Transcript of three hundred forty-fourth regular meeting of the Executive Directors of the Bank, held on Tuesday, April 10, 1962

STRICTLY CONFIDENTIAL ERC INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENr 344TH REGULAR MEETING OF EXECUl'IVE DIRECTORS Board Room International Bank Building Washington, D. c. Tuesday, April 10, 1962 The meeting was convened at 10:05 o'clock a.mo, Mr. Eugene Black, President, presiding. STRICTLY CONFIDENTIAL DETAILED TABLE OF CONTENTS OF THE 3L4TH MEETDn HELD ON APRIL 101 1962 - Item Welcome to Mr. Pierre Moussa head of the Department of new Operations - Africa••••••••••••••••••••••••••••••••••••••••••••• 3 Approval. of minutes of 343rd. Regular and the 246th Special Meeting and addition to minutes of February 13th••••••••••••••••••••••••• 3 Noting of reports on Bank and IDA operations covering period March 9 thru April$, 1962••••••••••••••••••••••••••••••••••••••••••••• 3 Approval. of report on organization and assitance in financing a proposed study of capital markets and financial institutions in Chile. Oral report by Mr. Knapp (Mr. Wood.lief Thom.as may head mission••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 3 Approval of increase of authorization for private sale of portions of loans up to $900 m•••••••••••••••••••••••••••••••••••••••••••• 16 Recording of approval on April 4, 1962 of report recording the results of the vote of the Board of Governors on the application of Somalia for membership in the Bank••••••••••••••••••••••••••• 20 Luncheon guest - Mr. Fowler Hamil ton of AID, Mr. Lingle, his deputy, and Dr. Eklund, Director General of the IAEA •••••••••••••••••••• 21 Pension Camnittee meeting••••••••••••••••••••••••••••••••••••••••• 21 STRICTLY CONFIDENTIAL 2 INDEX AGENDA ITEM: Page: Minutes of the 343rd Regular and 246 Special Meetings 3 Reports of the Bank and IDA Operations 3 Reconnnendation for a Chilean Capital Market Survey 3 Sales of Portions of Loans 16 Record of Previous Approval - Membership of Somalia 20 f Date of Next Meeting 21 I STRICTLY CONFIDENTIAL 3 P R OC E E D I NGS THE CHAIRMAN: Gentlemen., before we start our formal 'business., I would like to introduce to you Mr. Pier~ussa X :who just arrived last week to head our new African Department. Mr. Moussao (Applause.) The first item of business is the Minutes of the \1 ' jl 343rd Regular Meeting and the 246th Special Meeting held on Ma~ch ' . i I ! [13th and March 26th. There is also an addition to the minutes i I i I I !of February 13th which had previously been approvedQ I I I I' If there are no objections, I presume that these ! i !minutes stand approved. I 1 I l 1, I ,. I' The next item of business is the reports of the Bank l l ;, Ii l ! Hand IDA operations for the period March 9th through April 5th. Ii )' i ii l !i We have nothing to add to these reports. Are there any I I ,1 •, I Ji quest ions? rl I ,, •I h The next item is the report about the request by I " :, I ii ! !/ I !!Chile that we organize and assist in financing a study or the ii ,1 li capital markets and the financial institutions in that countryJ Ji I 1' l i!You have a memorandum on this., but I would like to ask Mr. I li i !! Knapp to add to this memorandum for you. ! " I li I I j; MR. KNAPP: Mr. Chairman and Gentlemen: I think 'I il !i i 11 i! ' l i,, this is a particularly interesting proposal, and I would like ··~,..: !1 ., !Ito give a little background ofthe work the Bank has done in 1: ~;')'. ' !J J! the field of capital market development and why we think that !! STRICTLY CONFIDENTIAL 4 this particular proposal in Chile is one of particular interest. We have been trying for some time in various ways to attack more; systematically the problem of helping our member countries mobilize their own resources for development. This is a very broad problem and, indeed, we think even more narrowly defined as the development of capital markets. We think of that in a very broad way. In other words, it is the whole problem of trying to mobilize savings for productive investment both in public and in private sectors. We have done quite a lot of studies in the Bank on this subject. You may recall that we had Dr. Phosh for a while heading up a special team that did studies, and those are now being carried on also on the economic staff. And we have done quite a lot of consulting work, sending out special visitors. As you all know, George Martin has done a lot of work on the more specific problem of helping organize govern- ment bond markets and that kind of thing, but we continue to feel that there ought to be some more systematic and better focused way of helping member countries to develop their capital markets and thereby to mobilize their resources for development. Now, the Chilean case has come along within this framework that the capital markets in Chile have been very, very seriously undermined and very seriously damaged over a STRICTLY CONFIDENTIAL 5 long period of years by the inflation. But Chile is finally, we hope, coming to grips with this inflation problem and notable progress has been made in the last few years toward currency stability, and they have been trying every way they can think of, partly with our advice and partly with the advic of others, to develop their local capital market, to develop a market for government securities, to mobilize private money for industrial investment and for housing and other types of both social and economic investment