


        The second element       emerges clearly from a comparison of the experience

        in    ~frica   with the semi-industrial countries.    Economic institutions

        neec to have developed to a point where they are likely to respond to

        an cppropriate set of policy signals.         The limited level of institutional

        ca~    ~ ity   in some African countries, but also in such countries as Bangladesh,

        ~ep~l    or Haiti, is manifested in both the public and the private sector.

        Pub l ic policy analysis is weak and information on the external

        env ~~onmcnt      limited.   The decision-making procecs is alow because it

        res:s on too few people.         Adjustment in the investment program is

        par~icularly       difficult, yet the public sector typically accounts for

        a large proportion of the total.          Private industry is smali, offering

        lit=le flexibility.          Concentration of exports is high, usually in

        pri:::iary commodities, making export growth difficult.       The banking system
                                  - 17 -


tencs to be embryonic and generally unable to stimula te investment

act i vities in particular sectors, and the tax base is so small that

the scope for increasing revenues or guiding investment and consumption

activities is severely limited.        The consequence is that the economy

has little capacity to move resources out of activities which are

adversely affected by changes in world prices into those which are

potential beneficiaries, even when appropriate changes in development

strategy have been agreed upon.


The third e l ement, and the most important, is the adoption of appropriate

policies.    'i'his has two components, the first relating to the link

between the economy and the rest of the world, and the second to the

level of    do~estic   expenditures.   By and large, successful adjustment

experiences have involved a recognition of the interdependence of the

wor : d econo3y.   In order to take advantage of the opportunities which

wor l d trade offers, it is necessary for countries to transmit within

a reasonable time-frame to both their producers and consumers, the

signal s which the world economy is goving through the price mechanism

about energy , agricultural commodities and industrial goods.       Countries

such as Korea, Brazil, °!'ialaysia and the Philippines which have maintained

hig~   growth rates have in general transmitted those signals and have

thereby been in a position to take advantage of the opportunities which

wor l d trade represents.     Countries which have put off conveying the changes

in world relative prices to their domestic producers and consumers have

delayed their own adjustment and often placed strains on management

of their domestic economy which have been insupportable.        A crucial

element in this is an appropriate exchange rate policy.
.   (,




                                           - 18 -




         However, simply maintaining relatively open economy with realistic

         pricing structures may not be enough.      Argentina provides a case of a

         country which by and large has done this, but has still not avoided a serious

         economic crisis.   A second case of this is Yugoslavia.     In Argentina the

         crisis has been fuelled by an uncontrolled public sector with its

         associated misallocations of investments and growing credit needs.

         In Yugoslavia it has been the worker-managed corporate sector which

         has placed unsustainable demands on the credit system.      A relatively

         open economy tequires as careful a management of domestic demand, if not

         a more careful one, than a more closed economy.      The major element in

         this area is a realistic public investment program -- realistic as

         to size,   approp~iate   in composition, and requiring public enterprise

         to generate a reasonable share of their investment requirements.



         Development management is essentially the capacity of government to

         frame and implement the policies needed to achieve rising living

         standards within the constraints of available external resources

         and the capacities of domestic institutions.      Why have some governments

         been able to manage adjustment skillfully while others have procrastinated

         until the situation has deteriorated so far that adjustment can only come

          in a painful fashion?     Clearly, this is not simply a function of the

          size and severity of the initial shock which these countries faced as a

          result of the oil price rise--some of those which suffered the highest

          incooe loss have adjusted rec·st successfully.
                                        - 19 -



Any assessment of the management capacity of developing countries

must take into account some of the inherent difficulties.          Developing

countries are subject to greater uncertainty than developed          ones~   and

this accounts for part of the problem.           Their economies are much less

diversified and they are therefore more vulnerable than the industrial

economies to major swings in the prices or output of a few key commodities

or to crop failures resulting from bad weather.           While it is possible

to gear policies to take reasonable fluctuations in prices and output

into account, the depth and severity of the present commodity crisis

not only has taken most observers by surprise but makes adjustment

to it in the short-term virtually impossible without excessive social

and political costs.         The World Bank would certainly not have advised

the government of Mauritius two or three years ago to cut back on its

investment program so as to safeguard itself against sugar prices

falling well below its costs of production.           The kind of conservatism

whic~    would avoid all possible risks in a developing country is likely

to avoid a good deal of the growth as well.           Part of the legitimate

risk-taking is for countries to step up borrowing during periods

when investment levels need to be kept high to permit re-structuring

the economy to changed prices on world markets.           This is precisely

what Brazil and Korea have done in recent years.           One of the factors

international lenders must keep in mind is that while adjustment is

necessary and inevitable, how quickly the necessary adjustments can

be made depends not only on management capacity but also on the

magnitude of       ch~nge   required.   In today's circumstances it is appropriate

 to   t ~lnk   in terms of years for many countries, instead of months.
                                      - 20 -




