International Business Expansion Into Less-Developed Countries

The International Finance Corporation and Its Operations

Erdener Kaynak, James C Baker

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9781560242017
• eBook ISBN:
  9781135837112
• Topic: Business
• Subtopic: Business General
• Index: Business

For the first time, here is the complete history of the International Finance Corporation (IFC). In the fifty years since the end of World War II, the world of development finance has grown rapidly. One of the many financial institutions which cropped up to help war-torn countries with their reconstruction was the IFC. International Business Expansion Into Less-Developed Countries examines the success of the IFC in its wide variety of public sector development activities. Covering thirty-five years of IFC operations, the book thoroughly evaluates the formulation of the concept of the IFC and its evolution as a viable global development finance agency. It is the most complete and up-to-date treatment available of the IFC.The administration and operational procedures are described in detail as are case examples of financial development in all regions. Problems encountered by the IFC and new and future activities of the IFC are discussed. Scholars of economic development and international finance will find the unusual way in which the IFC was established and the case examples presented a highly valuable reference, as will students of international studies and organizations.

Chapter 1

Global Development Institutions

Introduction

From the end of World War II until 1990, two global wars have been fought. One has been the political war between East and West which may have shifted to one between the West and the Moslem world — given the effect of Glasnost and Perestroika in 1989-90 and the Persian Gulf incident involving the invasion of Kuwait by Iraq in 1990. The other is the ongoing economic war between North and South that U Thant, the late former Secretary-General of the United Nations, once characterized as more relevant than the war between East and West (Thant, 1963).

Economies have been classified for operational and analytical purposes according to their gross national product (GNP) (World Bank, World Development Report, 1990, p. x). The “North” essentially includes the high-income economies, those whose GNP per capita was $6,000 or more in 1988 as well as a few of the middle-income economies whose per capita GNP was higher than $2,200. The former would include the United States, Japan, and the West European nations. The latter includes Brazil and some Asian nations such as the Republic of Korea and Taiwan.

The “South” essentially includes all middle-income countries with per capita GNP of between $545 and $2,200 and those low-income economies whose per capita GNP is less than $545. Thus, the higher-income economies seem to be geographically located north of the Equator while those middle-to lower-income economies are south of the Equator. Most lower-income, or developing, economies can be characterized as having relatively high population growth rates and relatively high infant mortality rates. In general, developing economies (LDCs), as compared with industrialized economies, are agrarian societies or produce extractive minerals whose prices rise less slowly in world markets than do the prices of their imports, generally of industrial products. Thus, the terms of trade do not favor LDCs. This phenomenon exacerbates their poverty. In terms of the world’s population that can be characterized as poor, most are located in South Asia and sub-Saharan Africa.

Although some progress has been made in the developing world in the last 50 years, some of the problems remain persistent. The United Nations published a document outlining proposals for a “Development Decade” in the 1960s and it pointed out that higher standards of living were suppressed because of the “higher rates of population growth in developing countries than in wealthier countries” (United Nations, 1962, p. 7). Countries such as Kenya still encounter devastating population growth rates approaching 4 percent, despite the implementation of birth control programs. Robert Theobald wrote that rapid development would only occur if the industrialized nations gave aid to the LDCs. The amount of aid given to LDCs has not kept pace with the growth of GNP in the industrialized countries and much has been spent by the latter on military goods, especially by the United States and the former U.S.S.R. while fighting the Cold War.

An examination of recent analyses of world economic growth shows that it moderated to “a more sustainable pace” in 1989, according to the International Monetary Fund (IMF) (IMF Financial Support, 1990). Growth in the developing countries was 3.25 percent in 1989, compared with 4.25 percent in 1988. Reasons for the slower growth in LDCs in 1989 include slower world trade growth, higher international interest rates, and lower prices for some non-oil commodities. Total external debt of LDCs changed very little from 1988 to 1989. Such debt totaled $1,235 billion in 1989, about one-third of combined gross domestic product of LDCs.

