Leveraging Financial Markets for

Development: How KfW Revolutionized

Development Finance Peter Volberding
Visit to download the full and correct content document:
https://textbookfull.com/product/leveraging-financial-markets-for-development-how-kf
w-revolutionized-development-finance-peter-volberding/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...

Banking and Financial Markets: How Banks and Financial

Technology Are Reshaping Financial Markets Andrada
Bilan

https://textbookfull.com/product/banking-and-financial-markets-
how-banks-and-financial-technology-are-reshaping-financial-
markets-andrada-bilan/

Just financial markets? : finance in a just society

First Edition Herzog

https://textbookfull.com/product/just-financial-markets-finance-
in-a-just-society-first-edition-herzog/

Finance for Normal People How investors and markets

behave 1st Edition Meir Statman

https://textbookfull.com/product/finance-for-normal-people-how-
investors-and-markets-behave-1st-edition-meir-statman/

Learn Java for Android Development: Migrating Java SE

Programming Skills to Mobile Development 4th Edition
Peter Späth

https://textbookfull.com/product/learn-java-for-android-
development-migrating-java-se-programming-skills-to-mobile-
development-4th-edition-peter-spath/
Fundamentals of Economic Development Finance Susan
Giles Bischak

https://textbookfull.com/product/fundamentals-of-economic-
development-finance-susan-giles-bischak/

Financial Deepening and Post-Crisis Development in

Emerging Markets: Current Perils and Future Dawns 1st
Edition Aleksandr V. Gevorkyan

https://textbookfull.com/product/financial-deepening-and-post-
crisis-development-in-emerging-markets-current-perils-and-future-
dawns-1st-edition-aleksandr-v-gevorkyan/

Multilateral Development Banks: Governance and Finance

Ihsan Ugur Delikanli

https://textbookfull.com/product/multilateral-development-banks-
governance-and-finance-ihsan-ugur-delikanli/

Pro Java 9 Games Development: Leveraging the JavaFX

APIs 1st Edition Wallace Jackson (Auth.)

https://textbookfull.com/product/pro-java-9-games-development-
leveraging-the-javafx-apis-1st-edition-wallace-jackson-auth/

Web Development with Node and Express Leveraging the

JavaScript Stack 2nd Edition Ethan Brown

https://textbookfull.com/product/web-development-with-node-and-
express-leveraging-the-javascript-stack-2nd-edition-ethan-brown/
EXECUTIVE POLITICS AND GOVERNANCE

Leveraging Financial
Markets for Development
How KfW Revolutionized
Development Finance
Peter Volberding
Executive Politics and Governance

Series Editors
Martin Lodge
London School of Economics
and Political Science
London, UK

Kai Wegrich
Hertie School of Governance
Berlin, Germany
The Executive Politics and Governance series focuses on central govern-
ment, its organisation and its instruments. It is particularly concerned with
how the changing conditions of contemporary governing affect perennial
questions in political science and public administration. Executive Poli-
tics and Governance is therefore centrally interested in questions such as
how politics interacts with bureaucracies, how issues rise and fall on polit-
ical agendas, and how public organisations and services are designed and
operated. This book series encourages a closer engagement with the role
of politics in shaping executive structures, and how administration shapes
politics and policy-making. In addition, this series also wishes to engage
with the scholarship that focuses on the organisational aspects of poli-
tics, such as government formation and legislative institutions. The series
welcomes high quality research-led monographs with comparative appeal.
Edited volumes that provide in-depth analysis and critical insights into the
field of Executive Politics and Governance are also encouraged.

Editorial Board
Philippe Bezes, CNRS-CERSA, Paris, France
Jennifer N. Brass, Indiana University Bloomington, USA
Sharon Gilad, Hebrew University Jerusalem, Israel
Will Jennings, University of Southampton, UK
David E. Lewis, Vanderbilt University, USA
Jan-Hinrik Meyer-Sahling, University of Nottingham, UK
Salvador Parrado, UNED, Madrid, Spain
Nick Sitter, Central European University, Hungary
Kutsal Yesilkagit, University of Utrecht, the Netherlands

More information about this series at

http://www.palgrave.com/gp/series/14980
 Peter Volberding

Leveraging Financial
Markets
for Development
How KfW Revolutionized Development Finance
Peter Volberding
New York, NY, USA

Executive Politics and Governance

ISBN 978-3-030-55007-3 ISBN 978-3-030-55008-0 (eBook)
https://doi.org/10.1007/978-3-030-55008-0

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
respect to the material contained herein or for any errors or omissions that may have been
made. The publisher remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.

