Full text of Economic Review (Federal Reserve Bank of Cleveland) : February 1963

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MONTHLY

IN

FEDERAL RESERVE BANK of CLEVELAND-----

THI S

I SSUE

Lending For International Developm ent. . .2
Around the Fourth District.................... .12
Participation In Food Stam p P la n ......... .13

0?efaicca'icf ?$ 6 3

SNOWY M O U N TA IN S P R O J E C T - S o u t h e a s t A u stra lia

P O R T O F C A L C U T T A - India

M a n y p r o j e c t s in
underdeveloped na­
tions have been fi­
nanced by various
international l e n d ­
ing institutions.

R O S E IR E S D A M -S o u t h e r n Sudan

Digitized Nfor
FRASER
U C L E A R P O W E R P L A N T — I ta ly ’ s fir s t


Y A N H E E DAM — N o rth e a s t T h a ila n d

A T L A N T IC R A I L R O A D - C o l o m b i a

Lending For International Development
another, however, with respect to the average
h e
a c tiv ity
of international lending
size of operations, the characteristics of bor­
agencies, which received a strong impetus
toward the end of W orld War II, has been rowers, credit terms available, and the sources
of funds utilized.
marked in more recent years by the increas­
ing variety of assistance programs. In the
early postwar period, when the immediate
Development Institutions
objective was to restore productive capacities
The International Bank for Reconstruction
of industrial countries with broadly similar
and Development, or W orld Bank, which
economic structures, a relatively standardized
operates on a multi-lateral basis, is the largest
approach was sufficient. Later on, however,
and best-known development institution. The
as the approach-emphasis shifted from re­
World Bank was formed in 1944, simultane­
construction to helping underdeveloped coun­
ously with the International Monetary Fund,
tries, which are in all stages of economic and
at the Bretton Woods conference.<2> The
cultural evolution, there emerged more diver­
present membership of the AYorld Bank, with
sified kinds of international financial assist­
the exception of Yugoslavia, is located out­
ance. To meet the broad spectrum of financial
side the communist bloc of nations.
requirements, international lending institu­
Although nearly all credit extended by the
tions have increased not only in number but
W orld Bank immediately following World
in scope of activity.
W ar II was for the reconstruction of coun­

T

The U. S. Government has played an im­
portant role in the establishment of six inter­
national development organizations, and in
two instances has been the sole sponsor.(1)
Certain basic information pertaining to the
international programs in which the U. S. has
participated is summarized in Table I. As the
table shows, four of the programs have been
established since 1956. The scale of opera­
tions and the extent of participation by the
U. S. is also indicated. All of the agencies
shown in the table are sources of credit for
development purposes, and all are able to
provide technical assistance to borrowers.
None of these institutions is in direct com­
petition with regular banking facilities. The
six international institutions differ from one
(1 ) O th e r m u ltila te r a l develop m en t le n d in g in stitu tio n s in
w h ic h the U . S . does n ot p a rticip ate in clu d e the E u r o p e a n
D e v elo p m en t F u n d o f the E u r o p e a n E c o n o m ic C om m u n ity .
T h is and other b ilateral sou rce s of d evelop m en t cred it are
o u tsid e the scope o f this article.
N o te:

P h o to g r a p h s on cover c ou rtesy o f In te r n a tio n a l B a n k
fo r R e c o n stru c tio n and D e v elo p m en t, W a s h in g t o n , D .C .

2



tries in Europe, no new loans have been made
for this purpose since the beginning of the
1950’s. Moreover, in fiscal year 1962 recon­
struction loans represented less than 8 per­
cent of total loans outstanding. The World
Bank extends credit to the government of
underdeveloped member countries primarily
for specific projects, e.g., the construction of
electric power and transportation facilities.
At the end of fiscal year 1962, loans outstand­
ing of the W orld Bank totaled $6.5 billion.
(Except where otherwise noted all subsequent
data refer to fiscal year 1962, which ended on
June 30.)
Capital stock of the World Bank is based
on subscriptions of the member governments,
with the amount of subscription varying with
(2) W h e r e a s the W o r ld B a n k is con cern ed p r im a r ily w ith
the flow o f cap ital in to lo n g -te r m in v estm en t a cross n a tio n a l
b o u n d a r ie s, the In te r n a tio n a l M o n e ta r y F u n d is con cern ed
w ith
p roblem s o f
in te rn a tio n a l liq u id ity
and
sh ort-term
cred it. T h u s, the tw o in stitu tio n s lead sep arate ex isten ces,
alth ou gh
they su p p le m en t each other an d th eir fu tu re s are
closely related.

Table I
INTERNATIONAL LENDING INSTITUTIONS
REGIONAL

MULTILATERAL

(Data as of end of
fiscal year 1962)
Creation
Borrowers of
Development Loans
Developm ent Credit:
Purpose

Maturity

Repayment

Current
Interest
Rates
Total Assets
(in millions)
Subscribed Capital—
Paid-in
Callable
Total

I nternational Bank
for Reconstruction
andD evelopment

1944

75 member
governments
......................
Social overhead
projects such as
transportation and
electric power
facilities
15-25 years

Currency in which
credit is extended

5%%

I nternational

BILATERAL

Finance
Corporation

International
Development
Association

Inter-American
Development
B ank

1956

1960

1960

1934
1961
(Development (Reorganized to
Loan Fund be­ present form in
1945)
ginning in 1957)

20 member
governments

Foreign governments and/or
U. S. and foreig n firms engaged
in foreign enterprises

Private firms Governments of
within 63 mem­ 62 member
countries
ber countries
Primarily for
expansion of
industrial
enterprises

Same as parent Basically encom­
but may include passes the range
of activities
housing and
of multilateral
sanitation
institutions
facilities