Global Development Institutions

Since the end of World War II, bilateral and multilateral economic assistance institutions have been established for the purpose of reducing the poverty of LDCs. Many of the industrialized or high-income economies have disseminated economic assistance — foreign aid — through central government agencies such as the Agency for International Development (AID) in the United States or the Development Assistance Committee of the Organization of Economic Cooperation and Development (OECD), an organization comprised of mostly European nations, along with Canada, United States, and Japan.

Several multilateral international financial institutions have been established to assist the economic development of LDCs. Among these are the International Monetary Fund (IMF), the World Bank Group agencies — World Bank, the International Finance Corporation (IFC), and the International Development Association (IDA), and regional multilateral agencies including the Inter-American Development Bank (IADB), the African Development Bank (AfDB), the Asian Development Bank (ADB), Islamic development institutions, and European Community development institutions.

The International Monetary Fund (IMF)

The IMF was established at a conference held in 1944 in Bretton Woods, New Hampshire. Delegates to this conference were highly supportive of the United Nations and believed a global financial institution was needed to provide liquidity to the war-torn and underdeveloped nations of the world which had not recovered from either the deflation of the Great Depression nor from World War II.

In 1946, member nations of the IMF subscribed foreign exchange and gold reserves to this agency to establish a pool of $8,800 million from which nations with short-term balance of payments imbalances could draw to obtain relief (International Monetary Fund, 1946). Currently, the IMF has available funds, or total quotas, amounting to SDR 90.1 billion (1 SDR = U.S.$1.369359) for this purpose. The IMF has proposed a 50 percent increase in these quotas to about SDR 135.2 billion. As of August 1990, 151 nations were currently members of the organization (“Members’ Quotas Guide,” August 1990). IMF is headquartered in Washington, D.C., and its President has always been a foreigner, usually a European.

The IMF was established for the following purposes: (Encyclopedia of Banking and Finance, p. 56).

1. to promote international monetary cooperation through a permanent institution that provides the machinery for consultation and collaboration on international monetary problems;
2. to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy;
3. to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation;
4. to assist in the establishment of a multilateral system of payments in respect to current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade;
5. to give confidence to members by making the general resources of the IMF temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity;
6. in accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

In 1968, the IMF was authorized by its member nations to create a new international currency called Special Drawing Rights or SDRs. This “paper gold,” as it was referred to, became a supplement to the international reserves held by IMF. Each member was given SDRs in relation to its total subscription of reserves. SDRs have not replaced the dollar or gold but have become an addition to the stock of international money (Moffitt, p. 33). Although SDRs have become well accepted and some international debt instruments have been denominated in them, they have never become a panacea to the world’s monetary problems because they were “too late, too small and too timid in [their] conception to save the system.” Most of them were allocated to the five major members of IMF: United States, Great Britain, France, former West Germany, and Japan (Moffitt, p. 33).

Since 1982, the international country debt problems have pushed IMF into another area of focus. It now plays a key role in designing austerity programs and advising countries with severe sovereign debt problems. In fact, IMF has become almost an international policeman in this area, forcing countries to act more responsibly in their monetary and fiscal policies. One of the first such countries whose economic policies were affected was Argentina when it was bailed out by loans from other Latin American countries as well as the United States in 1984. In helping countries alleviate their debt problems, IMF also works closely with the Bank for International Settlements (BIS) as well as with commercial banks which are creditors of these LDCs.