Cover image: © Doug Armand/Photodisc/Getty Image

This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To François, my family, and Toby
 Preface

In the nearly two years since the first draft of the book was completed,
marketized development financial instruments have only grown in size and
stature. Global development institutions have continued to create struc-
tured funds across new and existing markets, waded more boldly into
securitization schemes, and have double-downed on innovative climate
financing programs.
With the near-limitless demand for development finance, development
institutions have reemphasized that private investors are critical part-
ners. In fact, development institutions have ambitiously committed to
increasing private finance mobilization between 25% and 35% in only
three years. As part of that objective, the World Bank announced in 2017
its Maximizing Financing for Development (MFD) initiative. This strategy
seeks to systematically leverage all sources of financing to achieve the
SDGs through increased support for recipient governments to identify
bottlenecks, the development of legal and regulatory frameworks, and
the expansion of coordination with other private and public financing
sources. As one World Bank document notes, this is meant to make private
sector solutions the norm for how the World Bank does business. KfW has
followed a similar trajectory. Over the past two years, KfW has increased
its development financing offerings, ranging from agricultural finance to
digital finance. One noteworthy addition has been its AfricaGrow initia-
tive, a new “fund of funds” that provides equity capital for SMEs and
start-ups in Africa. KfW co-founded the fund with BMZ and Allianz

vii
viii PREFACE

Global Investors and the fund has an initial working capital of EUR 170
million.
Despite exponential growth, marketized development financial instru-
ments may now be facing their greatest existential challenge. The onset
of COVID-19 and the ensuing economic downturn has revealed the
potential shortcomings. Private investors have reoriented their investment
portfolios towards lower-risk profiles, a trend that generally disadvan-
tages developing countries; in fact, developing countries have registered
record capital outflows that have vastly outpaced those during the 2008
Global Financial Crisis. The sudden collapse of export markets for devel-
oping country industries and SMEs has also financially strained develop-
ment finance recipients and limited new opportunities. For the devel-
opment banks themselves, while well-capitalized banks like KfW will be
able to ride out the market turmoil, increased political pressure to focus
domestically may restrict appetite for accumulating additional developing
country financial risk. All of these trends potentially undermine marke-
tized development financial instruments. While no financial instrument
has yet been terminated because of COVID-19, uncertainty over their
future is undoubtedly at its highest level in decades.
Within this fluid context, I believe this book provides an impor-
tant window into understanding the political economy of marketized
development financial instruments. It may additionally provide insights
into what the future might hold for development finance, particularly
as global markets are reshuffled. Yet given the complexity and breadth
of development finance, this work is only one small, first step. It is
my hope that this book inspires and provokes both scholars and practi-
tioners to continue investigating these marketized development financial
instruments, as well as their evolving relationship with donors, recipients,
development institutions, and private investors.

New York, NY, USA Peter Volberding

May 2020
 Acknowledgments

I never anticipated to write a book about KfW, Germany, or develop-

ment finance. I began my Ph.D. as a scholar of China, and my original
dissertation focused on the intersection of Chinese foreign investment and
the emerging China Development Bank (CDB). Thwarted by geopoli-
tics and archival inaccessibility, I searched for months for a new topic,
and stumbled upon KfW by accident. Through these twists and turns, I
leaned heavily on my advisors, each of whom steered me in fruitful direc-
tions. The co-chairs of my committee—Jeff Frieden and Beth Simmons—
both provided invaluable support throughout the process. Jeff was a great
mentor and always pushed me to think broader and bolder. Beth was
meticulous in her feedback and supportive of my vision, and I appreci-
ated her endless dedication to ensuring my success. Rawi Abdelal brought
his expertise in finance and constructivism to our conversations, and I
was grateful to have his support as I embarked on an unfamiliar topic.
And Iain Johnston always remained engaged with my work and provided
thoughtful comments, even as it drifted further and further away from
my original China focus. I could not have asked for a more supportive or
inspiring committee.
The majority of the research for this book was conducted in Frank-
furt, Germany. During this multiyear period, I am particularly grateful
to Andreas Nölke and his team for hosting me at the Institut für Poli-
tikwissenschaft at Goethe Universität. His generosity in providing me
an academic home, in addition to his expertise in European political