activity. In this connection, they have just now come up with a development program which relies very heavily upon increas- . ing in a striking degree the rate of domestic saving and the flow of that saving into productive investmentG I don't recall the figures, but I believe the rate of saving in Chile, the gross saving in relation to GNP -- Gross National Product -- is something in the order of 8 or 9 per cent, which is extremely inadequate for a country that is seeking to expand economically in the way that Chile is today. And they have adopted a program which aims to raise that percentage to something like 15 per cent over a period of years, which is a really very ambitious undertaking. We will be circulating to you within the nex1:r:ew days a copy of our report on the Chilean Development Program and a letter of transmittal with which we are connnunicating this report to the Chilean Government. And great emphasis STRICTLY CONFIDENTIAL 6 is placed both in the report and in the letter of transmittal on the need for a very intensive domestic effort to mobilize their own resources for development. So it is against that background that we have received this request from Chile 1 and we have taken this very seriously. We have felt that this is an opportunity to take a concrete case and see what a resident advisory mission could do. We have written a lot of reports and communicated a lot of reports, but what is new here is to have a resident advisory mission to work with the government on this problem. 1 I am happy to say that we think we have obtained · the services of quite an outstanding economist to head this mission. I would like to call that confidential at the moment. We haven't completed the details, but Mr. Woodlief Thomas who is the Economic Advisor to the Federal Reserve Board and who is about to retire at the mandatory retirement age of 65 from that position is very seriously considering undertaking this mission for us. And we would be very pleased to have him do it and would want to support him. He has a very broad experience 1 of course 1 in the whole matter of financial institutions 1 capital market development 1 but we would want to support him from time to time, as is indicated here 1 by experts who would assist in particular aspects of the problem. THE CHAIRMAN: Are there any questions? STRICTLY CONFIDENTIAL 7 As a matter of fact, you have only had this memorand- um for one day, and if any of you would prefer to postpone action on this, we would be perfectly willing to do that because you haven't had long enough to think about it or to communicate with your governments. MR. ARAGONES: Mr. Chairman, I think it is a great way to assist the countries to help them in developing a capital market. I wonder if this undertaking would be along the lines of the Colombian report to the capital market or the Mexican that just came out. It would be wider, I suppose. MR. KNAPP: Well, it wouldn't be so much a report; it would be working in the country to design practical measures. We and the Chileans think we pretty well know the kinds of things that need to be done. I would say we did in the case of Colombia -- do you refer to a report about ten years old? MR. ARAGONES: No, a more recent one, I believe, on the capital market in Colombiao It was very good. MR. KNAPP: Oh, yes, I know what you mean. The difference is that the scope would be the same, the scope of this activity, but this would be to render practical advisory services on the spot in building institu- tions. THE CHAIRMAN: One is a report, and the other is action. STRICTLY CONFIDENTIAL 8 MR. ARAGONES: It would be interesting to know for ourselves, perhaps. THE CHAIRMAN: Mr. Machado? MR. MACHADO: Mr. Chairman, it is true we have had this memorandum for only a short time, but we are dealing with a very old problem and one with which we are all very familiar. I do not believe a better service could be rendered to our Latin American countries than to assist them in develop- i ing the local capital market. There are many good projects in Latin America we have not been able to finance through the Bank because of the lack of local currency. And this is very closely linked with the problem of the lack of a capital market. So I think that this step that the Bank is taking in the case of Chile is not only going to be very useful to Chile, but I think it 1 would set a pace that should be copied by other Latin American! I countries. And I am certainly in favor of rendering this service to this country. THE CHAIRMAN: Mr. Pitblado? MR. PITBLAOO: I, too, Mr-. Chairman, think Mr'. Knapp has put before us the answer to the questions which are raised in our minds on reading the paper on why this parti- cular operation in this particular country. And I am sure this plays a very direct service to Chile and an opportunity to acquire further practical experience which will work for STRICTLY CONFIDENTIAL 9 the benefit of all members of the Bank, and I entirely support it. THE CHAIRMAN: Thank you. Mr. Lieftinck. MR. LIEFrINCK: Mr. Chairman, I also welcome this proposal to assist Chile in the building up of her capital ii market. And I agree that the best way to do it is to have 11 [ an advisor stay there for, for instance, a year. I remember I the good work Mr. Martin has done on the question of marketing in Peru only by making short visits into that country. In that case, he not only prepared reports, but assisted authorities in