Perspectives in development; Development Aid and Internal Monetary Creation: A Marriage of Convenience

We present the fourth and final lecture from the perspectives in development conference held at Wingspread. The conference center of the Johnson Foundation in Racine Wisconsin. The conference was sponsored by the League of Women Voters Educational Fund and the Overseas Development Council in cooperation with the Johnson Foundation. One of the featured speakers was Henry Royce United States representative from Wisconsin who spoke on the topic of development aid and international monetary creation a marriage of convenience. Now here is Congressman Royce. You know we read a lot of editorials nowadays about. A pass by on the other side phenomenon of American life you remember that really tragic case of the young woman who was knife and murdered I guess out in Long Island a year or two ago while thirty seven different people walk by saying this is not my business well it is close to being true that Miss foreign aid lies bleeding in the alley

these days and I take my hat off to the league for not passing by on the other side but being enough interested to put this high on their agenda. Enjoy meeting. Now comes at a appropriate time this is after all the end of the great much heralded decade of development. This was the decade you recall in which the developed world was supposed to pony up with one percent of its gross national product to help the underdeveloped world. And as we know this decade is ending with a bang but with a whimper. Public ALP flows from only rich countries to the poor are something like thirty nine 100s. Just about a third of 1 percent of their GNP including even the private investment which was meant to be in this figure a tall it comes to something like three fourths of one percent.

And if we of the United States start getting too complacent and pointing the finger of scorn at others let it be recorded that our contribution is even more pun worthy and less than many other countries like the United Kingdom Belgium West Germany the Netherlands and particularly France and let it also be recorded that this year's foreign aid request before the United States Congress both the outgoing Johnson administration's request of the President Nixon's administration request is the lowest that it's been in 20 years 20 years ago I was a foreign aide or myself as deputy general counsel of the Marshall Plan and foreign aid and supported me for a year and it's only fair I suppose that I should support foreign aid. But you know what. There are other reasons which were very ably summed up in that excellent book which I understand you all have there with the report of the

Pearson commission. I was thrilled when I noticed that Mike Pearson an old friend of mine was to be on your program yesterday morning I'm sorry I couldn't be here I am. I think he was a happy man to be able to to do this report after his retirement from formal public life in Canada I had dinner with him in London a few months ago and somebody asked with reference to the dashing new prime minister of Canada Mr. Pearson. What do you make of Mr. Trudeau and he looked at him and said I made Mr. Treat You know the it was. Going to. Anyway be you know. The piercing Commission for its part recommended that it be present rather miserable. Point thirty nine percent. That is about a third of 1 percent of GNP which the wealthy ought to devote to the poor of the world

should double should be about seven tenths of one percent by the middle of the upcoming decade. It's rough that we have this shortfall of development aid when we do because it comes at a time as was brown so well pointed out when populations in the developing world are increasing when the developing countries are more and more loaded up with loans. Many of them at rather high interest rates and their difficulties repaying them are increasing and particularly at a time when their capacity to absorb foreign aid by the developing of their institutions is increasing. We developed in the. In the area of world institutions one that is a particular favorite of mine in recent years little idea of the International Development Association the aid

giving branch of the World Bank I see the aid giving branch because the World Bank itself is written as a banker's approach it makes hard loans and hard currencies at heart interest rates and with hard terms of repayment. I do it is the international worldwide equivalent of our own bilateral aid giving agencies. And of course it has the advantage of being multilateral. It can thus impose sensible conditions on its aid without getting into all sorts of political hassles as is the case in bilateral aid. It's got a splendored record of capable of ministration and its long term these these loans are are made in convertible currencies and they can be paid back over like 50 years at an interest rate of substantially zero at something like three fourths of 1 percent. And even the repayment is frozen for the first 10 years.

The only trouble with the idea is a beautiful one but I doubt it is broke. It's all the money we have so belatedly embarked upon a very modest replenishment around 400 million dollars a year from the whole of the whole of the developed world all the rich countries of which the United States says share is one hundred sixty million a year. Both the outgoing president of the World Bank George Woods and the present president Bob McNamara have repeatedly said that I did need to see as a bare minimum a billion dollars a year of lending power as opposed to the 400 million which it now has the Pearson commission indeed says that it ought to ought to have about a billion and a half by the mid 70s. I think this is these estimates are if anything conservative

and I'm in I'm very much impressed by what Mr. Brown had to say earlier this morning about the kind of crisis that is going to that he guesses will be faced in the mid 70s. It used to be thought that it be a straight male through Z and food you know food starvation crisis. Hopefully this will be avoided or at least pushed forward for a few years. But there is likely to be a considerable economic social crisis deriving from the fact that you're going to have this enormous increase in the routing age population you know all of these countries and they only they only way of providing jobs for them is by getting some kind of capital in place in the country and that costs money and that's why we have to think big is the Pearson Commission does in terms of what we want. So you've got a terrible shortfall and the fault and remaking by the developing world and what it ought to have

