World Bank Document

oping countries, and private direct investment adjusted for inflation (that is, real interest rates)
increased sharply in Latin America. The overall were usually in the 2 to 3 percent range.
U.S. balance of payments moved into deficit in Developing countries benefited from these inter-
1950 and stayed there for many years. During the national conditions. As a group, their output
1950s, this aroused little concern. It was a com- increased by over 5 percent a year. Some developmonly
held view that there was a "dollar short- ing countries grew much faster than others, accenage"
and that such deficits were appropriate for tuating the differences in average incomes. Curthe
leading international creditor.
rent account deficits were financed chiefly by
Europe's balance of payments improved corisid- official flows (loans and grants), by private direct
erably in 1958, boosting its foreign reserves. At the investment, and by trade finance. Official aid grew
end of that year, most European governments by about 3 percent a year in real terms in 1950-65.
declared their currencies convertible (Japan did the Direct foreign investment also increased rapidly, as
same only in 1964). Capital markets in Europe and multinational corporations sought new supplies of
the United States started to integrate, with private raw materials in developing countries. Export
capital flows becoming responsive to movements credits revived as a source of finance for developin
interest rates. In the late 1950s European banks, ing countries-a mixed blessing, as their relatively
notably in London and Switzerland, began to deal short maturities contributed to debt-servicing
in dollars. This marked the inception of what came problems for many countries.
to be known as Eurocurrency markets (described Several developing countries ran into debt diffiin
Chapter 8, Box 8.3). The decade had begun vvith culties in the 1950s and 1960s. Between 1956 and
official capital flows contributing to economic 1970, there were seventeen debt reschedulings
growth and trade expansion; it ended with a grow- involving seven countries (Argentina, Brazil,
ing volume of private capital flowing between Chile, Ghana, Indonesia, Peru, and Turkey), each
industrial economies.
of them more than once. The reasons for their diffi-
The postwar years also saw the progressive culties varied. Argentina, Brazil, Chile, Peru, and
decolonization of the developing countries. The Turkey shared certain problems: large budget defi-
United States and later other industrial countries cits; rapid inflation and delayed adjustments of the
began their formal programs of foreign aid. In the exchange rate; deteriorating terms of trade; declinearly
1950s, the World Bank shifted its focus from ing export earnings; the accumulation of shortreconstruction
to development, though it contin- term external debt. Ghana and Indonesia also had
ued lending to industrial countries, including these problems-though more acutely, because
Japan, during the 1950s and 1960s. In 1956 the they launched large, long-term projects that they
International Finance Corporation (IFC) was cre- financed with short-term credits and executed
ated to assist the private sector in developing inefficiently. In a number of other cases, including
countries through loans and equity investments. India, debt rescheduling was used to provide
In 1960 governments formed the International increased capital flows to low-income countries
Development Association (IDA) to provide a mul- when concessional flows from industrial econotilateral
source of concessional finance for low- mies were constrained.
income countries. These years also saw the estab- Creditors rescheduled their loans through ad
lishment of several regional development banks, hoc multilateral groups, such as the Paris Club.
including the Inter-American Development Bank The International Monetary Fund was also
(1959), the African Development Bank (1964), and involved in providing extra finance to support polthe
Asian Development Bank (1966).
icy reforms. In general, creditors did not incur
For most of the 1960s, the world economy capital losses; they extended maturities and
enjoyed a period of largely untroubled progress. received interest on schedule. Borrowers under-
Industrial economies grew by an average of 5 per- took policy reforms designed to bring their balance
cent a year, with little year to year variability in of payments into better equilibrium and to estabgrowth
rates. World trade grew even faster, at an lish the basis for economic growth.
average of 8.4 percent a year, helped by the pro- Although the 1960s saw a rapid expansion of
gressive trade liberalization policies pursued under world output and trade, some international monethe
GATT. Inflation rates in industrial economies as tary problems started to emerge. The United
a group varied between 2 and 4 percent a year, States made efforts to control capital outflows.
though individual countries had bouts of more Many countries experienced difficulty in maintainrapid
price increases. Nominal interest rates ing their exchange rates, notably Britain in the
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