Agency for
I nternational
Developm ent

Export-I mport
Bank

Purchase of goods and services
produced in the United States

12-20 years
depending on
nature of project

Over 10 years

10 to 20 years

Currency which Currency loaned Currency loaned
(except under
(in special
is loaned or
circumstances
Social Progress
invested in
local currency Trust Program)
corporations
may be accepted
in repayment)

U. S. Dollars

U. S. Dollars

Long-term
credit carrics
various stock
options

7%

50 years

%% service

m%

5 ;M %
for
spccial projects)

5 %%

5 /4%

charge

$6,563.8

$ 6,829.0

$125.4

$551.7

$475.0

—

2,049.0
18,435.0

96.5
3.5

387.5
529.7

400.0
450.0

$20,484.0

$100.0

$917.2

$850.0

Annual appro­
priations $1,112
in id
I LCoL ficpcil
ill
1lol_.d1
year

$7,000.0

50%

100%

100%

31%
U. S. Share

* Additional borrow ing authority from U. S. Treasury


36%

35%

2,830.0
4,170.0*

the size of the individual nation. The U. S.
subscription amounts to 31 percent of the
total. Only 10 percent of capital is paid-in,
however, and thus the bulk of the Bank's
subscribed capital, or 90 percent, takes the
form of a guaranty fund to be drawn upon
when necessary to meet obligations arising
out of credit extended or guaranteed by the
Bank.
The requirements with respect to the paidin portion are uniform : each member is to
pay one percent of its subscription in gold,
and nine percent in dollars or in its own cur­
rency. The means of payment for the callable
portion of capital, however, can be in gold,
local currency, and/or dollars.
Total paid-in capital of the Bank at the
end of fiscal 1962 was $2.0 billion. The major
source of funds available to the Bank is bor­
rowed capital, obtained by the sale of long­
term bonds. Such capital outstanding at the
end of fiscal 1962 amounted to $2.5 billion.
In order to fill development credit needs
not covered by W orld Bank activities, two
affiliates were formed in recent years. The
first of these is the International Finance
Corporation, established in 1956. The chief
characteristics that distinguish the IFC from
the W orld Bank are that it provides capital
funds in relatively smaller amounts than the
W orld Bank does, and that it lends to private
enterprises directly without government guar­
antee of repayment. So far, the investments
of IFC have been components of larger finan­
cing transactions, helping usually to complete
projects in which private investors have pro­
vided substantially more than the IFC com­
mitment. The IFC, in effect, is similar to an
investment banker in that both underwrite
security issues. Basic information pertaining
to IFC is shown in Table I. In addition, it
should be noted that the 63 member countries
of IFC also belong to the parent body, the
W orld Bank, and that investment commit­
ments of the IFC at the end of fiscal 1962
totaled $62.5 million.
The second affiliate of the W orld Bank, the
International Development Association, was
4



established late in 1960 to provide capital to
its 62 member governments on more liberal
terms of repayment and to help finance a
w7ider range of projects than its parent insti­
tution is permitted to support. The ID A can
finance projects of high developmental pri­
ority, such as housing and sanitation facili­
ties. Thus, the activities of ID A cover a
broader range of investments than those of
the W orld Bank. Basic information pertain­
ing to ID A is shown in Table I .(3) Loan
commitments outstanding as of the end of
fiscal 1962 totaled $235 million.
The Inter - American Development Bank,
unlike the W orld Bank and its affiliates, is a
regionally - oriented institution. The IADB
was organized early in 1960 by the 20 mem­
bers of the Organization of American States
for the purpose of providing an additional
source of capital to help promote the eco­
nomic growth of Latin America. IADB lends
both to government entities and indirectly to
private enterprises through local develop­
ment institutions. As of the end of fiscal 1962,
loan commitments outstanding amounted to
$271 million. Basic information pertaining to
IADB is also shown in Table I. It should be
noted that the callable portion of capital
serves primarily as financial backing for bond
issues.14’
In addition to its participation in these
multi-lateral and regional undertakings, the
U. S. has also provided long-term develop­
ment credit to underdeveloped nations on a
bilateral basis. In this venture, the U. S. has
worked through both the Export-Import
Bank and the Agency for International
Development.(5)
(3) T h e articles of agreem en t call fo r su b sc r ip tio n s to be
p aid in five a n n u a l in sta lm en ts. S ince on ly the in d u stria lize d
cou n trie s, in c lu d in g W e s te r n E u r o p e , an d the U n ite d S tates,
C a n a d a , A u s t r a lia , an d J a p a n are b ein g r eq u ired to m ak e
their su b sc rip tio n s availa ble in gold or free ly con vertib le
c u rren cie s, the effective resou rce s o f I D A w ill a m o u n t to
only ab out 8 0 p ercen t o f its total su b sc r ip tio n s.
(■*) In D e ce m b er 1 9 6 2 , a $ 1 b illion cap ital e x p a n sio n p r o ­
gra m w a s ap p ro v ed by the g o v e rn o rs o f I A D B . C on trib u tio n s
o f in crea sed cap ital w o u ld be m ad e b y m em b er c ou n trie s
u n d e r the sam e fo r m u la that w as follow e d in the o r ig in a l
capitalization o f the B a n k in 1 9 6 0 .
(5 ) T h e In te r n a tio n a l C oop eration A d m in istr a tio n h ad p r o ­
vid ed lon g-term loan s an d g r a n ts u n d e r the M u tu a l S ec u r ity
A c t of 1 9 5 4 , as am e n d ed . S u c h assista n c e, h ow ever, w as
p r im a r ily fo r d efen se su p p o rt an d th e re fore w ou ld not be
stric tly term ed d evelop m en t cred it.