ix
x ACKNOWLEDGMENTS

economy, were both critical factors in the completion of this book. While
based at Goethe Universität, I also met two colleagues—Matthias Thie-
mann and Daniel Mertens—who have not only become great friends,
but reliable co-authors as well. Ideas for subsequent projects on devel-
opment banks were conceived over Kaffee und Kuchen breaks during this
period. Moreover, both have motivated me with their deep theoretical
and substantive knowledge, as well as their passion for academic inquiry.
Additionally, I am thankful for the inspiring and thoughtful comments
from colleagues and friends. Tess Wise has been particularly generous with
her time, and I am appreciative for her near endless willingness to read
chapter iterations. Alex Hertel-Fernandez and Glory Liu also provided
invaluable feedback throughout the process. Chase Foster was instru-
mental in encouraging me to publish my dissertation as this book, in
addition to sharing his expertise on European politics. Elisabeth Köll and
Tamara Kay provided methodological advice and crucial moral support
during the most challenging times. I am also grateful for the thought-
provoking comments from numerous other colleagues and friends, which
includes (but is certainly not limited to) Jeffrey Javed, Jason Warner,
Stephen Pettigrew, Gabrielle Ramaiah, Simone Claar, Sebastian Möller,
Michael Schedelik, Johannes Petry, Marcel Zeitinger, Tobias ten Brink,
Christian May, as well as members of the Government 3005 International
Relations Seminar at Harvard University and the monthly politics seminar
at Goethe Universität.
In order to deepen my knowledge about development finance, I am
thankful for the dozens of discussions with experts and practitioners.
Armin Grünbacher, a rare scholar on KfW, was the first expert I talked
with, and he pointed me in the right direction. From there, I was able to
engage with a variety of scholars familiar with KfW and German devel-
opment finance, including Reinhardt Schmidt, Adalbert Winkler, Jan-
Pieter Krahnen, Manfred Nitsch, Ulf Moslener, and Hans Siebel. Their
commitment to my project was extraordinary.
I am also indebted to the dozens of librarians, archivists, and
researchers at institutions across the world that have helped assemble
the countless documents for this book. This has included the staff of
the Harvard University Library System (Cambridge, MA), the KfW
Historisches Konzernarchiv (Berlin, Germany), the World Bank Archives
(Washington, DC), the Goethe Universität Library (Frankfurt, Germany),
the Deutsche Nationalbibliothek (Frankfurt, Germany), the Deutsche
Zentralbibliothek für Wirtschaftswissenschaften (ZBW; Kiel, Germany),
 ACKNOWLEDGMENTS xi

the Ibero-Amerikanisches Institut (Berlin, Germany), the Koninklijke

Bibliotheek (The Hague, The Netherlands), the British Library (London,
UK), the National Library of China (Beijing, China), and the National
Archives of Singapore (Singapore).
For financial support, I am grateful for the numerous grants from
Harvard GSAS, the Asia Center, the Weatherhead Center, and the Center
for European Studies. This book would not have been possible without
their generosity.
At Palgrave, I am thankful to have an enthusiastic team of editors who
have facilitated the process, as well as the anonymous reviewers for the
manuscript. Their thorough feedback was incredibly helpful in revising
and strengthening the book.
Finally, I am eternally grateful for my wonderful family. They have
stood behind me for more than three decades, encouraging me to
pursue my passions and facilitating my growth. Their endless support and
patience for me have always served as an inspiration. Also, thank you to
my amazing partner François for his steadfast support through the weekly
(and sometimes daily) ups and downs. He constantly challenged me to
think and communicate more clearly and always distracted me with much-
needed breaks and unconventional vacation proposals, many of which
were brought to fruition. This book is dedicated to them.

New York, NY Peter Volberding

May 2020
 Praise for Leveraging Financial
Markets for Development

“This is an excellent book on an increasingly important topic. Peter

Volberding carefully analyzes how development institutions spearheaded
the creation, development, and expansion of marketized development
financial instruments to attract private funds, and how German KfW was
central in this evolution. He studies how development banks did this task,
and evaluates rigorously the advantages, but also the many limitations and
challenges of these marketized development financial instruments. A very
valuable book for academics, students, and policy-makers.”
—Stephany Griffith-Jones, Professor, Columbia University, USA

“Peter Volberding addresses a long-standing issue of delivering effec-

tive financing for sustainable economic development. He does not simply
provide the origin, evolution and challenges of marketized development
financial instruments, he goes beyond! He has a vision of the kind
of development finance many institutions should follow and gratefully
acknowledges that the maturation of marketized development financial
instruments follow a learning process in which some interventions failed
while others succeeded.”
—Désiré Kanga, Centre for Global Finance,
SOAS University of London, UK

xiii
xiv PRAISE FOR LEVERAGING FINANCIAL MARKETS FOR DEVELOPMENT

“Peter Volberding’s Leveraging Financial Markets for Development

explains how development finance shifted from and aid approach to the
discipline of the market. His engaging account documents the actors
and institutions—notably, the German state-owned KfW—that made this
revolutionary change possible.”
—Beth Simmons, Professor, University of Pennsylvania, USA

“In this book, Dr. Volberding provides a historical genealogy of the spread
of developmental financial instruments, focusing on a surprising key actor:
the German KfW and its first successful engagements with these funds.
Rather than private actors or the World Bank, he shows based on exten-
sive interviews and careful archival research that this national develop-
ment bank and its financing department was one of the crucial actors in
the rise and diffusion of these instruments, complicating simple stories of
capture.”
—Matthias Thiemann, Sciences Po-Paris, France
 Contents

1 The Marketization of Development Finance 1

The Creation of Marketized Development Financial
Instruments 3
Enabling Marketization in Development Finance:
The Experience of Germany’s KfW 6
The Road to Marketized Development Financial Instruments 12
Defining Marketized Development Financial Instruments 15
Marketized Development Financial Instruments
in Development Policy 20
The Limitations of Marketized Development Financial
Instruments 25
Contribution and Implications 27
Structure of the Book 31
References 33

