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Activities of the International Bank in the Middle East

Author(s): William Diamond

Source: Middle East Journal, Vol. 3, No. 4 (Oct., 1949), pp. 455-460

Published by: Middle East Institute

Stable URL: http://www.jstor.org/stable/4322117

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E ONOMI R V I WActivities of the International Bank in the

Middle EastWilliam Diamond

ON AUGUST i8, 1949, the InternationalBank for Reconstruction and Develop-ment granted a loan of $34 million to theGovernmentof India. This was the first loanextended by the Bank to any country in Asiaor Africa. In the course of the past year,however, an increasing proportion of theBank's energies have been concentrated onthe Middle East, which has in fact becomean important field of Bank operations.Since the summer of I948, the Bank hassent missions to Turkey, Lebanon, Egypt,Iraq, and India, and representativesof theBank have visited Syria, Iran, and Ethiopia.1Early in 1949, the Vice Presidentof theBank made a tour of Turkey, Iran, Egypt,Algeria and French Morocco in order to gainfirsthand knowledge of conditions in the re-gion and to discussmeans by which the Bankmight aid in its development.The staff of theBank has been at work not only on economicsurveys of the countries in the area, but alsoon the study of specificdevelopmentprogramsand projects.The pattern of the Bank's work in theregion suggests that in the near future out-right financial assistancemay be of only sec-

1 The eight countries cited here are the onlymembers of the Bank in the Middle East, and thusthe only countries eligible, under the Bank's Articlesof Agreement, for its assistance.

ondary importance among its contributions.The low level of savings and capital forma-tion in the Middle East, the foreign paymentsdifficultiesof most of its members, ts regionalpolitical problems, the internal instability ofmany countries, and the generally backwardstate of education and of administrativeandtechnical proficiencyare bound to inhibit sub-stantial lending by an institution pledged to acautious banking policy. Some of these inhib-iting factors are, however, fields in which theBankhaspromisedaid to its membercountries.Economic and financial advice and technicalassistance n the broadestsense of those termsmay thus be the spheres in which the Bankwill make its largest (and probablyits mostimmediate) contributionsto the countries ofthe Middle East.Specific projects in the Middle East arenow underconsiderationby the Bank for earlyfinancing.But whatever the sum of loans ex-tended in the next few years, it can be only afraction of the financial assistancewhich thearea will requirein the long term if its stand-ard of living is to be raised to a reasonablelevel. The capacity of this region to absorband to service foreign loans (factors to whichthe Bank pays particularattention) is, how-ever, severely limited; and Bank activity isprobablyrestrictedalso by the failure of manycountriesto preparecoherentand co-ordinated

v WILLIAM DIAMOND is Assistant Loan Officer in the International Bank for Reconstruction andDevelopment, Washington. In I944-45 he served in Turkey with the Foreign Economic Adminis-tration, during which time he also traveled extensively in Syria, Lebanon, Palestine, and Egypt.Joining the International Bank in 1947, he was shortly granted leave to act as Deputy ExecutiveDirector of the Foreign Trade Administration of Greece (I947-48). In January-March I949 heagain visited Turkey as a member of the Bank's mission to study that country's request for a loanin connection with its projected long-range investment program.

455

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456 THE MIDDLE EAST JOURNALprojects and programs. Assistance in thesefields is considered by the Bank not only acontribution in itself but a necessaryprecon-dition for financial aid. It is not surprising,therefore, that the Bank, without yet havingmadeany financialcommitments n the MiddleEast proper, has already sent, has promised,and has offered general economic missions,advisers,and technicians to all but two of itsmembercountriesin the Middle East, and hassought to encouragethe growth of both pri-vate and public investment in the area.