The Export-Im port Bank was originally
established in 1934, but its present form of
organization dates from the end of W orld
War II. The Ex-Im Bank is a U. S. Govern­
ment-owned corporation whose major func­
tion is to facilitate U. S. trade. Ex-Im had an
initial capital of $1 billion paid-in by the
U. S. Treasury, and may borrow, on a revolv­
ing basis, up to $6.0 billion from the U. S.
Treasury. Ex-Im extends credit of varying
maturities and/or provides guarantees on
loans made by other institutions/6’ Credit is
extended to both private enterprises and
governments for the purchase of capital ma­
chinery and equipment.
United States bilateral long-term credit is
also extended through the Agency for Inter­
national Development. AID was established
by the U. S. Government in the fall of 1961
in an attempt to help streamline the U. S.
contribution to the economic growth of under­
developed areas. Long-term credit, as one
part of AID, represents a continuation of the
Development Loan Fund which was estab­
lished by the Mutual Security Act of 19.17.(7)
Development credit under both programs has
been extended to public and private enter­
prises for the purchase of goods and services
produced in the U.S. Development loan com­
mitments by AID totaled $1.3 billion in fis­
cal 1962.
In contrast to the other development insti­
tutions, funds available to AID are based on
annual appropriations by the U. S. Congress,
and thus can not be committed to borrowers
for years in advance.
Lending Activity, 1958-1962
In the five years ended in fiscal year 1962,
the six lending institutions discussed in this
article, taken together, extended a total of
$9.0 billion in credit, or an average annual
amount of $1.8 billion. Chart 1 shows the
<r>) F o r p u rp oses of c o m p arison w ith the other in stitu tio n s,
on ly credit ex ten d ed by the E x -I m b a n k w ith a m a tu r ity of
ten y e a rs an d ove r is c on sid ered in this article.
(J ) A c tu a lly , the d evelop m en t loan s u n d er A I D are a con ­
tin u ation of the loan s extend ed by D L F w ith one m a jo r d if ­
fe r e n c e : u n d er A I D cred it is to be rep ayab le in d ollars
rath er than in fo reig n cu rren cie s as p erm itted by the D L F .




commitments of these institutions, on a com­
parative basis, highlighting the multilateral,
regional, and bilateral aspects.
During fiscal years 1958-1962, there was a
marked tendency toward increased use of
bilateral funds. Of the total funds committed
by the six lending institutions in fiscal 1958,
65 percent were on a multi-lateral basis (35
percent were thus on a bilateral basis). By
fiscal 1962, however, the relative shares had
nearly turned around; multilateral commit­
ments had dropped to about 46 percent of
total development credit extended, while
bilateral commitments had grown to about
54 percent.
If allowance is made for the fact that the
U. S. Government participation in expanding
regional credit is one-half and in multilateral
credit is one-third, then in fiscal 1958 the
U. S. provided 21.7 percent of the total ex­
tended on a multilateral basis and 35.0 per­
cent on a bilateral basis. By fiscal 1962, how­
ever, multilateral commitments of the U. S.
had declined to 14.4 percent while bilateral
commitments had expanded to 58.3 percent.
These changes in the shares of development
credit committed by the various institutions
have important implications not only for
potential borrowers of credit but, perhaps
more importantly, in the terms of the credit
extended. In other words, with the recent
reshaping of credit sources, are similar
amounts of credit available to borrowers as
previously? In addition, does this reshaping
mean that there are significant differences in
the credit terms available? Moreover, what
impact might these factors have on the course
of economic development in various countries ?
A Look at the Borrowers
Chart 2, on page 7, shows the geographic
distribution of development credit extended
by the six lending institutions from fiscal
1958 through fiscal 1962. The countries of
Asia and Latin America received the bulk, or
77 percent, of the total amount of credit ex­
tended. The principal borrowers in Asia were
India, Pakistan, and Japan, while the major
5

C h art 1.
P E R C E N T A G E D IST R IB U T IO N O F D EV ELO PM EN T C R ED IT
EXTENDED BY L E N D IN G IN S T IT U T IO N S

to Latin America, the com­
parison is based only on the
first two years of IA D B ’s
operation.

Fiscal Years 1958-62
A Look at Credit
Percent

80

-

-;‘

SSI
.

'•
)> B I L A T E R A L C R ED IT

60

WM :
-

40

-

20

-

------

=

R E G I O N A L C RED IT

c

The term ‘ ‘ development
credit” has been applied
loosely to numerous types
of financial assistance, rang­
ing from outright grants-inaid to various ‘ ‘ soft” and
“ hard” loans. When prop­
erly used, however, grantsin-aid do not qualify as de­
velopment credit since they
include only financial assist­
ance for which no repay­
ment is expected. Likewise,
“ soft” loans are similar to
aid and are, in fact, con-

>

5 -y e ar
total

’58

’59

'60

’61

’62

borrowers in Latin America were Brazil,
Colombia, and Mexico. The amount of credit
extended to African countries, although small
in relation to the total, increased rapidly
during the five-year period. On the other
hand, the relative share of credit extended to
European countries declined, despite the fact
that some parts of Europe, e.g., Southern
Italy and Yugoslavia, usually are considered
as being underdeveloped.
The activities of AID are fairly heavily
concentrated in Asia and Latin America. The
activities of the W orld Bank, in contrast,
have been more evenly distributed around the
wTorld. as befits its more diversified member­
ship and support. Although the share of the
regional institution — the Inter - American
Development Bank — is small compared wTith
the total credit extended by all institutions
6



are many varieties of soft
loans, but usually such
financial assistance is very
long-term (often carrying a
maturity of 99 years) and
has a low rate of interest.
Moreover, soft loans are
often repayable in local currency regardless
of the currency in which the credit is initially
extended. This latter provision is a particu­
larly desirable feature to an underdeveloped
country, which often finds it difficult to ac­
quire other currencies. “ H ard” loans, are
made on commercial terms, i.e., with a ma­
turity of ten or more years (but with a maxi­
mum between 20 and 30 years) and at a
market rate of interest. Moreover, these loans
must be repaid in the currency lent.
As defined in this article, the development
credit of the lending institutions is long-term,
with a maturity of ten years and over. Other
characteristics of credit, however, vary among
the institutions. These characteristics include
the purpose and size of loans, the repayment
schedule and currency of repayment, and
costs of borrowing.