The most recent operations of IMF show that 49 member countries had 51 arrangements with IMF and 87 nations were using its resources — more than half its membership (“Members’ Quotas Guide,” August 1990). The IMF committed SDR 11.3 billion to member countries in 1989 in the form of stand-by, extended, structural adjustment, and enhanced structural adjustment facility arrangements. These commitments represented a 6-year high in 1989/ 90. Members withdrew SDR 4.4 billion in 1989 while repaying SDR 6.0 billion. Thus, IMF credit outstanding fell to SDR 22.1 billion in 1989/90 from SDR 23.7 billion in the prior year. The average IDA credit is granted with a grace period of 10 years, maturity of 38.3 years (40 years for IDA-only and least developed countries as classified by the United Nations, and 35 years for other recipient countries), and a service charge of 0.75 percent on the unpaid balance (Stern, June 1990, p. 20).

In its three decades of operations, the IMF has provided 2,183 credits through December 1989, totaling $54,784 million to 86 countries. Of these, $38,021 million have been disbursed and $16,763 million have yet to be disbursed. Since 1985, the agriculture and rural development sector has received the largest amount of IMF credits, receiving more than one-third of IMF commitments. By geographical region, African and Asian nations have received the vast majority of IMF credits, nearly 90 percent on a combined basis (Stern, p. 21). As usual, the United States has shared the heaviest burden of IMF funding, contributing 42.34 percent of the initial 1961-1964 funding, 25 percent of the eighth replenishment for 1988-1990, and 21.61 percent of the ninth replenishment for 1991-1993 (Stern, p. 23).

The World Bank Group

The World Bank Group, headquartered in Washington, D.C., includes the World Bank, the International Finance Corporation (IFC) — the topic of this book, the International Development Association (IDA), as well as more recently established operations — the International Centre for Settlement of Investment Disputes (ICSID) and MIGA, the Multilateral Investment Guaranty Agency. The latter two agencies are not considered global development agencies, although they play important roles in this area, and, thus, will not be discussed in this section.

The World Bank

The World Bank was established in 1944 at the conference in Bretton Woods, New Hampshire, in which the IMF was also established. These two global financial agencies were “designed to be central institutions in a world free of war and destructive economic nationalism” (Acheson, Chant, and Prachowny, p. 14). The World Bank, or Bank as it will be referred to in this study, was originally named the International Bank for Reconstruction and Development, in light of its two major objectives: reconstruction of war-torn areas and economic development of low-income nations (Acheson et al., p. xix). The Bank represented a new experiment in international finance, i.e., an international financial agency supported by the credit of its member nations, each of which would have a voice in the Bank’s investment policies (Business Week, October 6, 1956, p. 132).

Charter members of the Bank had to be United Nations and IMF members. The bank was originally capitalized with authorized capital of $10 billion subscribed by member nations (Rotberg, 1973, p. 10). The Bank, as of the end of FY1990, had total subscribed capital amounting to $125.3 billion. With the acceptance of Angola to membership, the World Bank now has 152 members (World Bank, Annual Report, 1990).

The Bank makes loans to LDCs only for social overhead capital projects and whose payment of principal and interest must be guaranteed by the recipient government. Bank loans are characterized as hard-term loans in that they are for relatively short periods to maturity — generally, 15 years — and the interest payments are relatively high — currently variable-rate interest rates on Bank loans are in the 10-12 percent range. The Bank made $15.18 billion in loans in FY1990 and, of this, a total of $13.9 billion was disbursed (World Bank and IDA Annual Report, 1990, p. 13). Overall, it has a loan portfolio which has been disbursed and is outstanding which amounts to $89.1 billion, made to 91 countries and a total of $49.2 billion of loans approved but not yet disbursed (The World Bank: A Financial Summary, p. 7).

The Bank obtains its funds in a number of ways. Its present capitalization, presently $125.3 billion, is not used for development loans except in the case of a dire emergency. Most of its funds are obtained by floating Bank bonds on the international bond market. These debt instruments carry the highest rating because of the excellent operational history of the Bank, its conservative lending policies, and because it does not lose money on its own loans since recipient governments must guarantee repayment. Its borrowings total $86.5 billion in 23 currencies or currency units, with about 94 percent of the debt at fixed rates with medium-to long-term maturities. The Bank limits short-term and variable rate borrowings to 15 percent of its total debt (The World Bank: A Financial Summary, p. 10).

