Working Paper
Mobilizing International Surpluses for World Development

The Study Group arrived at the following conclusions and recom­mendations: 1. Substantial surpluses on current account are likely to prevail for the next several years among many developed countries, and there is a need for their diversification towards meeting developing country re­quirements, both on intrinsic grounds, and in the interests of promoting global economic stability. 2. Japan, in particular, should take an initiative to launch a $125 billion five-year plan for resource transfers to developing countries, at an annual rate of $25 billion. Such an initiative is fully in line with the three-year programme already begun by Japan for the period 1987—89; if matched by other developed countries, the joint effort would contribute significantly to world development. Depending on the persistence of Japan's current account surplus, the plan might be extended beyond five years. 3. The ideal mechanism for implementing such a Japanese initiative would be to equip a Japanese Government Agency with an explicit government guarantee that will enable it to borrow in the domestic capi­tal market on market terms, with resources for an appropriate level of interest subsidy to be provided to it by a suitable reallocation of Japanese Official Development Assistance. 4. In the Japanese context, the following equivalent mechanisms are also available: (a) Loans raised under the guarantee of a suitable agency, a Japanese Trust Fund might be covered by private reinsurance arrangements. (b) Developing countries might borrow from the Japanese com­mercial banking system against the collateral of zero coupon bonds purchased from the Japanese or international market, or specially issued by the Japanese Government. The amounts borrowed would be a sub­stantial multiple of the investment needed to buy these bonds, whose face value on maturity will be equivalent to the principal borrowed, thereby fully securing the "bullet" repayment of the principal. The most appropriate mechanism for this form of borrowing would be through a Japanese Trust Fund located in Tokyo and liaising with the World Bank and other regional development banks, for administering the scheme. It could, alternatively, be located within the World Bank, especially if other countries were to join in adding resources to the facility. Its management might be entrusted to a Policy Co-ordination Committee including commercial banks, the Bretton Woods institutions and major developed countries in order to facilitate the evolution of longer-term policy frameworks for lending. The Trust Fund would purchase the zero coupon bonds from the Japanese Government and from the market, borrow in its own name from the Japanese commercial banking system and from the market, and relend these monies to developing countries at a suitable blended rate. In order to support a five-year programme of borrowing annually of $10 billion, with a possible extension to ten years, the Trust Fund would ideally need resources from the Japanese Government for the purchase of the bonds to be used as collateral. This would have no immediate net financial impact on the Japanese budget, since the funds would return to the budget when the bonds are purchased. The interest subsidy needed to provide a representative blended rate for lending at below the market rate for borrowing, can be met for the duration of the lending programme, out of the increment in Official Development Assistance during the period 1987—1991. (c) Recourse could be had to the Export Import Bank of Japan to step up its co-financing arrangements beyond the recent levels of $2 billion a year, by drawing more substantially on a pool of resources totalling $150 billion annually that are available to the Zaisei-Toyushi — the Government's Fiscal Investment and Loan Programme (FILP). Additional amounts in the region of $10 billion annually for a five-year period, with an extension to ten years if desired, are entirely feasible on this basis. (d) The Export Import Bank of Japan has an unutilized guarantee power of around $40 billion which could be utilized in a variety of ways for increased transfers to developing countries; the guarantee power itself could be increased either by increasing the Bank's capital or by varying its gearing ratio. (e) The International Monetary Fund should be enabled to borrow in Japan's capital market at the rate of $5 billion annually for the pur­pose of programme lending to low-income developing countries, under the IMF's Extended Financing Facility. The Japanese Government should provide an interest subsidy to reduce the cost of these funds to the user. (f) A debt restructuring facility, utilizing market mechanisms, might be established on a Japanese initiative, in order to pave the way for a resumption of lending to debtor countries. (g) Lending under these programmes might focus on infrastructure development, in addition to normal project and programme lending in support of growth-oriented adjustment programmes. 5. Japan is in a position to aim for a tripling of Official Develop­ment Assistance over the period 1985—90.