C h a rt 2.
PERCENTAGE D ISTRIBU TIO N OF DEVELO PM ENT
CREDIT BY R E G IO N S A N D L E N D IN G INSTITUTIONS
Fiscal Y e a r s 1 9 5 8 -6 2

ASIA

4 8 .4 %

LATIN AM ERICA

2 8 .5 %

EUROPE

1 3.9 %

AFR IC A

8.0 %

OTHER

1. 2 %

©
IBRD

IfC

ID *

100.0 %
IAOB

M ultilateral and Regional
Credit

EX-IM

AID

Bilateral
Credit

NO TE : Th e size of e ac h circle c o r r e s p o n d s to the a m o u n t of
d e v e l o p m e n t cre dit e x t e n d e d as a p r o p o r t i o n of the total.




Purpose of Loans. Most of the development
credit extended by the W orld Bank has been
in relatively large loans (with many in the
$50 to $100 million range), and has been
used primarily for electric power facilities
and transportation. The W orld Bank finances
only the foreign exchange portion of the
credit. Industrial and agricultural credit,
which in general is of smaller average size,
has played a comparatively minor role in
W orld Bank lending activity. The ID A also
extends credit for “ social overhead” pur­
poses such as road construction and improve­
ment of harbor facilities, but the amount of
credit extended by ID A is smaller in size.
The IFC, in contrast, specializes in lending
or investing in private industrial enterprises,
often through local development institutions
in participation with private banks. The IFC
participation is usually the smallest com­
ponent of the total credit and is directed to
a wide variety of industries.
The lending activities of the IAD B are
broad, encompassing most of the principal
features of the W orld Bank and its affiliates.
IADB generally seeks to participate with
other lending institutions, in that it is will­
ing to finance up to a maximum of one-half
of a particular program. Loan commitments
have been somewhat smaller in size than those
of the W orld Bank, depending primarily on
the type of project financed.
The Ex-Im Bank and A ID establish a
revolving fund for a borrower to purchase
specific capital equipment and machinery
produced in the United States. Since em­
phasis is placed on having the proceeds spent
in the country which grants the credit — in
this case the U. S. — such credit has often
been termed “ tied loans” .
A common procedure of the Ex-Im Bank,
for example, is to guarantee payment of
letters of credit issued by the commercial
bank in favor of the supplier of goods in the
U. S. The borrower is then notified of the
transaction, and that repayment is to be made
to the Ex-Im Bank as pre-arranged. In con­
trast, credit extended by the W orld Bank

and other multilateral institutions is granted
to the borrower in the currency with which
the borrower purchases the goods. Tied loans
are not an uncommon feature of bilateral
credit, as many countries lend on this basis.
Repayment Terms. World Bank credit usu­
ally carries a maturity of 15 to 25 years and
is repayable in instalments after a shortduration grace period. Credit of the IFC
often carries various stock option features
upon maturity.<8)
All ID A credit is on identical terms which
are considerably more liberal than those of
either the parent body or IFC. ID A credit
not only carries a maturity of 50 years, which
is much longer than was previously available
to underdeveloped nations, but also defers
amortization until after a ten-year grace
period. All credit of the multilateral institu­
tions, however, is repayable in the currency
in which equipment and services are origi­
nally purchased.
The credit terms offered by the regional
institution, IADB, vary. Private undertak­
ings usually can obtain credit with maturities
of 12 years, while public or social overhead
ventures may obtain credit with maturities
up to 20 years.
While the maturities of the Ex-Im Bank
are similar to those of the World Bank, the
maturities of AID are often longer. A ID 's
predecessor permitted repayment in the cur­
rency of the borrower even though the goods
or services were originally purchased in the
U. S. (In some cases the loans of Al l ) carry
maturities up to 50 years and thus verge on
being “ soft” loans.)
Although most of Ex-Im ’s credit to finance
the movement of goods is intermediate-length
credit, a substantial amount of total credit is
long-term. For example, of the $942 million
(8 ) A n im p ortan t d evelop m en t d u rin g 1 9 6 2 w as an a m e n d ­
m e n t to the A r tic le s o f A g ree m en t o f the IF C w h ic h rem oved
the r estriction on eq u ity in vestm en t, thereb y en a b lin g IF C
to m ak e first in vestm en ts in eq u ity fo r m as w ell as to p a r ­
ticip ate fo r the first tim e in an u n d e r w r itin g o f com m on
sh a re s. P r e v io u sly , the com p lex in v estm en t fo r m u la s that
I F C had to em ploy in ord er to ob tain som e e q u ity fe a tu re s
in ex te n d in g cred it w ere a seriou s b a r r ie r to ex p a n sio n of
o p eration s.