2 1950–1970: The World Bank, DFCs,

and the Foundations of Private Investment
Mobilization 37
The International Bank for Reconstruction and Development
(IBRD) and Early Development Finance 38
The International Finance Corporation (IFC) 44
The IFC and the Mobilization of Private Finance 45
The Early 1960s: Reform and Expansion 48

xv
xvi CONTENTS

Reform 1: 1961 Equity Stakes 49

Reform 2: Greater Borrowing Capacity 51
The Late 1960s and 1970s: Expanding the IFC’s Mission 52
Development Finance Companies (DFCs) 54
DFCs as a Solution 54
1950–1968: The Growth of DFC Partnerships 59
Redefining the Relationship Between the World Bank
and DFCs 65
Conclusion 72
References 73

3 1970 to 1990: Development Finance in Crisis

and the Search for a New Paradigm 77
Disappointing Development Outcomes 78
Evaluation Programs and Rethinking of Project Loans 79
DFCs Falter 82
No Need for New Institutions 88
Risk Aversion 89
Financial Dependence on World Bank or Government
Financing 90
Dependence on Macroeconomic Conditions 92
Susceptible to the Same Political Pressures 94
Lessons from DFCs 94
The Search for a New Development Model 96
The Desire to Harness Private Investment 96
Programmatic Assistance—Different Method, Similar
Challenges 99
A Renewed Embrace of Financial Markets
for Development Outcomes 101
Revisions of Existing Strategies via Markets 102
A Shift in the Focus of Development 103
Conclusion 108
References 109

4 KfW and the Early Stages of Marketized Development

Financial Instruments 113
KfW and the Crisis of Development 114
Increasing Challenges for KfW 119
 CONTENTS xvii

Early Experiments with Financial Markets 123

Leveraging Private Capital Markets 124
Early Support for Private Entrepreneurs and DFCs 128
1989–1992: The Nexus of Political Crises and Economic
Development in Germany 131
German Reunification and the Expansion of KfW’s Role 133
The Collapse of the Eastern Bloc and Financial Assistance 137
The Growth of a Market-Based Development Model 143
Conclusion 149
References 150

5 The Maturation of Marketized Development Financial

Instruments: Microfinance and Structured Funds 155
The Microfinance Revolution 156
The Growth of IPC and Support for Microfinance 159
Expansion of Microfinance in Southeastern Europe:
KfW’s Regional Initiatives 166
The European Fund for Southeast Europe (EFSE) 174
The Balkan Crisis and European Assistance Initiatives 175
Transitioning to a Structured Fund 180
Conclusion 189
References 190

6 The Scaling Up of Marketized Development Financial

Instruments from 2005 to the Present 195
The Expansion of Structured Funds for Development 196
The Influence of EFSE on Future Development Fund
Instruments 197
KfW’s Expansion of Regional and Global Structured
Funds for Development 201
Green for Growth Fund (GGF) 210
Microfinance Enhancement Facility (MEF) 211
Sanad Fund for MSMEs 212
Eco Business Fund 213
Finca 214
TCX (The Currency Exchange Fund) 216
New Frontiers of Development Finance: National
Promotional Banks, Insurance Funds, and Securitization 219
xviii CONTENTS

Renewed Support for National Promotional Banks 219

Development Assistance as Insurance 223
African Risk Capacity Insurance Company 224
InsuResilience Investment Fund and InsuResilience
Solutions Fund (ISF) 225
Other Financial Instruments: Green Bonds
and Securitization 229
Conclusion 233
References 234

7 Toward the Future for Marketized Development

Financial Instruments 237
KfW Leads the Long Shift Toward Marketized Development
Financial Instruments 238
Marketized Development Financial Instruments
as Development Policy—The Past and Future 242
Development Policy Expands Marketized Development
Financial Instruments 243
The Global Spread of Marketized Development Financial
Instruments and Its Future Directions 245
Challenges to Marketized Development Financial
Instruments 248
The Impact and Limitations of KfW and Avenues
for Future Research 250
The Road Ahead for Marketized Development Financial
Instruments 253
References 254

Appendix 257

References 261

Index 279
 Acronyms

AAAA Addis Ababa Action Agenda

AADFI Association of African Development Finance Institutions
ADB Asian Development Bank
AIDB Ethiopian Agricultural and Industrial Development Bank
AIFMD Alternative Investment Fund Managers Directive
AIIB Asian Infrastructure Investment Bank
ARC African Risk Capacity Insurance Company
AU African Union
BAF Blue Action Fund
BCF Blended Climate Finance
BGK Bank Gospodarstwa Krajowego (Poland)
BIO Belgian Investment Company for Developing Countries
BMZ Bundesministerium für wirtschaftliche Zusammenarbeit und
Entwicklung
BNDE Banque Nationale de Developpement Economique (Morocco)
BNDES Banco Nacional de Desenvolvimento Econômico e Social (Brazil)
BRI Bank Rakyat Indonesia
CAF Corporacion Andina de Fomento
CCRIF Caribbean and Central American Catastrophe Risk Insurance
Facility
CDB China Development Bank
CDC Commonwealth Development Corporation (UK)
CDP Cassa Depositi e Prestiti (Italy)
CDU Christian Democratic Union
CFG Credit Guarantee Facility
CIF Climate Insurance Fund