DEVELOPMENT PROBLEMSThe Bank has never made a statement of

its policy in the Middle East as such, orreviewedits problems n the region. However,the FourthAnnualReportI948-I949 of theBank, presented to the Board of Governorson September 3, I949, sumsup the Bank'spolicies and problems, with particular refer-ence to the obstacles to effective investment.2Both the volume and the natureof the Bank'sactivities in the Middle East should be con-sidered in the light of that statement.In the past year and a half, and more par-ticularly since the establishmentof ERP, theBank's main interests have been focused onassistance to underdeveloped areas, amongwhich the Middle East is specifically cited.Though it repudiatesany wish to underesti-mate either the magnitude or the urgency ofthe task or the need for funds, the Reportemphasizes the difficulties in the way of de-velopment and the obstaclesto effective Bankaction in suchcountries.It does,however,statethat these factors cannot determine the paceof development. The Bank has learned inthe course of its operations . . . how limitedis the capacityof the underdeveloped ountriesto absorbcapital quickly for really productivepurposes ; to expect rapid results may onlyinvite disillusionmentand failure.Severalreasonsare given for this low capac-ity and for the necessity of gradual develop-ment:

i. Low level of educationand health.2. Political instability, and its attendanteconomicand financial insecurity and lack ofconsistent policy and of administrative con-tinuity.2 See also Third Annual Report ip97-ip,48.

3. Inefficient public administration.4. Frequent emphasis of governments onshort-runobjectives which promise immedi-ate advantage [rather] than on the long-rundevelopmentof the country, particularlysincethat normallyentails some sacrificeof inimedi-ate benefitsand may adverselyaffect importantlocal interests.5. Backward social structure of manvunderdeveloped ountrieswith their wide ex-tremes of wealth and poverty, in whichstrong vested interests often resist anychanges which would alter their position. Animportant aspectof this factor is the mainte-nance in many countries of inefficient andoppressive systems of land tenure [which]militate against increase in agricultural out-put and improvement n the general standardof living.6. Insufficiency f domesticcapital,a reflec-tion both of the low level of national incomeand of the primitive machineryand incentivesfor creating and mobilizing savings.7. Chaotic monetary conditions and un-sound fiscal and monetary policies.

8. Lack of adequate planning and co-ordination and of well-prepared projects, theresult partly of the wide gap between theconcepts of development potentialities and ofpractical economicpropositions,partly of frag-mentaryand unreliabletechnicaland statisticaldata, and partly of inadequatetechnical andadministrativeskill.The Report emphasizes that these limitingfactors in economicdevelopmentrequireactionprimarily by the countries themselves; manyare problems which can be solved only atthe national level. Their solution can, how-ever, be acceleratedby foreign technical andfinancialassistance.This diagnosis of the problems posed byunderdeveloped ountries n general seems par-ticularly applicable o the Middle East. ManyMiddle Eastern countries have suggested am-bitious plans for rapid and spectacular eco-nomic transformation, but those plans havebeen notable for their lack of realistic analysisof resourcesand obstacles, as well as for theirlack of integration. Few projects or programshave been able to stand up under the criticalglare of the Bank's investigations in applyingits criteria of bankability. The improvement

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ECONOMICREVIEW 457of the conditionsthat inhibit developmentandthe establishment of political and economicstability and of certain standardsof adminis-trative and technical efficiency would haveimportant implications for the Middle East.There are many influential individuals andinterests who, though they would like loans,have in the past vigorously opposedcorrectivemeasuresof the kind which the Bank wouldbe likely to suggest as a conditionfor a loan.Two countries in the Middle East (Iranand Turkey) have explicitly called on theBank for the kind of technical advice whichthe Bank has now recognized as one of itsmajor functions: the analysisof economicpo-tential and of development problems; theformulationof practicalinvestmentprograms;the means of mobilizing economic resources;the strengthening of the general financialsituation; and the selection of competent ad-visers and technicians. Even without beingcalled upon to render such assistance, theBank's views on local economicconditionsanddifficultiesare made known whenever a Bankmissionvisits a membercountry.Whether theadvice or suggestions made therein are ac-cepted is a matter for the government to de-cide; but a loan from the Bank is normallyconditioned at least on a declarationof goodintentions by the government concerned,andsometimeson specificprioraction.As the BankReport obliquely suggests, one reason for thewillingness of membercountriesto ask for andperhapsto accept such advice is undoubtedlythe fact that the Bank holds a carrot in theform of concrete financial assistance.The Report calls attention to one specialtype of technical aid in which it believes na-tional or internationalagenciescan be of onlylimited importance:industrial know-how andmanagerialcompetence.These can be acquired,the Bank feels, only by the encouragementofprivate enterpriseand investment. The Bankhas recommendedhat freedom to invest underfair conditionsand freedomfromgovernmentaldiscriminationbe granted both to foreign anddomestic private capital. This policy is basednot only on the requirementsof the Bank'sArticles of Agreement; it rests also on thepractical fact that in no case yet put to theBankcan its membergovernments n the Mid-dle East bear alone the burden of the invest-