8



credit extended in fiscal 1962, about $235
million, or one-fourth, carried a maturity of
ten years and over.
Lending Rates. All of the development
institutions except ID A lend on commercial
terms. The W orld Bank, for example, bases
the interest rate on development credit on
the rate it would have to pay 011 a bond issue
of similar maturity. (A ll countries which
borrow at a particular time are charged the
same rate of interest.) To this rate is added
1.25 percentage points to cover administrative
costs. The rate charged by the W orld Bank
has been historically between four and six
percent (the current rate is 5.75 percent).
The IADB, the Ex-Im Bank, and AID in
their hard loans are currently charging simi­
lar rates.
In contrast, the rate charged by IFC has
almost always been higher than that of the
other institutions (the current rate is 7 per­
cent). A principal reason why the rate
charged by IFC is relatively high is the
amount of risk usually involved in its loans.
Unlike the other development institutions,
the credit 01* investments of IFC in private
enterprise carry no government guarantee of
repayment. On the other hand, the second
affiliate of the W orld Bank, IDA, charges no
interest but only a service charge of % per­
cent.<il) Whereas the types of investments
made by IFC are expected to provide a rea­
sonable return, the credit of ID A is for social
overhead purposes which usually are accepted
as nonprofit making.
The funds of IDA are nearly exhausted,
while IFC has committed only half of its
available funds. The easier terms of ID A are
undoubtedly a major factor in the relative
attractiveness of ID A loans. One other im­
portant aspect of the attractiveness of IDA
credit is related to the stage of economic
development of the particular borrower. Since
the type of credit extended by IDA usually
precedes that of the IFC in terms of what
a country needs for its growth, loans from
(9 ) In sp ecial in sta n ce s both the I A D B an d the A I D
issue cred it w ith a relative ly low or n o in te re st c harge.

w ill

the former have performed a very important
preliminary function, and have thus been
vigorously sought out.
With the exception of IDA, and some
credit extended by AID, the terms of credit
of the other development institutions, al­
though not identical, are similar and can be
grouped under the “ hard'' loan definition.
Thus, the principal differences of the devel­
opment institutions lie along the lines of
whether credit is multilateral or bilateral and
whether such credit is tied.
When tied loans are employed in strictly
bilateral agreements, trade among several na­
tions geared to the grounds of comparative
advantage is rendered difficult. The tying of
loans favors the creditor rather than the bor­
rower, and is thus potentially a hindrance to
the growth of underdeveloped areas; this is
so, especially as compared with credit which
can be used in a variety of ways and in a va­
riety of countries, and thus promotes wider
channels of trad e/10’
Sources of Funds
As mentioned earlier, the main source of
funds to AID are annual appropriations by
the U. S. Congress, while the funds of the
Ex-Im Bank are derived largely from the
initial capital and borrowings from the U. S.
Treasury. In addition, a significant amount
of funds available to the Ex-Im Bank is ob­
tained from repayments of outstanding loans.
On the other hand, although capital sub­
scriptions by the members of the multilateral
institutions comprise an important portion
of funds available, such paid-in capital is not
the only, and in the case of the W orld Bank,
not the principal source of funds. The World
Bank and the IAD B have also tapped the
bond markets of several nations. This source
of funds is more elastic than others and ex­
plains in part why the bulk of the capital of
(10)
O n e reason w h y the U .S . c u rren tly places m a jo r em ­
p h asis on tied cred it is b ecau se o f the U .S . b a la n ce o f p a y ­
m en ts situ a tio n . T o the extent that the fu n d s w h ich are
loan ed to other coun tries are u sed to p u rch ase U .S . p o o d s
a n d services, the b alan ce of p a y m e n ts is n ot affected a d ­
versely.




the World Bank and IADB takes the form of
a guaranty fund. (See Table II.)
The U. S. has been the principal capital
market entered by the W orld Bank, although
the U. S. share of the total has declined some­
what.* 11* Bonds of the W orld Bank have also
been floated in Switzerland and Germany,
and to a much lesser extent in the United
Kingdom, Netherlands, and Italy. The chief
purchasers in the U. S. have been pension
and trust funds, insurance companies, and
savings banks. These groups have exerted
a strong demand for the bonds as prices of
such issues have been well maintained in rela­
tion, for example, to the prices of U. S. Gov­
ernment obligations. W orld Bank bonds usu­
ally are priced to yield about 50 basis points
more than yields on U. S. Government long­
term bonds of comparable maturities. The
increase in the funded debt of the World
Bank during fiscal years 1958-1962 amounted
to over seven and one half times the increase
in paid-in capital, and thus was its most
important source of funds.
The IADB floated its first bond issue ($25
million) in Italy in April 1961, less than two
months after making its first loan. Although
the issue was subscribed in total by a con­
sortium of Italian banks, the agreement pro­
vides for the eventual offering of the bonds
for public subscription. In this instance,
funds which were subsequently lent to IADB
members were obtained from investors who
are not members of the bank. (This is also
the case when the W orld Bank sells bonds in
Switzerland, which is not a member.) When
the IA D B ’s second bond issue ($75 million)
was floated in the U. S. in December 1962,
the amount of IA D B ’s bonds outstanding
became one-fourth as large as its paid-in
capital.
Several of the lending institutions have
been successful in selling their loans as par­
ticipations. Sometimes participations are ar­
ranged simultaneously with a loan agreement,
and at other times they represent subsequent
( I 1 ) A t the end o f fiscal y e a r 1 9 6 2 , the U . S. d ollar sh are
o f fu n d e d debt o u tsta n d in g w as a b o u t th ree -fo u rth s o f the
total.

9

Table II
FLOW OF FUNDS OF INTERNATIONAL LENDING INSTITUTIONS

SUMMARY OI ACTIVITY FOR FISCAL YEARS 1958-1962
(in millions)

MULTILATERAL

BILATERAL

REGIONAL

Export-Im port
Inter-American
Agency for
liank(4)
International
Development
Development*3)
lian kd)- (2)

International Bank
lor Reconstruction
and Development

International
Finance
Corporation

I nternational
Developm ent
Association*!)