The Bank also sells some of its loans to other financial institutions, such as private commercial banks, thus encouraging private sector participation in the development process. Finally, repayment of principal and interest on its loans also furnishes funds for the Bank.

The Bank has been a highly successful international development finance institution in its 45 years of operation. However, it has not been without criticism. Some believe it is a giant bureaucracy not totally in control. Its current President is Barber Conable, a former member of the U.S. House of Representatives. The President of the Bank has always been an American, nominated by the President of the United States — thus, politics plays a role in the appointment — whereas the President of the IMF has always been a foreigner, generally from Europe. Conable, in his first few years, created controversy at the Bank by restructuring its organization and reducing its staff.

Some believe the Bank has little effect where emergency relief is needed, that constraints are present in structural adjustment lending, and that, although its Articles of Agreement are non-political, it is highly influenced by major shareholders, e.g., the United States (Please, 1984, p. 85). In addition, the Bank tends to have technocratic problems. Because of the awesome financial power of the Bank, technocrats play a significant role in the definition of development, thus resulting in Bank support for project issues which are too technical (Please, p. 90; Morris, 1963).

In addition to these criticisms, the Bank is quite conservative in its operations. Aside from the government guarantee requirement for its loans, the Bank maintains a relatively high degree of liquidity, currently holding $17.2 billion in actively managed investments in government and agency securities and deposits in selected banks (The World Bank: A Financial Summary, p. 7). This represents more than 15 percent of its subscribed capital. It also maintains $16.7 billion of paid-in capital available for lending and reserves. Nearly two-thirds of this is in reserves and accumulated net income — unallocated (The World Bank: A Financial Summary, p. 11). Finally, the Bank has callable capital which is a direct, unconditional obligation of member countries amounting to $116.3 billion (The World Bank: A Financial Summary, p. 11).

The 1990 Annual Report of the World Bank shows that the area receiving the highest amount of Bank loans was Asia with 30.9 percent of FY1990 loans. Latin America and the Caribbean received 28.8 percent, Europe, Middle East, and North Africa received 21.3 percent, and Africa received 19.0 percent, respectively (“World Bank Expects 1991 Lending,” September 24, 1990). When compared with its historical overall allocations, these data show that the Bank has changed its lending policy with regard to certain regions in recent years. Overall, its disbursed and outstanding loans by regional distribution show that Latin America and the Caribbean region have received 36 percent of Bank loans, Asia has received 32 percent, Europe, Middle East, and North Africa have received 22 percent, and Africa has received only 10 percent (The World Bank: A Financial Summary, p. 5). Its commitments in FY1990 were $20.7 billion, compared with $21.4 billion in FY1989. Actual loan disbursements to LDCs in FY1990 amounted to $13.9 billion.

The International Finance Corporation (IFC)

Since IFC is the subject of this study, suffice it to say at this point that it is the only fully global financial institution which gives economic assistance to the private sector without the requireme...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of Tables and Figures
• Preface
• Chapter 1: Global Development Institutions
• Chapter 2: The International Finance Corporation: Origin and Background
• Chapter 3: Operations and Administration of the International Finance Corporation
• Chapter 4: IFC’s Project Evaluation Methodology and Portfolio Management and Control
• Chapter 5: IFC Programs: Early Years
• Chapter 6: IFC Programs: Since 1980
• Chapter 7: The International Finance Corporation in Latin America
• Chapter 8: The International Finance Corporation in Asia
• Chapter 9: The International Finance Corporation in the Middle East
• Chapter 10: The International Finance Corporation in Africa
• Chapter 11: The International Finance Corporation in Europe
• Chapter 12: Development Financing Benefits: An Evaluation of the International Finance Corporation
• Chapter 13: Problems of the International Finance Corporation
• Chapter 14: The IFC: Its Future
• Bibliography
• Index