xix
xx ACRONYMS

CIS Commonwealth of Independent States

CMAC Caja Municipal de Ahorro y Crédito
COMECON Council for Mutual Economic Assistance
CORFO Corporación de Fomento de la Producción de Chile
CTF Clean Technology Fund
DAC Development Assistance Committee
DBE Development Bank of Ethiopia
DBJ Development Bank of Japan
DBN Development Bank of Nigeria
DBS Development Bank of Singapore
DBSA Development Bank of South Africa
DEG Deutsche Investitions- und Entwicklungsgesellschaft
DFC Development Finance Company
DFCC Development Finance Corporation of Ceylon
DM Deutsche Mark
DSE Deutsche Stiftung für internationale Entwicklung
DSGV Deutsche Sparkassen- und Giroverband
EBF Eco Business Fund
EBRD European Bank for Reconstruction and Development
EC European Commission
EDI Economic Development Institute
EFBH European Fund for Bosnia and Herzegovina
EFK European Fund for Kosovo
EFM European Fund for Montenegro
EFS European Fund for Serbia
EFSE European Fund for Southeast Europe
EFSI European Fund for Strategic Investment
EIB European Investment Bank
EIF European Investment Fund
ENR European Neighbourhood Region
ENSI EIF-NPI Securitisation Initiative
ERP European Recovery Program
ESAF Enhanced Structural Adjustment Facility
ESG Environmental, Social, and Governance Objectives
EU European Union
EUR Euro
EXIM Export-Import Bank of China
FAFIN Fund for Agri-Finance in Nigeria
FASA Financing the Agricultural Sector in Armenia
FDI Foreign Direct Investment
FEFAD Foundation for Enterprise Finance and Development
FfD Financing for Development
FiM Finance in Motion
 ACRONYMS xxi

FMH FINCA Microfinance Holding Company

FMO Nederlandse Financierings-Maatschappij voor Ontwikkelings-
landen
FPAS Forecasting and Policy Analysis System
GAFSP Global Agriculture and Food Security Program
GCF Green Climate Fund
GCPF Global Climate Partnership Fund
GDP Gross Domestic Product
GDR German Democratic Republic
GGF Green for Growth Fund
GIB Green Investment Bank (UK)
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit
HBOR Croatian Bank for Reconstruction and Development
IBRD International Bank for Reconstruction and Development
ICICI Industrial Credit and Investment Corporation of India
ICO Instituto de Credito Oficial (Spain)
ICSID International Centre for Settlement of Investment Disputes
IDA International Development Association
IDB Inter-American Development Bank
IDFC International Development Finance Club
IFC International Finance Corporation
IFG International Foundation for Greece
IICY International Investment Corporation of Yugoslavia
IMDBI Industrial and Mining Development Bank of Iran
IMF International Monetary Fund
IMI Internationale Micro Investitionen
IPC Interdisziplinäre Projekt Consult
IsDB Islamic Development Bank
ISF InsuResilience Solutions Fund
KDFC Korea Development Finance Corporation
KWG Krediwesengestz
LBDI Liberian Bank for Development and Investment
LIP Local Initiatives Project
MDB Multilateral Development Bank
MDG Millennium Development Goals
MEB Micro Enterprise Bank of Kosovo
MEF Microfinance Enhancement Facility
MENA Middle East and North Africa
MIDF Malaysian Industrial Development Finance
MIF Microfinance Investment Fund
MIF Multilateral Investment Fund
MIFA Microfinance Initiative for Asia
xxii ACRONYMS

MIGA Multilateral Investment Guarantee Agency

MSME Micro-, Small-, and Medium-sized Enterprise
NDB National Development Bank
NDB New Development Bank (formerly BRICS Development Bank)
NGO Non-Governmental Organization
NHIF National Health Insurance Fund
NIDB Nigerian Industrial Development Bank
NIF Nordic Investment Fund
NORAD Norwegian Agency for Development Cooperation
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and Development
OED Operations Evaluation Department
OeEB Oesterreichische Entwicklungsbank
OOF Other Official Flows
OPEC Organization of the Petroleum Exporting Countries
PDCP Private Development Corporation of the Philippines
PICIC Pakistan Industrial Credit and Investment Corporation
PPP Public-Private Partnership
RDFI ReDesigning Development Finance Initiative
RMB Renminbi
RSBF Russia Small Business Fund
SBCI Strategic Banking Corporation of Ireland
SDG Sustainable Development Goals
SDIP Sustainable Development Investment Partnership
SEC Securities and Exchange Commission
SEP Special Energy Programme
SIDA Swedish International Development Cooperation Agency
SIFIDA Société internationale financière pour les investissements et le
développement en Afrique
SME Small- and Medium-Sized Enterprises
SNI Societe Nationale d’Investissement (Tunisia)
SOCOFIDE Société Congolaise de Financement du Développement
SOE State-Owned Enterprise
SWF Sovereign Wealth Fund
TCX The Currency Exchange Fund
TOSSD Total Official Support for Sustainable Development
TSKB Türkiye Sinai Kalkinma Bankasi
UN United Nations
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNIDO United Nations Industrial Development Organization
USAID United States Agency for International Development
USD US Dollar
VEB Volkseigene Betriebe
WEF World Economic Forum
WFP World Food Programme
 List of Tables