starting capital issues in the market. The only point of doubt which is in my mind is whether it I requires four experts for an average stay of at least one year each. I could understand that we would have one advisor for a year, and from time to time, he could be assisted by an expert. Whether that should be three experts all staying there for one year, seems to be quite heavy, and I wonder whether we couldn't reduce the considerable cost involved by playing it down a little bit. MR. KNAPP: Could I contnent., Mr. Chairman? THE CHAIRMAN: Yes. MR. KNAPP: Perhaps the four experts at an average of a year is a bit misleading because we think of the chief STRICTLY CONFIDENTIAL 10 of mission being there probably two years. It isn't basically a year's mission with four people. It is a weighted average of the chief of mission being there up to two years and other experts being there for maybe six months or even lesser periods. I might point out that one reason why we should make i~ at least an 18-month mission is the tax problem. That is to say if at least the American nationals on the mission are out of the country at least 18 months, we are relieved of paying tax on their salary, which makes a sub- stantial difference. But in any case, we think the nature of the job requires something like an 18-month to two year assignment for the chief of mission and with other people revolving about him. THE CHAIRMAN: I think this is a pretty rough estimate, though. I don't think we could tell exactly. I think we have to feel our way about it as we go along. Mr. Cheno MR. CHEN: ~. Chairman, I, too, would like to subscribe to this. I think it is a very worthy project, and I fully support it. THE CHAIRMAN: Mr. Garland. MRo GARLAND: Mr. Chairman., this seems to me to be interesting if we can put into practical operation some of the lessons we have drawn from these previous studies. The Bank has done a certain amount of work in this field already STRICTLY CONFIDENTIAL 11 in a more or less academic way. I did, however, have the same feeling as Mr. Lieftinck about the four experts and the cost figures which were suggested. Will one of the experts be a Bank man or someone who is familiar with the work that has been done by the Bank in this field, somebody for the mission to draw on the Bank's previous experience? MR. KNAPP: He will certainly draw on the previous experience. Mr. Thomas, in the first place, will spend a couple of months, if Mr. Thomas undertakes this, in the Bank before he goes out in absorbing and using this ma.terialo We expect he would be supported by a junior economist speaking Spanish. It is essential to have that in the second man, and we hope to find him from among the Bank staff. I don't know if we have picked a man yet, have we? MRo DIAMOND: No, sir, we do not yet have a man, and 1 in all probability his number two will come from the Bank. So far as the others are concerned, this will depend 1n part I I upon Mr. Thomas• or whoever it is preliminary visits to Chile,1 which is pointed out in paragraph 3, which we will rely on I to determine exactly what kind of additional expert is neces- II sary. ·1 The likelihood is that the additional ones other I than his number two will have to come from outside the Bank. THE CHAIRMAN: Mr. Donner. STRICTLY CONFIDENTIAL 12 MR. DONNER: Mr. Chairman, I consider that the task . to make available the internal resources for the development purposes is one of the major efforts which should be under- taken. When one studies the situation as it prevails 1n a I great many countries, it is rather appalling to see how low I the internal savings ratio is in a great many countries -- on14 three per cent, four per cent, something like this. And we I know that as well as one can judge things, they probably need! a savings ratio of about 15 per cent that a country can hope 1 to contribute out of its own resources sufficiently to make a I good start in developing its economic efforts. I 11 So, therefore, since it is an important task, since i the Bank has the experience and since in this case Chile wants I I to go ahead, I think we ftlould do it and do everything we I can do to help them. As to the number of experts, I think this has to be decided and the staff will have to be built up. ! However, I have another concern. Internal savings I I to be made available for development purposes do not depend on~y I on private savings. This I understand is an undertaking to I enhance private savings in Chile. Now, in a great many countries and particularly just in countries en voir develop- ment -- I like the French expression -- the contribution of public savings are extremely important. So, therefore, I would like to ask: Has the Chilean STRICTLY CONFIDENTIAL 13 Government in its considerations for the ten-year plan given enough and keen enough attention to the problem of doing the utmost to enhance savings overall, economic savings? In other words, can one asswne that these efforts here to mobilize 1 private savings and channel them into development purposes will be accompanied by as keen and as energetic an effort to raise the amount of public savings so as to achieve an over- all savings ratio in the country, which comes close to what a country should do if they want to e~pect promising progress in their development efforts. Otherwise, if that is not the case, I could imagine that the Bank would be well advised to look into this problem, too. MR. KNAPP: