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objective because it provides a larger net flow of Given that the economic objective of official capital over the long run. assistance is ultimately to improve the allocation of There can also be a practical rationale for conces- resources and to increase the rate of economic sional assistance. In low-income countries many of development, the form of assistance that will most the direct beneficiaries of public investments and effectively promote this objective can vary signifiservices (health and education are examples) are cantly among countries depending on the countoo poor to pay their full cost-yet the economiy as try's specific economic situation. It will also be a whole benefits. Since the benefits occur some- influenced by the capabilities and strengths of the where in the economy, it might be argued that individual donor-of course, as the next section governments should be able to capture a portion of discusses, other donor motivations also influence them, through fees and taxes, in order to seivice the nature of assistance. From a development perborrowing on market terms. However, the time spective the basic question is, What are the basic period over which the returns accrue can be very constraints to economic growth and how can offilong, thus producing a debt-servicing mismatch cial assistance help reduce or remove them? In for commercial loans. In addition, it is often diffi- many countries in order for existing and future cult for a government, for social, political, or investment to contribute effectively to increased administrative reasons, to capture the benefits of economic growth, policy reforms are needed to such investments, particularly those designed to remove economic distortions that prevent the effiincrease the earning capacity and well-being of the cient allocation of resources. Such policy reforms, poor. It has also been argued that in certain cases- however, generally take time to produce positive for example, clean water supplies and immuniza- results while additional costs may arise very tion programs-attempts to charge fully for the quickly. In such circumstances, nonproject assisservices can substantially reduce their use by the tance can both encourage the undertaking of the poor, thereby harming the economy and society as needed reform and provide rapidly disbursing a whole. resources needed during the transition process. Another practical argument for concessional Similarly, when countries face severe balance of assistance relates to the fact that to service external payments and domestic budget constraints, efforts debt not only do domestic resources have to be that help stabilize the economy and lay the founincreased, but they also have to be converted into dation for future growth and investment can be a foreign exchange. Countries at early stages of critical component of a package of actions and prodevelopment-where there is great need to under- grams designed to assist the country. Such efforts take investments in social services and infrastruc- can include: the financing of the importation of ture-often face institutional and other constraints intermediate inputs, which will permit the use of that can reduce their capacity to increase export existing private and public sector idle capacity, earnings rapidly. Since concessional flows do not thereby quickly increasing domestic supplies and generate as large a debt-servicing and foreign exports; and the financing of the maintenance and exchange burden as flows at market rates, they rehabilitation of existing investment. These types increase the ability of these countries to make such of assistance have been particularly important in needed investments. many of the middle- and low-income countries, The arguments for concessional assistance apply where the flow of private capital has typically primarily to the low-income countries. Although declined with the onset of debt-servicing difficulmiddle- and upper-income developing countries ties. also need to invest in basic social infrastructure, which has long gestation periods and externalities, Donors' objectives their more developed economies provide a basis to obtain increased levels of private capital and also Donors supply official assistance for many differto generate the foreign exchange needed to service ent reasons: to assist the economic development of commercial loans. However, even in many middle- the recipient; to further their own strategic, politiincome countries, official assistance can play a cal, and commercial interests; to maintain historivaluable role by providing not only long-term non- cal and cultural ties; and to express their humaniconcessional capital, but also technical assistance tarian concern. This combination of objectives can and policy advice. It can also be a catalyst to pri- affect the nature of official flows-and can serivate flows, stimulating increased levels and ously reduce the effectiveness of such flows in proimproved terms. moting development. The level, growth, and rela- 100
tive performance of different countries in the Figure 7.2 Volume and growth of provision of concessional assistance, ODA, is illus- ODA disbursements by donors, 1983 trated in Figure 7.2 and Box 7.4. Volume of disbursements Recent studies have demonstrated the role of nondevelopmental considerations in determining DisbursementsasapercentageofGNP the distribution of ODA. Political interests v *Norway undoubtedly played an important role in the allo- Netherlands cation during 1981-82 of 39 percent of U.S. bilateral ODA to Egypt and Israel; of 38 percent of 0.8 *Sweden French ODA to four overseas departments and ter- * Denmark *France ritories; and of 42 percent of OPEC members' bilat- Belgium eral and multilateral ODA to two countries, Jordan Australia and Syria. Similarly, the mnineral resources of Zaire 0.4 d *Canada Germany and Zambia are often cited as a significant com- Switzerland Jiapan mercial reason for U.S. aid to these countries. Japly