$ 196.0

$ 96.5

$387.5

$400.0

—

$ 652.0

—

—

—

—

$3,585.2

—

24.2

—

—

lesources:

Additions to Paid-in
Capital
Appropriations by
Congress
Increase in Funded Debt

1,487.0

—

—

Participations and/or
Sales of Loans

1,000.0

10.6

—

n.a.

—

1,447.1

Repayments

352.0

0.8

—

—

n.a.

2,022.0

Interest Income (5)

304.0

12.8

1.5

1.3

$3,339.0

$120.7

$389.0

$425.5

$3,585.2

$4,796.1

$3,560.0

$62.5

$237.0

$271.0

$3,037.9

$1,854.0

Total

)evelopm ent Loans
Committed (6)

n.a.

n.a. not available
(!) Represents only 2 years of data.
(2) Does not include operations of Social Progress Trust Fund.
(3) Includes only activity o f development loan program.
(4) Resources of the Export-Im port Bank represent funds for all credit extended (including short- and
intermediate-term credit.) Development loans committed are only credit for a term of 10 years and over.
(5) Includes interest incom e from loans and investments.
<6) Includes a small portion of loans which have been committed but not yet disbursed.




675.0

sales from the portfolios of banks. By selling
a loan, a bank exchanges one type of asset
for another, i.e., cash, and is able to free
funds for relending. In the five years ended
in fiscal 1962 the W orld Bank sold $1.0 bil­
lion to other investors, or over one-fourth of
the total amount of credit extended. In the
same period, the IFC sold a total o f $10.1
million, and in fact extended most o f its
credit on a participation basis with other
financial institutions.
Because of their institutional nature, the
sale of bonds is not a feasible alternative
source of funds to either AID or the Ex-Im
Bank. However, these institutions can employ
participation agreements. For example, the
Export-Import Bank, for the first time in
August of last year, offered $100 million of
notes to European industries.
To the extent that the development insti­
tutions are able to obtain funds from sources
other than capital, they may be described as
financial intermediaries. Having a banking
and not a subsidy basis of operation helps to
assure continuity for an institution; it means
that it does not have to face the difficulty and
somewhat more discontinuous means of hav­
ing funds appropriatetd. Financial intermedi­
aries, moreover, have the ability to mobilize
funds from capital-exporting countries and
to lend to capital-importing nations. The
international role of the multilateral institu­
tions does; not consist solely in raising capital
in developed countries in order to relend to
underdeveloped countries. A multilateral in­
stitution may borrow from either group and
lend to either group, and may even finance
projects in the same countries from which it
is currently borrowing. At times, the AYorld
Bank has done precisely this.
An Im portant New Development
A recent twist which has been gaining in
popularity involves a consortium of develop­
ment institutions, or pooling of resources, to
finance a particular program in a country.
Many programs contain a variety of credit




demands wThich can be served by different
types of financial assistance. For example, in
July of last year, ten nations (including the
U. S.) and the W orld Bank announced sub­
scriptions totaling over $1 billion to help
India finance the second year of her current
five-year plan.
The IFC, in particular, has devoted most
of its lending and investing activity to par­
ticipation plans with private lenders. Six
commercial banks and the IFC agreed in
August 1962 to advance $2 million to the
largest cotton-textile maker in Colombia. The
year before, the same company had raised
$3 million through a subscription issue to
stockholders. Conditions in the Colombian
capital market in 1962 were not favorable
for stock or bond issues, nor could the com­
pany obtain funds from regular domestic
banking channels. The IFC in this instance
served as a broker in bringing together the
commercial bank participants to take over
the largest share of the loan, all of which was
without government guarantee.
The first joint financing project of the IFC
and its parent body, the W orld Bank, to the
local development bank of Morocco was an­
nounced last December. The project was also
the first of a number of planned combined
operations, whereby the W orld Bank is to
provide the loan funds and the IFC will pro­
vide share capital.
Encouraging the growth of local develop­
ment institutions is one of the more effective
but less publicized efforts of the international
development institutions. After obtaining
funds from an international financial institu­
tion, a local development bank can redistrib­
ute the funds to smaller and medium-sized
industrial enterprises which lack a private
market to obtain funds. Since 1950, the
World Bank has lent over $150 million to
development agencies. Currently, the World
Bank is advising a large number of newdyindependent African nations on preparing a
foundation for growth through local develop­
ment institutions.
11

Some Concluding Comments
Estimates of total annual credit needs of
underdeveloped nations vary greatly; but
many estimates show needs that are two to
three times as large as the annual average of
credit extended from fiscal years 1958
through 1962 by the six international institu­
tions discussed here. The achieving o f eco­
nomic growth is not only a question of how
much credit is or should be extended; it is
also a question that is related to the purposes
for which credit is used. There are a large
number of underdeveloped countries, all of
which are at different stages of economic
growth. Perhaps the most important aspect
of development assistance is the ability to
evaluate the prerequisites to growth, and
then to marshal the resources with which to
meet these requirements. For some nations,
the development of educational and technical

training may provide a quicker and yet more
lasting contribution to growth than would
placing undue reliance on financial assistance.
This is especially relevant to countries in the
preliminary stages of growth where a debtservicing burden, even one on easy terms,
could be prohibitive.
Since the end of W orld W ar II, the inter­
national institutions created primarily for
world-wide lending have made an important
contribution to economic development. The
relatively recent multiplication of such insti­
tutions on a regional and bilateral basis re­
quires that there be close coordination in
lending activities. The current popularity of
consortia arrangements suggests that the pos­
sibilities for new and more efficient approaches
to international development are by no means
exhausted.