Well, the mission that we have sent has looked into this problem very intensively, and their conclusions are contained in this report which will be cir- culated in a day or so. The short answer is that the Chilean Government has not done enough and that we have, in fact, proposed to say that we cannot coIIUllend this program and don't want to assemble a consultative group to consider the Chilean program until we have received a statement from the government as to what further steps they propose to take. I think you will find that this report emphasizes this problem, and I agree with you. MR. DONNER: In which field? STRICTLY CONFIDENTIAL 14 MRo KNAPP: Well, in a whole variety of fields. But in the first place, in taxation and curbing other government expenses of a nonessential character. There, are indeed tax measures pending in Chile, the passage of which would be extremely helpful in this direction. MR. DONNER: So I could imagine if a country means serious business, somehow, they might need assistance just in that field, too, which is probably as important, certainly as important, as the effort to mobilize private savings. But this will be tackled? I MR. KNAPP: Yes. • THE CHAIRMAN: As a matter of fact, all we are askinf : you today here is to approve this in principle. We don 1 t I expect to disburse arty of this money until the next fiscal I year. And before that, we will come back to you with a formal proposal of a specific amount before we are ready to go ahead with it. MR. DONNER: And I assume, if I just may ask this further question, that the Bank would make available these services at least in the long run for the whole period envis- aged here if there are reasonable guarantees that the Chilean Government, in its part of the other fields, for instance, the fiscal field, does all the measures necessary without which any efforts to mobilize more private savings would 1 just be futile. STRICTLY CONFIDENTIAL 15 THE CHAIRMAN: Yes. Mro El Mandjra. MR .. EL MANDJRA: Mr. Chairman., I certainly think that this is an excellent service we are rendering to the Chilean Government. And I am all in favor of such recommendation. I have only one question: I was wondering if it was the intention of this group to make later on a sort of survey -- not a survey., but a report -- on their experience and to draw certain conclusions which might be useful later on for other governments who might come to the Bank and ask for the same assistance. Is it within the program of this group to have such a report made for future use? This is such an attractive idea., other governments might wish to ask for the same assistance. MR. KNAPP: I think this is a very good idea. I think it would be divided into two parts. One would be a report which would be suitable for general circulation., which would emphasize the more constructive things that were accomplished., and also a report to the Bank as to the difficulties and pitfalls which would be of help to other missions in this field. I think we would certainly want to extract that kind of experience out of this mission. THE CHAIRMAN: Mr. Khosropur. MR.. KHOSROPUR: Mr. Chairman., I would like to STRICTLY CONFIDENTIAL 16 welcome this proposal which I think really is very, very useful in the interests, not only for Chile, but it is a problem for all other developin}'countries. It is the problem, .X. of mobilizing the private savings, which is really crucial and important for all these underdeveloped countries, which i I in most of them, maybe the capital is available, but they don'~ I know how to use it and how to mobilize it. And I hope we can I I help some other underdeveloped countries in this problem. I This is a very broad study, and I think besides I ,' i all these points which have been mentioned here, the mission \I [I has to make a study of the truces, study of the corporation 11 iaw, things which are more important in mobilizing the 11 1 capital. ! And so, I am in favor of that, and I hope we can help Chile and later some other countries to mobilize their private capital. THE CHAIRMAN: Thanks. Anyone else? Well, I assume from this that you approve this in principle. The next item is a draft resolution, asking you to approve the authorization for a private sale of portions of our loans, to have this authorization increased from $700 million up to $900 million. We at the present time have an I authorization of $700 million, and we have about reached that. 11 i !I I. STRICTLY CONFIDENTIAL 17 So we think that we need about another $200 million to cover the sales for the next six to twelve months. Incidentally., sales from the portfolio have been · very heavy recently., and this is a very encouraging thing I: h 1 ;which shows the increase in interest in this country and [i abroad in what you call foreign securities. Are there any questions on this? II Dr. Donner .. I 11 MR. DONNER: Mr. Chairman., your reference to the fac, jthat the portfolio sales have greatly increased in the last period brings up an observation which I had made., looking to the operation reports. There are two., and you have just I concurred in this. I had the impression that I hadn't seen I I very often such long lists and big amounts of sales, of.borrow~ ' er's obligations. So that's one thing., and you have .con- lfirmed that there is this recent development. There was a second observation which r made., and I wonder whether I am right or not. I see here in