The influence of nondevelopmental motives for NewZealand United States aid is also highlighted by a comparison of bilateral 0 Austria and multilateral programs. During 1980-82 only 40 0 2 4 6 8 percent of the bilateral aid from the DAC countries Disbursements (billions of dollars) and less than 20 percent of OPEC bilateral aid went to low-income countries, whereas two-thirds of all Real growth of disbursements, 1977-78 to 1982-83a multilateral aid went to them. Finland In addition, DAC donors usually require the Japan recipient to purchase goods and services in the Switzerland donor country; this is not true for OPEC donors. Italy This "tying" of aid covered some 43 percent of Germany bilateral ODA from DAC donors in 1982-83, while France another 11 percent was classified as partially tied. Norway These figures probably understate the volume of Austria tied aid, since informal arrangements often exist to Netherlands place orders with donors. The result can be a lower Denmark quality of goods and services, often more expen- Australia sive and less appropriate to the needs of the recipi- Belgium ent. Studies on the costs of aid tying suggest that it United States reduces the value of development loans by about Sweden 15 to 20 percent, and in individual cases by much Canada more. New Zealand In recent years, donors have increasingly used United Kingdom mixed credits (combining aid with export credits) to promote their commercial interests. Use of this -4 0 4 8 12 16 financing mechanism can distort trade flows and Percent reduce the effectiveness of aid (see Box 7.5). a. Average annual percentage change in real terms between In contrast, most procurement resulting from Source: OECD 1984. multilateral assistance is subject to international competitive bidding procedures. Indeed, one of the often-cited advantages of multilateral assistance is that it is generally far less influenced by development and tackle poverty, or that it is harmnondevelopmental interests than is bilateral aid. ful in principle. Those who object to aid on principle do so from two distinct viewpoints: Does aid help development? * One school derives from dependency theory, arguing that underdevelopment is not merely the absence of progress; it reflects active exploitation of the "periphery" by the developed market economies of the "center." Aid is therefore a tool to Foreign aid has always been controversial. Its critics believe either that it is often badly administered, severely reducing its ability to promote 101
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Public Disclosure Authorized Public
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World Development Report 1985 Publi
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Foreword This is the eighth World D
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Contents Definitions and data notes
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A.4 Population and composition of G
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Definitions and data notes Capital
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culated without making deductions f
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Part I Overview and Historical Pers
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Figure 1.2 Trends in selected debt
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countries depend on three variables
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ties includes many countries in Lat
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intermediation of the World Bank an
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In dealing with all these issues, t
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tury. By contrast, net capital infl
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tees on terms that seldom preserved
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mid-1960s and France a few years la
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Table 2.2 (continued) Country group
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Table 2.3 Net resource receipts of
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anking assets and liabilities. They
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Box 2.3 How inflation affects loan
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Box 2.4 The changing nature of debt
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agreement has been reached with Ecu
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Part II Role of Economic Policies 3
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Table 3.1 Current account balances
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eceipts minus social security outla
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expected to be high-a view consiste
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story. Difficulties had started ear
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Box 3.4 The costs of protecting sug
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4 Foreign borrowing and developing-
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World Development Indicators, Table
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Box 4.1 The debt cycle hypothesis A
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Page 65 and 66: Figure 4.5 Borrowing and growth in
Page 67 and 68: Box 4.4 Guidelines for borrowing De
Page 69 and 70: have been forced to reschedule thei
Page 71 and 72: happened to different developing co
Page 73 and 74: Figure 4.6 Change in investment, sa
Page 75 and 76: Figure 4.7 The composition of credi
Page 77 and 78: tion started increasing consumer su
Page 79 and 80: Box 4.6 Capital flight in the South
Page 81 and 82: and tighter fiscal and monetary pol
Page 83 and 84: Export Rehabilitation Program to pr
Page 85 and 86: 5 Managing foreign finance The prev
Page 87 and 88: Box 5.2 Integrated debt management:
Page 89 and 90: vate borrowing more carefully. In M
Page 91 and 92: available to the country. Some tech