Anxiu+tdl the tyountU 1'bUt’Uct—
Electric power production in Cleveland and northeast Ohio
expanded eounterseasonally during most of February and simul­
taneously widened its year-to-year margin. Output in the last two
weeks of the month posted year-to-year increases of 7 percent and
8 percent as compared with 4 percent on average during January.

At department stores in the Fourth District, sales for the four
weeks ended February 23 were fractionally below year-ago levels,
in contrast to the 3 percent increase reported for the nation.

Earning assets at Fourth District reporting banks rose nearly
$38 million in the week ended February 27. Most of the change
was reflected in loan accounts and the net increase in total loans
was the largest in any week since the turn of the year.

12



Participation In Food Stamp Plan
(Fourth District)
h e F ood S t a m p P l a n was introduced in
mid-1961 by the U . S. Department of
Agriculture as a means of providing indigent
families with a more adequate diet, The pro­
gram attempts to achieve this goal by increas­
ing the food purchasing power of low income
families. As the food budgets of these families
improve, the nutritional level of their diets
also increases, i.e., food purchases tend to
shift from wholly staple foods to a wider
range of foods, including meats, dairy and
poultry products, fruits, and vegetables. The
higher consumption levels of such foods, in
turn, expands the demand for farm products.
Higher meat consumption, for example, would
increase the demand for livestock products
and, at the same time, result in a higher level
of feed grain utilization.

T

The food stamp program is supervised by
the U. S. Department of Agriculture but util­
izes the staff of state and local welfare agen­
cies. These agencies certify the households
eligible to participate and they also distri­
bute the food stamps. Another feature of the
program is that it uses regular marketing
channels. Retail food stores, authorized by
the Department of Agriculture, accept the
coupons in payment of foods purchased by
participants.
in areas of operation, the Food Stamp
Plan has replaced the Department of A gri­
culture's direct distribution program which
donates farm products acquired under mar­
ket stabilization programs to people in finan­
cial need. The foods distributed through this
program are only those in surplus or plenti­
ful supply such as dried milk, butter, cheese,
flour, and rice. In contrast, the Food Stamp
Plan allows participants to purchase a wide
selection of food items; any food or food
product may be purchased with food stamps
except alcoholic beverages, tobacco, coffee,




tea, cocoa, bananas, and those foods specific­
ally labeled as imports.
Fourth District A reas
The feasibility of the Food Stamp Plan was
initially tested in eight economically depressed
areas in the U. S. The areas selected included
the city of Detroit, Michigan, the VirginiaHibbing-Nashwauk area of Minnesota, and
the following counties: Franklin, Illinois;
Silver Bow, Montana; San Miguel, New
Mexico; McDowell, West Virginia; Fayette,
Pennsylvania; and Floyd, Kentucky. The
last two of these pilot areas lie within the
Fourth Federal Reserve District,
As a result of relative success in the pilot
areas, the program has been offered to 39
additional areas which cover 45 counties and
3 cities in 23 states. In contrast to the selec­
tion of the pilot areas, the extended coverage
was designed to subject the program to more
diverse economic and social circumstances as
well as to obtain a wider geographic distri­
bution for program operations. Availability of
Department of Agriculture personnel in an
area was also a requirement for participation.
The two pilot counties in the Fourth Dis­
trict were selected to participate in the food
stamp program on the basis of depressed
economic conditions. Fayette County, Penn­
sylvania is located in the bituminous coal
mining area and has experienced a chronic
unemployment problem. Since 1954, the an­
nual rate of unemployment in this county
has averaged 14 percent or higher. When the
program was initiated in this area in 1961,
23 percent of the total civilian labor force
was unemployed. The rate of unemployment
for selected months in Fayette County and
other Fourth District areas is shown in the
table on the next page.
13

Unemployment Rates in Participating Areas, Fourth District
(estimated total unemployment as a
percent of estimated civilian labor force)

Ohio
Cleveland SMSAd)
Lucas County
Pennsylvania
Pittsburgh SMSA<2)
Fayette County
Kentucky
Floyd County
Perry & Knott Counties
(1 )

November 1962

March 1962

March 1961

March 1960

4.8
5.2

5.3
8.6

9.6
10.0

N.A.
N.A.

9.8
15.80)

9.5
18.9

12.7
26.0

8.1
17.1

11.2(4)
14.2<4)

14.6
22.4

19.1
25.7

13.8
15.8

In c lu d e s C u y a h o g a an d L a k e C ou n tie s.

(2 )

In c lu d e s A lle g h e n y , B e a v e r , W a s h in g t o n , an d W e stm o r e la n d C ou n tie s.

(3 )

L a te st figu re availa ble, O cto b e r 1 9 6 2 .

(*)

L a te st figu re availa ble, A u g u s t 1 9 6 2 .

S o u r c e s : C leve lan d an d T oled o Offices, O h io S tate E m p lo y m e n t S e r v ic e ; P ittsb u r g h an d U n io n to w n -C o n n e lls
v ille D is tr ic t Offices, P e n n s y lv a n ia B u r e a u o l E m p lo y m e n t S e c u r it y ; a n d R e se a r c h an d S ta tistics S ervice,
K e n tu c k y D e p a rtm e n t o f E c o n o m ic S e c u r ity .
N o t e : F ig u r e s are not sea son ally ad ju ste d .