done you've got the clear judgment of all of the. Experts that are very substantial sums of concessional development aid will be needed in the next decade. And while all of this sad business has been going on in the field of international development aid something a little more hopeful has been going on in another branch of international economics namely international money and balance of payments and reserves. They are in a nutshell it began to be apparent to anybody who knew anything about it as long ago as 10 years that the world couldn't stagger along with its present system of foreign exchange reserves. Those foreign exchange reserves consisted principally of good attractive but rather archaic metal that of which the supply was largely controlled by the Union of South Africa and the Soviet Union and particularly in recent years

are little or no gold has been coming into the international monetary system so be the international money which is needed to lubricate World Trade and Investment just wasn't there the other form of the international reserve mainly the British pound sterling in the American dollar. We're beginning to get more and more fragile and there is more and more unwillingness on the part of foreign central banks to hold them. And you also had the. Very obvious problem that if we paid we the United States paid attention to the nagging of everybody else and got our balance of payments in order and didn't run a deficit every year then the international reserves would dry up so there had to be something better than gold in the dollar as the international unit of exchange so fortunately before that fiasco the money masters of the world did pull up their socks and figure out how to do it namely

by the issuance of what has been called paper gold special drawing rights which is doing into the in the international world precisely what we've done in this country ever since the Federal Reserve was founded in 913 namely have some careful controlled method of creating new international reserves. And look first at Rio de Janeiro in September nine hundred sixty eight. And then at Washington just this last month at the annual meetings of the International Monetary Fund of The World Bank. The idea of special drawing rights was ratified and in the next three years almost 10 billion dollars worth of special drawing rights will be issued. Expect nothing complicated about special drawing rights there. They're not the kind of money that you and I will carry around with us. There are international bankers money there are pieces of paper which the International Monetary Fund will issue each year about three or three and a half billion dollars give to the

member countries and they then each one of them agrees to accept them from the others in settlement of their international trade and investment balances. So just as the dollar bills that we carry around are right something because people will accept them. So special drawing rights will be worth there. Weight and gold and more because people namely Central Banks will agree to accept them. So it looks as if the threatened strangulation of the international monetary system through running out of money through the fact that no gold is coming into the system and that dollars in Sterling were very poor reserves. It looks as if the threat and strangulation of the International Monetary mechanism is not going to come about that there will be a Perils of Pauline rescue at the last moment by the special drawing rights. So we've

got in the field of international development aid a terrible shortfall and a crisis in the field of international money a very hopeful sign looks as if things are at least partially fixed up there for a while. Now let's maybe talk about putting them together. I've been describing these SDR special drawing rights. I've said that they're dished out by the International Monetary Fund to members. How are they dished out. Well they're dished out according to the quotas of the members. The porters are the original allocations made by the International Monetary Fund right after Bretton Woods back in 1984. And under those initial quotas. The rich of course got the lion's share. The industrial nations of Western Europe the United States Canada and Japan. Therefore by

reason of their quotas are going to get almost two thirds 64 percent of these new special drawing rights the United States and the United Kingdom alone just by themselves two countries will get thirty six percent more than one third of all the rest of the countries of the world the remaining 80 member countries of the International Monetary Fund all of them who are will get the remaining one third. And bear in mind that these special drawing rights are in a very real sense manna from heaven. Nobody has to work for them. If this country wants to get As. Part of its monetary reserves we Americans have to work for and that is we have to sell goods and some triangular fashion to South Africa and buy gold from South Africa. We have to sweat for it. Similarly if we want German marks Italian lira Japanese yen or anything else

we have to work for it. But these special drawing rights fall is the rain from heaven they come without working. And as the developing nations of the world discover as they are discovering that this man AI is being divided up two thirds to the rich one third to the poor. Questions will be raised on the floor shall we say. This comes at a time when again referring to Mr. Brown's discussion the developing world has plenty to be upset about. Quite apart from this mal distribution of special drawing rights for example the developing world produces sugar at about one third the price of sugar in the United States and in the other. Northern Hemisphere countries most of which use Beach sugar the United States

has recently increased its domestic high cost production and decreased the ratio of imported tropical sugar one of the greatest foreign exchange earners the developing countries have in wheat which the developing countries are about to be able to produce in exportable quantities and very cheaply. The common market. Germany and France are erecting a a impenetrable tariff wall against that of some countries of Asia are developing new strains of rice and are getting ready to export those. But Japan which wants to be the economic leader of that part of the world again has a fenced me policy to protect its very high cost rice growers. And you can carry this same thing forward into textile holes and shoes and and other products.