Table 1.1 Timeline of key events for the evolution of marketized

development financial instruments, 1944 to present 10
Table 2.1 Total IFC investment in DFCs, 1969 62
Table 2.2 Total IDA, IBRD, and IFC investment in loans and
equity, through 31 December 1971 64
Table 3.1 Profitability of DFCs funded by the World Bank,
1943–1973 83
Table 3.2 Sources of total financing of DFCs as of 31 December
1967 (% of total resources) 91
Table 4.1 KfW investments in DFCs, 1962–1981 117
Table 5.1 Tranched risk structure for EFSE as of 2016 186
Table 6.1 KfW investments in structured funds as of 2017 203
Table 6.2 KfW structured fund investments, 2016 207
Table A.1 List of interviews 257

xxiii
 CHAPTER 1

The Marketization of Development Finance

On 10 October 2016, a diverse group of high-level government officials,

civil society representatives, and private sector businessmen convened at
the United Nations headquarters in New York City. At hand was a discus-
sion over how to best implement the recently adopted 2030 Agenda
for Sustainable Development and its attendant Sustainable Develop-
ment Goals (SDGs), a comprehensive 17-point agenda that, if achieved,
aimed to improve the living conditions of hundreds of millions of
people through transformational investments in infrastructure, industry,
entrepreneurship, and environmental protection. The SDGs were lauded
for their ambitions. At the meeting, then UN Secretary-General Ban Ki-
moon hailed the goals as “the people’s agenda, a plan of action for ending
poverty in all its dimensions, irreversibly, everywhere, and leaving no one
behind” (UN 2015b).
However, it was ubiquitously acknowledged that implementing the
SDGs would be extraordinarily expensive. One study estimated that devel-
oping countries would collectively need more than USD 4.5 trillion in
investment annually, a sum that eclipsed the combined financial power
of the world’s development agencies by more than 30 times (WEF and
OECD 2015a, 4). With development assistance (as a percentage of donor
country GDP) waning, donor government funds alone would be insuf-
ficient; development institutions would need to mobilize funding from
the private sector. With global private capital markets worth more than

© The Author(s) 2021 1

P. Volberding, Leveraging Financial Markets for Development,
Executive Politics and Governance,
https://doi.org/10.1007/978-3-030-55008-0_1
2 P. VOLBERDING

USD 200 trillion, private enterprises, commercial banks, and institutional

investors would be critical to marshalling these resources. As H. E. Peter
Thomson, President of the UN General Assembly, remarked, “the private
sector serves as the custodian of the largest pools of the world’s resources,
and the main engine driving entrepreneurship and innovation around
the world. It is therefore vital that the private sector is brought in as a
key partner in our discussions on how to mobilize the investments that
are needed to achieve the SDGs” (UN 2017b). Development institu-
tions had fully embraced private capital as a key to achieving outcomes;
development policy had become focused on its mobilization.
To be certain, the desire to use private capital to finance economic
development had been a long-standing conviction. In the 1950s, develop-
ment institutions like the World Bank prioritized funding for privately-led
projects and avoided supporting state-owned enterprises as a matter
of policy. In 1956, the International Finance Corporation (IFC) was
established with the express objective to promote private entrepreneur-
ship. This strategy reflected a deep-seated belief that developing country
public institutions lacked the dexterity and capabilities to ignite economic
growth. Three decades later, the landmark 1989 World Development
Report emphasized that a vibrant domestic financial sector was critical
to a developing country’s growth potential and reemphasized private
initiative as the central driving force. However, throughout this period,
development institutions struggled to mobilize private investment. Fore-
most among the reasons was that development projects were often not
financially viable for private capital. They were the projects that required
large capital investment, had long—and uncertain—repayment horizons,
and were located in countries with higher political and economic risk.
These were—and still are—all factors that private investors eschew.
In order to attract private investment, development institutions began
to align economic development policy with the logic of financial markets.
This required two components. First, development projects hewed closer
to commercial investment principles. Development institutions prioritized
financing over grants in order to create projects with a revenue stream
to pay back investors. To match projects to investors and avoid creating
moral hazards, interest rates on those financing programs reflected, at
least partially, the riskiness of the project. Second, in order to attract
more private investors to these new and riskier investment opportuni-
ties, development institutions redeployed donor government funds to
absorb risk within the newly-created financial instruments. Crucially, this
 1 THE MARKETIZATION OF DEVELOPMENT FINANCE 3