The principal industries in Floyd County,
Kentucky include coal mining, lumber, and
some farming. This area has also experienced
a high rate of unemployment. During 1961,
the rate of unemployment averaged 15.2 per­
cent of the civilian labor force in Floyd
County.
Knott County, Kentucky recently entered
the Food Stamp Plan (see accompanying
map). More than 700 families in this area
were initially eligible to receive food stamps.
In addition, Perry County is expected to
participate in the program beginning about
March 1. The rate of unemployment in these
two counties amounted to 14.2 percent in
August 1962. The program operation in Knott
and Perry counties is an extension of the
Floyd County program.
Lucas County, Ohio entered the program
about December 1, and during the first month
approximately 11 thousand people partici­
pated. The city of Pittsburgh, Pennsylvania
is scheduled to enter the program about
March 1, and about 17 thousand families are
expected to participate. The Standard Metro­
politan Statistical Area in which Pittsburgh
is located has experienced a substantial rate
of unemployment since 1958; figures for se­
lected months during the past three years are
shown in the above table.
14



The last Fourth District area scheduled to
enter the Food Stamp Plan as part of the
extended trial coverage is Cuyahoga County,
Ohio. The target date in this area has tenta­
tively been set as May 1. At present, ap­
proximately 15 thousand families are ex­
pected to participate.
Program Adm inistration
The U. S. Department of Agriculture super­
vises the food stamp program, although the
state and local welfare agencies, which ad­
minister federal assistance programs, are re­
sponsible for a major part of the operation.
This co-agency feature provides program
adaptability to local economic needs and
conditions.
The welfare agencies establish the eligibil­
ity standards for program participation. Fam­
ilies are automatically eligible to receive food
stamps if they are receiving federal aid under
the following Social Security programs: old
age assistance, aid to dependent children, aid
to the blind, and aid to the disabled. Families
receiving general assistance under state or
local programs are also automatically eligible.
In addition to families on relief programs,
eligible participants in the food stamp pro­
gram include individuals or families with in­

PARTICIPATION IN FOOD STAMP PLAN
F o u rth D istrict

Pilot Counties
Entered Program
Decem ber 1, 1962
Target date M a rch 1, 1963
Target date M a y 1, 1963

comes and resources below a level specified
by the certifying agencies. For such non­
relief participants, the eligibility standards
are similar to those used by the welfare agen­
cies to administer the state general assistance
program. As shown in the following table, a




family of four in Pittsburgh is eligible to par­
ticipate if its monthly income does not exceed
$245. An additional qualification is that the
fam ily’s liquid assets are less than three
times as large as the income amount shown
in the table on page 16.
15

Monthly Household Income Limits For
Food Stamp Participation
Persons In
Pittsburgh,
Cuyahoga County,
Household
Pennsylvania
Ohio
1
$110
$110
2
170
180
3
205
220
4
245
260
5
280
290
6
315
320
7
350
355
8
390
385
9
425
415
10
460
445
S o u r c e : C o u n ty W e lfa r e B o a r d o f A ssista n c e , A lle g h e n y ,
P e n n sy lv a n ia an d T h e C u yah oga C ou n ty W e lfa r e D e p a rtm e n t,
C u yah oga C o u n ty , Ohio.

To ensure that food expenditures will be
increased, an eligible family is required to
purchase stamps equal in amount to what is
typically spent on food. The Department of
Agriculture supplements the volume of pur­
chased stamps with additional free stamps so
that the participant’s food budget is more
nearly sufficient to purchase a nutritionallybalanced diet. Thus, the volume of free cou­
pons issued varies inversely with the amount
of monthly income per family member. In
situations where the family has no income,
however, the purchasing requirement is
waived.
During a five-month period in 1961, food
stamp participants in the eight pilot areas in
the nation at large purchased an average of
$2.8 million worth of stamps a month for
which they paid $1.7 million. Based on these
figures, participants can be expected to spend
an average of $.62 for every $1.00 of food
stamps received.(1) Results in the pilot areas
indicate that the nutritional level of partici­
pants' diets was higher after introduction of
the program. For example, almost 50 percent
of the households participating in Detroit,
Michigan had diets which met recommended
levels during the program, as compared with
(1) T h e F o o d S t a m p P r o g r a m , U . S. D e p a rtm e n t of A g r ic u l­
ture, A p r il 1 9 6 2 , p. 5.

16



30 percent before the inauguration of the
program. In Fayette County, Pennsylvania,
39 percent of the households had recom­
mended diets during the program; the pre­
program figure was 26 percent.(2)
In addition to certification of eligible fami­
lies, the welfare agencies are also responsible
for distributing the coupons to participants.
This is the procedure being used in the Ohio
and Kentucky program areas of the Fourth
District. In the Pennsylvania areas, however,
commercial banks have been authorized to
distribute stamps when presented with an
identification card which shows the number
of coupons to be issued and the purchase price.
A participating family spends the food
stamps at any retail grocery store which has
been authorized to participate in the program
by the Department of Agriculture. The food
stamps are reedemed by retailers at a com­
mercial bank. The banks receive credit from
the Federal Reserve System, which in turn is
reimbursed by the U. S. Treasury. The Food
Stamp Plan thus utilizes both regular market­
ing channels and the banking system in its
attempt to increase the nutritional level of
the diet of low income families.
Program Potential
The Food Stamp Plan, which was initially
tested in eight pilot areas and subsequently
offered to 39 additional areas, is still in the
experimental stage. Results obtained in these
trial areas will largely determine whether the
Department of Agriculture will offer the pro­
gram throughout the entire nation. If the
program were to be so extended, it has been
estimated that four million persons would
participate.(3)
(2) Food C o n su m p tio n an d D ie ta r y L e v els U n d e r the P ilo t
Food S ta m p P r o g r a m , A g r i c u l t u r a l E c o n o m i c R e p o r t X o . 9 ,
V . S. D e p a rtm e n t o f A g r ic u ltu r e , pp. 1 7 -1 S.
(•';> The Food S ta m p P la n , J o u r n a l o f F a r m
1 9 6 2 , pp. 5 9 8 - 6 1 5 .

E c o n o m i c s , M ay