So truly when you put together the the short changing that's going to be done on special drawing rights and they start changing. It's being done excluding from trade the products of the developing countries. St Matthew's Gospel has is really come true and in which it said that under every one that hath shall be given. But from him that hath not shall be taken away even that which he hath or as we say here in Racine them as has gets. And. As I say when this an equal distribution of ours is brought home to the developing countries it is going to rub a good deal of salt in the wounds. So our task it seems to me is to see whether we cannot pluck from the national frustration the flower of opportunity. With that in mind

our Congressional Joint Economic Committee last August a couple of months ago after copious hearings and much thought got out a report which up dated an idea which has been tossed around for over the last ten years namely the idea of. Joining Mary this new money international money has to be ours. And the problem of development aid specifically what we recommended is that the 18 wealthy countries they aid giving countries of the International Monetary Fund or at least the countries that ought to be giving out a good aid namely the United States Canada the countries of Western Europe England France Germany Italy the Scandinavian countries the Low Countries and so on. Japan Kuwait Australia and a couple of others

we suggested that when they get their annual allocations of Estee ours this manna from heaven from the IMF they leave a percentage of them we suggest a 25 percent but it could be much greater than they have. They leave them in the cigar box at the International Monetary Fund and say use these to add to the funds of the great multilateral developing agency and thus these new reserves this new money before it starts its business of becoming part of the reserves of the wealthy countries will make an initial round trip in which it will help bring tractors and. Milling machinery and locomotives and electrical equipment and fertilizer and all the other things that are needed to the developing countries. The idea as I say was formulated and made the subject of our report in

early August. We were delighted that the Pearson commission and its excellent study devoted a couple of pages to the idea and suggested that it was really a further study. I was also quite pleased that at the World Bank meeting. Two or three weeks ago in Washington about 20 of the governors of the World Bank in their annual speeches made specific mention of this point and have started including it as part of their not yet quite non-negotiable demands. The only sour note was struck by the distinguished representative from the the Netherlands a very conservative gentleman who referred to it as a idea of the devil can imagine saying a thing like that about her demeanor. Anyway another development that pleases me is the Brookings Institution has set up a special task

force to take the marriage of convenience idea and try to ready yet an actual legislative form that's oh so the New Statesman can say well the bugs have been worked out of this we've got to study it for the next 10 years which is one trouble with making progress in international matters. Well let's now take a look at the way how this marriage of convenience proposal would work at the disc at the advantage of it and then at some of the objections that may be raised to it because I have to confess that it is my hope that that difficult though the subject matter is the league and its attention to the problems of development aid will seize upon this as one part of a total package of measures which could assist in getting a reasonably adequate amount of the of the wealth of the rich world transferred to the people of the not so rich world. Big

obvious greatest single advantage of this idea of using some of the new manna from heaven as the RS is that it would at least double ideas lending capacity as I've said I've got about 400 million a year to lend. If you asked the 18 rich countries to put in just a quarter 25 percent of their new SDR this would this would more than double it. This will go through all the arithmetic but this gives yield about five hundred forty million dollars a year to be added to the 400 million that Ida now has and thus approximate the 1 billion dollars a year of lending capacity which everybody agrees that I don't want to have. If you wanted to if you could talk the wealthy countries to putting in more than 25 percent that would be great actually. There's no reason why they shouldn't put in 50 percent 70 percent or

some greater figure if they for example they put in 70 percent then not that would that would up ideas and your lending capacity to 2 billion a year which which they could do very well use but we in our report were quite modest because we didn't want to be run out of the ballpark for obvious extravagance with other people's money. A second point in here I looked at my friend. So when I was sitting earlier is that this marriage of convenience would get rid of very largely of the vexing balance of payments problem. The vexing balance of payments problem because it has been said in recent years in the United States and the same thing's been said in Germany and England and everywhere else. We can't do very much about foreign aid because our balance of payments is precarious and frequently in deficit. And if we give foreign aid in large amounts

this will really put us into in a bind internationally so the story runs I think in most cases it's a point made with faulty analysis. But anyway it is made and I think any political observer of the Decline and Fall of foreign aid in recent years would have to agree that the balance of payments rock is the one upon which it is tended to founder. This could all be nicely sloughed off if we use this special drawing rights device because these special drawing rights never get into the balance of trade payments problem a tall. They would be under this proposal abstracted from a country before they ever got into its reserves just to run through the arithmetic again Suppose the United States and the other countries adopted this proposal. Well. We still would get right off the bat 75 percent of the new money which we're supposed to get