Page 93 and 94: The maturity structure of debt earl
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Page 99 and 100: Part III Mechanisms for Internation
Page 101 and 102: Box 6.1 The growth and distribution
Page 103 and 104: Box 6.2 The deployment of the OPEC
Page 105 and 106: Box 6.3 The international interbank
Page 107 and 108: investment grew steadily for much o
Page 109 and 110: "graduation" of some developing cou
Page 111 and 112: Figure 7.1 Net receipts of official
Page 113: issue is the right balance between
Page 117 and 118: tion of aid directly supports priva
Page 119 and 120: happened in the absence of aid. Two
Page 121 and 122: gram. This involves close collabora
Page 123 and 124: Box 7.8 Aid coordination Aid coordi
Page 125 and 126: Figure 8.1 Net position of developi
Page 127 and 128: Box 8.2 Arab banks and internationa
Page 129 and 130: default clauses would ensure that a
Page 131 and 132: perceived creditworthiness of devel
Page 133 and 134: Debt rescheduling and the banks Ban
Page 135 and 136: Box 8.7 Increasing the flexibility
Page 137 and 138: Box 8.9 World Bank cofinancing The
Page 139 and 140: 9 Direct and portfolio investment T
Page 141 and 142: Box 9.1 Direct foreign investment i
Page 143 and 144: however, there has been a positive
Page 145 and 146: By contrast, some of the newly indu
Page 147 and 148: ecognition of the relevance of this
Page 149 and 150: Table 9.2 Return on investment in e
Page 151 and 152: Part IV Perspectives and Policies f
Page 153 and 154: ently estimated at slightly more th
Page 155 and 156: mies would continue to grow faster
Page 157 and 158: Middle-income countries Major expor
Page 159 and 160: Table 10.6 Net financing flows to d
Page 161 and 162: cies and performance against the me
Page 163 and 164: Table A.3 GDP, 1980, and growth rat
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Table A.7 Consumption, savings, and
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Table A.9 Change in export prices a
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Table A.12 Composition of debt outs
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problems in the Latin American coun
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Interbank Market: A Descriptive Stu
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Diversification in the Nineteenth C
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Contents Key 168 Introduction 169 M
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Table 21. Labor force 214 Populatio
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Introduction The World Development
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that it is a weighted average; the
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Life expectancy The map classifies
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GNP per capital Life Area Average a
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Average annual growth rate (percent
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GDP' Distribution of gross domestic
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Average annual growth rate (percent
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Distribution of gross domestic prod
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Value added Food aid Fertilizer con
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Distribution of manufacturing value
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Energy consumption Average annual e
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Merchandise trade Average annual gr
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Percentage share of merchandise exp
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Percentage share of merchandise imp
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Destination of merchandise exports
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Destination of manuiactu red export
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Receipts Gross international reserv
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Public and publicly guaranteed medi
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External public debt Interest payme
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Average interest Average Average Co
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OPEC Amount 1975 1976 1977 1978 197
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Average annual growth Hypothetical
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Crude Crude Percentage Percentage o
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Percentage of population of Pretgof
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Urban population Percentage of urba
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Life expectancy at Iniant birth (ye
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Daily calorie supply Population per
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Number Number enrolled in enrolled
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Percentage of total expenditure Hou
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Percentage of total current revenue
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Percentage share of household incom
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appropriateness of the exchange rat
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and electricity, water, and gas. Al
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import unit value index, this indic
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The summary measures in this table
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Data are mainly derived from the Wo
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and other training institutions by
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Bibliography of data sources Nation
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World Devlelopment Report 1985 focu
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