ments they wish to undertake; that burdenmust be shared by whatever private accumu-lations of capital exist in those countries andby foreign equity capital. This policy, too, isalways likely to meet oppositionfrom power-ful vested interests.

ACTIVITY BY COUNTRIESThe Fourth Annual Reportof the Banksetsforth in brief the nature of the Bank's opera-tions to date in each of its membercountriesin the Middle East. It would seem from thissurvey, as well as from the Bank's generalpolicy statements, that its direct financialassistanceto the governmentsof the Middle

East is likely to be limited largely to underly-ing development in the fields of agriculture,transport,and power. Even in these fields, itsaid will be restrictedto modestapplicationsoffunds for strategicpurposeswhich would havebroad economic ramifications, especially ineliminating productionbottlenecksand facili-tating the movementof goods, and for whichprivatecapitalwould be unobtainable.For therest, it seems to be the Bank's intention topersuadelocal governmentsto encouragepri-vate investmentand to create favorablecondi-tions for foreign capital; this principlewill beparticularlyapplicableto projectsfor the pro-duction and processingof raw materials andfor light industries.Egypt. The Egyptian Government, in De-cember 1948, submittedto the Bank a projectproviding for the irrigation of about 250,000acres in Qena Province. Since the availablewaters of the Nile are already almost fullyutilized for irrigation purposes,the object ofthe Qena projectwas to tap subsoilwater by-meansof deep-wellpumps.As a result of sub-sequent discussions,the Bank sent a mission,including a hydroelectricand irrigation spe-cialist, to Egypt in March-April I949 to studythe country'sfinancialand economiic ituation,to consider the Government's plans for eco-nomic development,and to investigate specif-ically the Qena irrigation project. Therecommendationsmade by the mission to theEgyptian Government concerning the sub-stance and administrative co-ordination ofEgypt's long-term development program arenow being considered by the government.Meanwhile, the Bank is considering he grant-

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458 THE MIDDLE EAST JOURNALing of a loan for the initial stage of the Qenaproject, covering approximately50,000 acres.Ethiopia. The Ethiopian Government in-formally presented to the Bank, in February1948, a development program based largelyon projects suggested by the U. S. TechnicalMission to Ethiopia in I944-45 and by variousprivate consultants. The Bank expressedgen-eral interest in these plans, but no concretediscussionshave taken place. In the meantime,general exchangesof views have occurredbothin Addis Ababa, during a visit of the Bank'sMiddle East representative,and in Washing-ton, during a visit by an adviser of the Ethi-opian Government.

India. At the invitation of the Indian Gov-ernment, extended in December 1948, a Bankmission, ncluding a railway consultant, visitedIndia from January to March 1949 to studythe economy of the country and the bestmeans of using a loan to develop India's re-sources.Programs covering three sectors of theIndian economyreceivedspecial attentionfromthe mission.The first provided or the rehabili-tation of rail transport, which has sufferedseriously from lack of repairand replacements.Bank assistance was asked in financing therehabilitationand improvementof the railwaysystem, including a project for the purchaseof locomotives, rolling stock, and spare parts,in order to relieve serious bottlenecks in theinternal distributionof goods.The secondcov-ered projects for the increase of crop yieldsand the expansionof arable land in an effortto reduceIndia'scritical food deficit. The gov-ernment proposedprojects (among others) forthe clearance of about I.5 million acres ofjungle and for the reclamation of about 4million acres of weed-infested land. In addi-tion, two river development projects wouldprovide for extensive irrigation. The thirdspecial field of the mission'sactivity was elec-tric power. Two multi-purposeprojectswerestudied by the mission for the generation ofcheapwater power,the reductionof flood dam-age, and the irrigation of nearby land. Onewas in the Damodar River Valley in Bihar,and the other in Northeast Punjab.Despite the low rate of capital formationand the postwardeteriorationof India'sbalanceof payments,the Bank was convinced both of