the operation Ireport that quite a number of very long-term portfolio sales have been made., maturities. One I see in 1978 has been sold; another 1972 has been sold; several 1972. Is that also a new trend that now there develops interest in these longer maturit s where so far., the interest was restricted to maturities up to., 1I believe., 5 years., or at least not very much more. THE CHAIRMAN: Yes., it is new. I think that's even STRICTLY CONFIDENTIAL 18 more encouragingD MR. DONNER: Yes. Has this effect now to do with a change in the interest rate structure in the market, or has it to do with the going down of the sales prices more than the Bank has done so far? I see that some of these maturities have been sold with quite heavy discounts. Has the interest which has developed for these longer maturities been a con- sequence of the concessions we have made? THE CHAffiMAN: I think there are two reasons for this increase in activity or increased interest. One is that we have haa a good bond market in this country recently. · And secondly, there has been an amazing increase in the interest in foreign securities. MR. DONNER: In this country? THE CHAIRMAN: In this country. A large bulk of these sales, some of the biggest sales, were in this country. As a matter of fact, one of the interesting features of these sales is that the biggest recently have been in Chicago, and the sales have been to Chicago banks. And these banks have bought stuff from our portfolio either for their own invest- ment or for trust funds. And this is very unusual because these banks have never had any interest to speak of at all in any of our securities before. So I think it is a combination of two things -- the bond market has improved in this country and, therefore, the STRICTLY CONFIDENTIAL 19 prices that we are offering bonds at -- we haven't reduced our prices at all. We have kept our prices what they were. But I I as the bond market goes up, our offerings become more attractire· ' Of course, if the bond market continues to go up, wel I may have to change our prices. But I don't think we have soldj I ' I enough yet to be thinking about that. 1- MR. DONNER: Does your last remark, Mr. Chairman, j also cover these cases here, the sales of the Belgian Congo papers, Nigerian, a very long term maturity, 1978? I had assumed originally when I read this that these maturities of countries which are not so close to the part of American investors probably have gone to European investors for special reasons. THE CHAIRMAN: You mentioned two -- Nigeria and what else? MR. DONNER: Nigeria maturities, 1978, which is a small amount -- well, not a very large amo'lll'lt, 347. THE CHAIRMAN: Well, those two particular ones have gone to Europe, and my understanding is they have gone for the investment or European pension ftmds. MR. DONNER: The same would hold true probably that a large number ot:Belgian Congo -- THE CHAIRMAN: That's right. Those have mostly been! in Belgium., MR. DONNER: So then, it would be true, wouldn't it, STRICTLY CONFIDENTIAL 20 to assume that they had also enjoyed a large demand coming ' ;j from Europe for these papers, larger than probably during the I q i last year? 1 1 THE CHAIRMAN: No, I don't think that the European I demand is any larger than it has been. I think the increase I I mostly has been in America. Isn't it? MR. CAVANAUGH: Now, there has been some increase every place. THE CHAIRMAN: But the biggest increase has been in 1 this country. MR. DONNER: Thank you. THE CHAIRMAN: You notice the biggest amount we have sold has been Australia. Australia has been the most popular name that we have had ror sale. i' ' Is there any objection to this increase? The next item, the minutes.or this meeting will record your approval on April 4th of the results of the vote or the Board of Governors on the membership or Somalia in the Bank. I ,am sorry to say we have no rurtper business today, but the next regular meeting will be held on Thursday, May 10th. We may have to have some special meetings before that date. If there is no other business today, we have a I STRICTLY CONFIDENTIAL 21 regular monthly luncheon today at 1:00 o 1 clock, and we will have i as our guest Mr. Fowler Hamilton of AID, and he has agreed 1 ii to talk to us briefly and informally along the line of the previous speakers that we have had. He will have with him ..-. Mr. Lingle, his Deputy, and also we will have Dr. Ekl,nd who is the newly appointed Director General of the International Atomic Energy Agency. They are not going to make speeches; they are just going to be there. But this luncheon will be at 1:00 o'clock. MR. LARRE: I have been seeing a report that Mr. l:J/i,.,1Ai~AIA Schmidt was going to A:£2•:J e:s for a week or so, and would he be kind enough to make a report to the Board on this trip, what he has seen at the time he was there when he comes back? THE CHAIRMAN: He hasn't been there yet. MRo KNAPP: Mr. Larre is saying when he does. THE CHAIRMAN: We would be very glad to do that. MR. LARRE: Because we have some interest. THE CHAIRMAN: He started once and called his trip off, but he is going there. Well, if there is no other business, after this meeting, there will be a meeting of the Pension Committee, and I would like to ask Mr. Garland, Mr. Larre and Mr. Machado to remain for a meeting of the Pension Committee. This meeting is now adjourned. (Whereupon., at 10:40 o'clock a.m • ., the meeting was adjourned.)