and that's 75 percent more than the zero we're getting now because there isn't any new money. Now before FDR is coming into the system. Secondly even the 25 percent that would be withheld by the International Monetary Fund and used to finance these development aid purchases for India and Pakistan and Peru and Colombia and Nigeria and Kenya and so on. Even that 25 percent which initially fulfilled a economic development function would very shortly land up in the coffers of the central banks of the wealthy countries because that's where the money would be spent. But the crucial difference is that it would it would end up in those coffers after it had performed a useful development aid function. So not only says the initial 75 percent but the remaining 25 percent of the special drawing rights we would end

up in the coffers of the wealthy countries. So that I think it can fairly be said that this portion of development aid could be financed without balance of payments problems and thus overcome the hang up which we now have which is oh we can't afford foreign aid because it wrecks our balance of payments. The third crow point which I would like to make is related to this second one. It also has to do with balance of payments. One of the worst things about the balance of payments bogeyman is that it has been used by our country and by almost every other country to tie foreign aid to the country which is giving the foreign aid. I'll admit that it's better to tie foreign aid than not to give it a tall. But it also is an extremely expensive way. It means that the developing country. Given what was called foreign aid instead of being able to shop around the world to get the machinery which

is best cheapest and most available of machinery is what it happens to want has to go to the particular country which gave it the gave it the foreign aid in the first place. This has two bad effects. First as I've said it enormously decreases the benefit of a given amount of foreign aid to a developing country. Secondly it tends to make rather fatter and Louis the the aid giving country because it is a monopoly position. It doesn't and it doesn't have to compete with the other countries of the world in price and quality and service and other things. So. A very important advantage of using special drawing rights as a ingredient in foreign aid is that it would free us of this requirement of time. A fourth favorable

aspect favorable if you believe in foreign aid is that this comes as close to being painless and as any type of foreign aid can ever be the kind of foreign aid which annually causes our executive branch so much agonies at the hands of Congressman Otto Passman and others is a kind of foreign labor First you have to go endless late to the foreign affairs and foreign relations committees of the House and Senate and get yourself an authorization every here and then having done that you then go before the Appropriations Committee and try to get an appropriation and when the when the. Get adequate funds have finally been obtained the aid people are understandably exhausted now. How would how would the special drawing rights route differ from that as well. It differs because of the

manna from heaven nature of special drawing rights. Congress would not have to authorize or appropriate annually anything for this form of foreign aid. It would be done once and for all. If the idea were adopted because Congress would have to approve this use of special drawing rights about once that were done then 25 percent of the manna from heaven would every year without any legislative authorization go into the GOING TO THE into the development fund of idea. Now of course it would be necessary for the United States Congress as always to see that our economy is run on a full employment without inflation level. But the chances of we're talking about half a billion dollars worth of additional foreign aid every year. The chances of a half a

billion dollars worth of foreign aid being the camel that broke the back is speaking from the standpoint of inflation of the developed world. Those chances are very small because the gross national product of the countries of the developed world is around 2000 billion a year ours alone is close to one trillion one thousand billion. So that one tooth out of the total of goods and services that are going to be produced added to what you already got by way of demand is not going to be very significant. So the the the the fourth point as Ive said is that while of course Congress and any other national legislature are going to have this new system would have to use sound fiscal and monetary policies to guard against inflation. There would not have to be any direct budgeting or taxation for foreign aid.

The fifth pro point is related to it. Just because they're good they're there wouldn't need to be ordinary budgeting in taxation. You wouldn't need these any old authorization and appropriation measures which are now the bane of bilateral AIDS. Sure as I've said you would require that Congress on a once and for all basis approve the whole plan. But these matters involving the International Monetary Fund happily come through our subcommittee the international finance subcommittee. My We have a somewhat better record on the floor of that now than the bilateral foreign aid people have possibly because nobody understands what in the world we're talking about. There are there are some precedents incidentally for