risk assumption altered the risk-reward calculation for private investors

and turned previously unbankable development projects into investment
opportunities. As a result, these financial instruments grew in number
and complexity over time, and attracted substantial private investment.
Throughout this process, development institutions drove innovation for
new instruments and their application to new sectors. These financial
instruments, which relied on a mix of commercial logic and public risk
assumption, constitute what I term marketized development financial
instruments.
Marketized development financial instruments are now so pervasive
that their advantages are axiomatic. Development institutions and private
investors alike have embraced them as way to bring private investment
to, and catalyze growth within, development countries. Over the past
decade, the World Bank has redoubled its efforts to create new financial
instruments backed with donor government funds, ranging from future-
flow securitizations to diaspora bonds (cf. Ketkar and Ratha 2009). The
World Bank’s president, Jim Yong Kim, has also publicly embraced private
investors in development projects via World Bank risk-sharing schemes
(Thomas 2018). KfW, the German development bank, has created more
than a dozen investment funds, and participated in at least 30 additional
investment vehicles with more than EUR 1.4 billion in funding since
2008. From the SDGs to smaller, targeted funds, marketized develop-
ment financial instruments are now central to international development
policy.

The Creation of Marketized

Development Financial Instruments
While the evolution to marketized development financial instruments
mirrored the global growth of financial markets, their creation was far
from preordained. Given the unprofitable and riskier nature of devel-
opment projects, marketized development financial instruments were
dependent on one crucial factor: donor government risk assumption of
developing country investments. Traditional development policy, which
distributed assistance primarily as grants or project loans, provided few
opportunities for financial instruments, and even fewer risk guarantees.
Yet by the early 1980s, and accelerating through the 2000s, donor
governments had come to embrace these new financial instruments as
critical to development policy. Therefore, this book asks why donor
4 P. VOLBERDING

governments, which were reluctant to add financial burdens from devel-

opment assistance, supported these new marketized development financial
instruments abroad in which they assumed investment risk? In addition,
development institutions played a central role not only as the primary
creator of these financial instruments, but also their greatest propo-
nents. Why did development institutions—rather than the private financial
sector—champion marketized development financial instruments? Finally,
which institutions were critical in facilitating this evolution?
I argue that development institutions played a critical role in creating,
managing, and promoting these new marketized development financial
instruments as a way to solve two problems. First, beginning in the
late 1970s, donor countries wanted to increase the speed and scope
of development assistance in ways that served broader political interests
but simultaneously preserved financial sustainability. Second, development
institutions themselves had long desired to provide assistance in ways that
maintained economic incentives and were financially sustainable. Marke-
tized development financial instruments enabled development institutions
to respond to these pressures. Development institutions—particularly the
German development bank KfW—experimented by convincing politi-
cians to redirect funds away from grants and loans and toward more
complex financial instruments. This promotion of risk-sharing mech-
anisms through marketized development financial instruments allowed
assistance to be faster, more flexible, and more attractive to private capital.
Moreover, by using donor government assistance as risk buffers within
financial instruments, development institutions were able to decrease
investment risk to private investors while also reducing the annual outlays
on the part of donor governments. Critically, in order to ensure that
these new instruments pursued development objectives and avoided
creating moral hazards, development institutions not only strictly adhered
to market operating principles, but also created new financial instru-
ments and maintained managerial control over them. This ensured that
both financial intermediaries and end-users had incentives to pursue the
development projects envisioned by donor governments.
Development institutions were the actors best suited to catalyze these
new financial instruments. Since they already existed at the nexus of
private markets and public ownership, development institutions had the
familiarity with financial markets as well as a political mandate to pursue
economic development abroad. Their access to government resources
enabled innovations of new risk-sharing financial instruments that the
 1 THE MARKETIZATION OF DEVELOPMENT FINANCE 5

private sector could not develop. Moreover, development institutions also

had the institutional ability to maintain equity stakes and managerial
control over investment decisions. This was a crucial factor in ensuring
that these financial instruments balanced between pursuing development
objectives while simultaneously maintaining proper incentives for recipi-
ents. In short, development institutions did what private financial insti-
tutions could not do—they leveraged donor government development
assistance as a risk buffer in new financial instruments that made develop-
ment projects attractive to private investors. Interestingly, private investors
remained on the sidelines for much of this process. While they were
beneficiaries of a government risk-subsidized investment vehicle, private
investors remained skittish. In the end, development institutions not only
strongly supported marketized development financial instruments, but
also spearheaded their creation.
In order to examine the evolution of marketized development financial
instruments, I focus on the understudied experience of Germany’s KfW.
Using archival research and over 70 interviews with development practi-
tioners, I argue that KfW played a particularly important role beginning in
the late 1980s in innovating new marketized development financial instru-
ments. Three key institutional characteristics enabled KfW to become
a pioneering development institution. First, KfW had the strong polit-
ical and economic backing of the German government and was close
to policymakers in developing new policies. Second, KfW’s institutional
flexibility to create, manage, and hold equity stakes in new marketized
development financial instruments meant that it could ensure incentives
were maintained. Third, KfW had extensive experience with private finan-
cial markets through its own domestic promotional business, meaning
that it was institutionally experienced in mixing public institutions with
private initiatives. These three characteristics became particularly impor-
tant for KfW during critical junctures of political urgency for the German
government. Reunification, the fall of the USSR, and the Balkan crisis
provided the necessary political impetus to allow KfW to leverage its
unique institutional characteristics and innovate with marketized develop-
ment financial instruments. Moreover, as these instruments proved to be
financially sustainable and developmentally impactful, KfW helped propa-
gate their use to other sectors and countries and worked in conjunction
with other development agencies to encourage their proliferation.
6 P. VOLBERDING