the government'sintention to encouragesav-ings and reduce unproductive expenditures,and of the long-termprospectsof the country.Accordingly, on August i8 the Bank granteda loan of $34 million; it will be usedto financethe purchaseof locomotives,boilers, and loco-motive spare parts and is part of an $84 mil-lion programfor this purpose.Detailed studiesare now beingmadeof a thermal powerstationat Bokaroin the Damodar Valley, and of theproject for clearing weed-infested land. TheBank has indicated that, if they confirm theresults of the preliminarysurveys, there willsoonbe otherloans totalling about$40 millionfor these projects.3

Iran. The IranianGovernment nformed heBank in October 1946 of its wish to apply fora large long-term loan for the co-ordinateddevelopmentandmodernizationof agriculture,industry, and transport over a seven-yearperiod.Initial investigationsby the Bank'sstaffshowed that the programwas largely a collec-tion of individualprojectsand neededcarefulanalysisof the appropriateness, elative prior-ity, and inter-relationships f the specificproj-ects included therein. In August I948 Iranaskedthe Bank to advise in the selection of avarietyof foreignexpertsto assistthe SupremePlanning Board in working out a more inte-grated program. The Bank suggested theadvisabilityof obtaining a co-ordinatingcon-sultant to integrate the work of the manyexpertsandsuggestedthat, to assure ong-termcontinuity, an establishedorganizationwouldbe better than an individual adviser for thispurpose.These suggestionswere accepted,andthe Iranian Governmentnamed OverseasCon-sultants,Inc., to study its Seven-YearPlan andto recommendmeasures or its implementation.In March I949 the Vice President of theBank visited Iran to survey the general situa-tion. He reported that Iran's resources andforeignexchangepositionprovidedgroundsforconsiderable ptimism n the country'sdevelop-ment possibilities, f the developmentprogramwas administeredcompetently and effectively

3On Sept. 29, 1949, the Bank announced that ithad granted an additional loan of $io million toIndia to finance part of the cost of agriculturalmachinery required for the reclamation of landsinfested with kans grass and for the clearing ofjungle lands.

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ECONOMIC REVIEW 459and sound economic policies were followed.The Bankhasagreedto study the possibilityofparticipating, initially on a modest scale, infinancing some of the development projectsrecommendedby Overseas Consultants, Inc.Following a visit by Bank representatives nJune, it was suggestedto the IranianGovern-ment that, aftercompletionof OCI's reports,aspecific list of projects for the first years ofthe programshould be preparedand that theBank would undertaketo study this list.Iraq. The Iraqi Government opened infor-mal discussionswith the Bank and submittedextensiveeconomicand financialdata concern-ing the countryin 1947. The Bankwas advisedthat Iraq was considering he establishmentofa Development Board, chargedwith responsi-bility for integratingthe government'svariousplans into a comprehensivedevelopmentpro-gram. The Bank expressed its willingness todiscussspecificprojects and promisedto makeits staff membersavailable from time to timefor consultationwith the Board.When the Middle East representativeofthe Bank visited Iraq in December 1948 andJanuary 949, hewasapproachedith regardto a loan for a four-yearinvestmentprogramfor flood control, irrigation, agricultural ma-chinery, a silo, railways, roads, and bridges.Staff members of the Bank visited Iraq forgeneral discussions n April I949 and advisedthe governmentthat the Bank would be will-ing to considera loan for floodcontrolprojectsif public financeswere put on a sound basisand a properlyconstitutedDevelopmentBoardwere established to co-ordinate and executethe general program.The three projects spe-cifically suggestedwere the completionof theHabbaniyastorage project on the Euphrates,the Gibraltar Dam on the Dyala, and theWadi Tharthar storageproject on the Tigris.It was felt that the other projects under dis-cussion in Iraq could not be properlystudiedor evaluated until they had been reviewed bythe DevelopmentBoardin relationto the totalneeds and resourcesof the country.