Congress giving the executive branch of authority over a long term to make some pretty sweeping allocations of funds for example back at 933 Congress by law. When we devalued back thirty six years ago Congress set up a Google stabilization fund which had billions of dollars in it and that fund has been used ever since then without congressional control and it never seemed to bother Congress too much. Equally we in the Congress permitted some years ago the Federal Reserve system to make swaps and exchanges with other foreign central banks which again involve billions of dollars we don't annually return to that once they've been given permission. We watch it but don't need any legislation. Equally in this very special drawing rights matter which Congress approved a year ago we we delegated then our authority to the United States Treasury to join

every year in this creation of new manna from heaven so there's plenty of precedence for getting away from annual ization even in aid giving. 16 finally and very importantly to achieve this marriage a special drawing rights and development aid would meet the demands of the developing countries for more assistance in a very constructive way. I think here the analogy to use again suggested earlier today between some problems we have within our country. You know our you know our ghettos and they had problems of the rich world and the poor and I think that's an analogy which stands up. I for one think that one of the reasons we're being confronted now by demands that are certainly

difficult to meet and sound outrageous to some people is that we waited too long in meeting the just demands of the people of the ghettos of this country. Equally I think if we get out in front and do something about the Gospel exporting to Saint Matthew with respect to the developed countries developing countries we will be in much better shape and. Kind of demands that are made upon us will be. I think the difference between demands that can be met and those that can now out to to wind up I think we have to take a look at some of the objections that made may be made to this most of which I've really touched upon already why it will. It's said that this is going to cut down on the amount of special drawing rights that the wealthy countries are going to receive. No it really won't as I say 75 percent of their special drawing rights will go into their coffers immediately and the other 25 percent after a little circuitous trip in which they go out

to Peru or Lalas or Nigeria will come on right back to Washington or Frankfurt or Rome or Tokyo or wherever they started from. It is true that that 25 percent. Will go not to the country which happened to have them dished out to it in the first place. But if the country would guess the order but what better way can you have to stimulate competition among nations than something like that. The second objection is that it will cause inflation in the wealthy countries by expanding the demand from the developing countries. As I've said I don't really believe that all one half a billion additional year in development aid to the developing countries is in and of itself going to cause inflation to a 2000 billion dollar a year group of wealthy countries. Sure they've all got to manage their economies sensibly but if you look even at the recent years of rather full

employment in the developing countries there's always been several of them that had a little recession or some excess capacity on their hands and those would have been the ones in which the to which the orders would have been sent. Indeed just to just to put to rest any argument of tall of the. I'm of this nature namely that this thing will cause inflation. Any country any developing country that really finds itself embarrassed by a glop in surfeit of orders from the developing countries can always do certain things to cut off that order of those orders they can advise their manufacturers on about in theory bases to be slow in meeting them. They can they can impose export taxes which I don't like very much but that is one way of cutting it down or they can do what I think West Germany should have should have done some time ago and I hope is about to do namea revalue their their

currencies upwards so their prices go up and they don't get so many orders. Indeed if the if the world came to some recognition which I certainly favor I have some flexibility in exchange rates. Then whether a country revalued its currency upwards would not depend upon the political bakery's of domestic politics but the German peasants think with teasing her things but really brand things. But would depend upon good old Adam Smith supply and demand and would would create a very happy end. Free economic solution the the third possible objection is is related to this second inflationary objection the third one is that only if you if you cut the developing countries in a special drawing rights you create an irresistible lobby to create a swollen and inflationary supply of special drawing rights which will inundate the whole

world with a lot of excess and profit and quite funny money. Well not really because when special drawing rights were created they were long. It was locked up in the most conservative banker like fashion that an excess amount can't be created for example a country or a group of countries with 15 percent of the total International Monetary Fund voting power can stop any creation of a special drawing rights. We alone the US could could veto all by ourselves any creation of special drawing rights that. We believed was too big and I'd be the first to say that under this linkage proposal of that we're making the total amount of special drawing rights and anyone here has to be. Not the amount that we all like the developing countries to get but the amount that is needed to duplicate a worldwide system of foreign trade and investment on a non-inflationary basis. So I really think this drops out

as does the fourth and last objection which may be made to it namely that it will cause legislatures in the wealthy countries to lose control over foreign aid. Well I think that I think that it would be just great if the legislatures of the developing countries retreated a little bit from their own over control of foreign aid from there every two months. A revision of the thing. But I have to point out again as I already have that it doesn't mean the Congress would lose control Congress would be asked to legislate on the whole proposal to debate it exhaustively and to decide whether they want to go along with it. And as the plan progressed any time Congress didn't like it Congress could take up the matter again and vote to opt out so there is no real loss of legislative control. Well they're in a somewhat dated nutshell Weasley. On the cruise in times of this difficult marriage between development aid and

monetary reform an idea whose time is not yet quite come but we do need a statesman or two to act as a marriage broker and maybe the the good efforts of the League of Women Voters can help find that state. You've been listening to Henry Royce United States representative from Wisconsin as he discussed the topic development aid and international monetary creation a marriage of convenience. This was the fourth and final lecture recorded at the perspectives in development conference held at the Wingspread conference center of the Johnson Foundation in Racine Wisconsin. This is the national educational radio network. In.