A second set of problems comes from the dependence of governments on

key i nterest groups, and the resultant pressures to administer the

economy to the advantage of those particular groups.         In many developing

countries governments are narrowly based, often depending on a coalition

of the urban working class and the government bureaucracy, who even if

smal~      in number, have the organization and the presence in the capital

city to be able to exert very direct and effective pressures on

poli t icians, whether elected or not.      The result is the substantial

urba~      bias in the investments and current expenditures of many

deve ~ oping    countr y governments, and a network of subsidies for urban

consumers which are often more a reflection of the difficulty o f

raisin g the prices of food and urban services, than a conscious effort

to c Dannel subsidies to these groups.         The stronger these groups the

more difficult it is to make key changes.         President Sadat's attempt

to r e duce food subsidies in Egypt in the late seventies met wit h riots

in t n e streets and was rapidly withdrawn.       Yet subsidized imported

f   lou~   was being p riced so low that it was used to feed livestock .      The

rece ~ t    necessary changes in Ecuador give us another example of the

polit ical difficulties of such actions, particularly when delayed

too l ong.


The nixed success of developing countries in the adjustment process

is, h owever, not unique to them.        The performance of the industrial

coun~ries      has been equally mixed.    While we should be aware of the

differences in performance, since they must underlie business and

investment decisions, this variabilicy should not surprise us.         Th e
                                  - 21 -



economic progress of the developing countries has been, and is

likely to continue to be, a varied and uneven picture.       There will

be short-term crises as internal factors, such as crop failures,or

external factors, such as commodity price fluctuations, take their

toll and governments are unable to respond as quickly as might be

,._.-ished for fear of damaging particular political constituencies.

But despite the variability of the past, development is one of the

success stories of tne t·wentieth century.     And we can be confident

th~t   the developing countries will also accommodate to the massive

changes of the '70s.    rhe important issue is whether the developing

countries will be given the time to take the measures needed for

adjustment.    And time in this case is defined by the willingness

cf lenders - private and official - to provide the necessary external

ca~ital.    For the higher income developing countries this is not a

:catter of aid     they do not require resource transfers on concessional

terms -- nor are they now significant recipients of such aid.         Rather,

for the middle- and higher-income countries what is important is whether

the l evel of commercial lending will be adequate to allow them to make the

 transition at a pace, which does not strain their political and

 social fabric to breaking point. For the lower income countries,

however, it is a matter of aid, since they cannot service

 commercial debt, and   t~e   aid environment is poor.   No matter how

well managed their economies, w:.:hout adequate flows of concessional

 assistance -- and this means significant increases over prcjected

 :evels -- their adjustment will be slow and they        cannot lay , the

 ~asis   for accelerated growth in future years.
                                - 22 -



In considering resource flows, bankers, industrialists and governments

must take a long-term view and not be guided exclusively by current

events or exceptional circumstances.      For instance, the current

discussion about the creditworthiness of countries for borrowing on

commercial terms, fails to distinguish between countries with

appropriate policies and effective management and others.        It isn't

obvious why events in Poland should have implications for Hungary

or Yugoslavia, or why events in Mexico or Argentina should affect

Brazil's access to the market, any more than Braniff has implications

for Xerox.     We must look at countries individually and over time and

assess longer-term development strategies and managerial capacity.



As f ~r as the World Bank is concerned, we have tried to be a

steadying presence and to provide support over time in a consistent

and ?redictable way, while moving countries in the direction of better

policies through a series of politically feasible steps.       This is some-

times a much less dramatic role than the international community would

have us play, but we need to weigh the impact of     shar~   swings in our

willingness to lend to countries against the painstaking efforts over

a long period of time to build up institutional capacities and

managerial skills.      Much of what we contribute is through working year-

in year-out with individual institutions and ministries, building up

capacities through a series of lending and technical assistance

activ ities.   This is the kind of relationship which we would urge the

leaders of the   e.s.   business community such as yourselves to try to

foster in developing countries.      The lessons of the adjustment
                                   - 23 -


expe=ience which I described earlier, should I think send a positive

message as to the capacity of many developing countries to take the

dif f icult decisions which are required of them, given the interest

and the support of the world connnunity.



The civersity of the developing world is not therefore just a

matter o f the widening variations in income levels and emerging

regi o n~l     dif f erences, but also of the differences in their capacity

to manage their economies over the long run.         While all developing

coun~ries       need continued inflows of capital from abroad and the

tech~ o l ogy    and e x pertise associated with that capital -- they differ

in   t ~ eir   capacit y to make effective use of these external resources

in   t ~e   development process.   As a group of people at this meeting

whose interest lies in transferring capital and expertise to

deve l o?ing countries, our concern must be to identify those

sitt.:ations where that capital and expertise can be put to the most

proaJctive use.        I hope that I have been able today to suggest to

you the lines of such an approach.