In June and July I949 a Bank missionvisited Iraq to make an economic survey ofthe country, to study the flood control plans,and to advise the government on the establish-ment of the DevelopmentBoard.The financialneeds of the railway system were also dis-

cussed. The report of this missionis still understudy.Lebanon. The Lebanese Government firstapproachedthe Bank with respect to a loanin April 1948. Although no specific projectswere put forward, a programof agriculturaldevelopmentonce approvedby FAQ was sug-gested. It included the purchaseof farm ma-chinery, the construction of irrigation worksand grain handling facilities, and the institu-tion of an agriculturaltraining program.With the assistance of a specialist fromFAQ, a Bank mission visited Lebanon inSeptember,and a staff memberwas there againin April I949. Their purposewas not to studyspecific projects, but to survey the generaleconomy of the country and particularly itscapacityto absorband service a foreign loan.As a result of these visits, the Bank has indi-cated its willingness to consider a small loan,preferablyfor projects in the field of agricul-ture.Syria. No formal discussions have takenplacebetweenthe Bankand Syria.The SyrianGovernment has only recently indicated thatit proposed o raise the questionof a loan andsuggested that it was thinking of a series ofprojects for drainage,irrigation, hydroelectricdevelopment,and railways.Turkey. In March I948 Turkey requesteda large loan to financea four-yearinvestmentprogram covering almost every aspect of theTurkish economy, although 8o per cent ofthe total was earmarked for transrirtationfacilities, chiefly railway improvement andexpansion.As the programwas not sufficientlyco-ordinated,and as its financing seemed be-yond Turkey's reasonableprospectsof absorp-tion and repayment,the Bank suggested thatthe entire program be reviewed and a smalllist of high priority projects be submitted.After further analysisand discussion, a smallmission visited Turkey in January-March1949. It had the doubletaskof appraisingTur-key's generaleconomicsituation and of review-ing the mass of projects which the Turks hadin mind, with a view toward selecting thosemost suitable for Bank financing. Subse-quently, the governmentmade a formal appli-cation for various projects in mining, grainstorage, power, irrigation, port and shippingdevelopment, locomotive repairs, and textiles.

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460 THE MIDDLE EAST JOURNALAlthough the mission and the Bank man-agement were convinced of Turkey's potenti-alities for development, they were also im-pressed with certain economic difficultiesnowfacing that country. First of these was thealreadysu:bstantialoreign debt,which is likelyto increase becauseof ECA's present policy ofextending aid to Turkey in the form of loans.It was found that inflationary pressures (theresult largely of heavy military expenditures),Turkey's low level of exports, and the deficitin its international accounts, particularlywiththe sterling area, requiredcorrectivemeasures.These difficultieswere enhanced, he Bankfelt,by the obstacles in the way of private enter-

prise which threw virtually the entire burdenof investment on the government. The Bank,at the same time, believed that the TurkishGovernmentneeded a comprehensive nd inte-grated investment program and effective ad-ministrative machinery for assuring its execu-tion.These problemsare receiving the attentionof the Turkish Government, which has re-quested whatever technical assistance he Bank

might be readyto give. At the invitation of thegovernment,the Bank will soon send to Tur-key an economicmission to advise it on suchgeneral matters as the preparation and co-ordination of a comprehensive nvestmentpro-gram and the strengthening of Turkey's fiscaland administrativestructure. In addition theBank, convinced that Turkey's development sbeing impeded by the backwardnessof, andlimitations on, private enterprise,will send arepresentative to investigate the means bywhich productive investment by private capi-tal can be fostered.Meantime, a technical mission has alreadyarrived in Turkey to study and evaluate threeprojects which the Bank consideredmost suit-able for immediate financing. These are thebuilding of a dam on the SeyhanRiver, nearAdana, which will prevent the now frequentand devastating floods in the lower SeyhanValley, extend the area under irrigation, andprovide electric power for an area with greatindustrial potentialities; the erection of newgrainstoragefacilitiesthroughoutthe country;and port improvementand development.