KfW was certainly not the only development institution to promote

these financial instruments; however, I contend that it was a key insti-
tution in their evolution. While existing scholarship has focused on the
contributions of the United States and the World Bank in establishing
and guiding an international development paradigm, I argue that KfW—
and more broadly the German government—provided crucial support in
the creation and propagation of marketized development financial instru-
ments. This book therefore aims to uncover both KfW’s and the German
government’s contribution to the development paradigm and, critically,
provides an important window into the processes by which marketized
development financial instruments emerged.

Enabling Marketization in Development

Finance: The Experience of Germany’s KfW
KfW is now one of the world’s largest development institutions with
an annual volume to developing countries of EUR 8.7 billion (KfW
2019, 6), but it was not originally envisioned as an international devel-
opment institution. Founded in 1949 as Kreditanstalt für Wiederaufbau
(Reconstruction Credit Agency) to rebuild Germany after World War II,
KfW evolved into Germany’s all-encompassing promotional bank; only in
1961 did KfW become the country’s primary development institution.1
Through the 1970s, KfW’s development strategy mirrored that of the
World Bank. Its dominant perspective was that underdevelopment was the
consequence of a lack of domestic savings as well as poor economic policy
and infrastructure, both of which inhibited private investment. There-
fore, KfW focused on funding key infrastructure and industrial projects
to relieve bottlenecks, often with motivations toward supporting German
industry, and supported the World Bank’s global network of development
finance companies (DFCs). A mix of grants and project loans dominated
these investments. However, by the early 1980s, assessments of develop-
ment projects and DFCs revealed serious deficiencies, as many were found
to be ineffective, wasteful, and market-distorting.
KfW, as well as other development institutions, had a long-standing
conviction that economic development was best achieved by leveraging

1 Germany’s development assistance was originally divided into three institutions. KfW
was responsible for financing, GTZ for technical assistance, and BMZ for concessional
financing. Over the years, these responsibilities became concentrated within KfW.
 1 THE MARKETIZATION OF DEVELOPMENT FINANCE 7

the private sector. Since its inception, KfW itself closely followed private
investment principles, and even to this day still uses its European Recovery
Program (ERP) funds on a revolving basis. Yet even beyond its propen-
sity to rely on private investment processes, KfW possessed a number
of unique institutional characteristics that made it well-positioned to be
able to experiment and innovate with marketized development financial
instruments. First, KfW had strong political and economic backing of
the German government. This most notably included being a full faith
and credit entity of the German government, meaning that KfW could
widely and cheaply borrow on private capital markets. However, it also
included a close working relationship with politicians and bureaucrats to
co-develop policy initiatives. Second, KfW had greater institutional flex-
ibility than other development institutions. As a bilateral development
institution, KfW was not bound by the same restrictions that limited
participation in financial intermediaries and instruments within recipient
countries, giving KfW much more flexibility in structuring new instru-
ments and maintaining oversight over operations, which helped ensure
that development objectives remained aligned with individual incentives.
Finally, KfW had extensive experience from its domestic operations using
promotional finance instruments and raising capital on private financial
markets. Taken together, these three unique attributes laid a foundation
of both institutional capacity and flexibility that was necessary in order to
create marketized development financial instruments.
However, a series of political crises added urgency to efforts to
codify these instruments into policy. First, in 1989, German reunifica-
tion provided KfW with experience in adapting its domestic programs to a
development context and in pushing the German government to embrace
risk assumption as a means to expand and expedite fund dispersal. It also
demonstrated the need to better coordinate financial intermediaries and
manage operations, particularly in challenging macroeconomic environ-
ments. Second, the fall of the USSR allowed KfW to apply the strategies
deployed in the former GDR to an international context. Moreover,
concerns of regional instability convinced the German government to
expand its risk-sharing measures in new financial instruments in order to
quickly attract private investment. Third, following the Balkan crisis in
Southeast Europe in the mid-1990s, which raised apprehensions of new
states becoming engulfed in political unrest on the border of the EU,
German and European politicians were willing to quickly provide financial
resources to stabilize the region. During this period, KfW operationalized
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Age of anxiety
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.

Title: Age of anxiety

Author: Robert Silverberg

Illustrator: John Schoenherr

Release date: August 26, 2023 [eBook #71491]

Language: English

Original publication: New York, NY: Royal Publications, Inc, 1957

Credits: Greg Weeks, Mary Meehan and the Online Distributed

Proofreading Team at http://www.pgdp.net

*** START OF THE PROJECT GUTENBERG EBOOK AGE OF

ANXIETY ***
 Age of Anxiety

By ROBERT SILVERBERG

Illustrated by SCHOENHERR

"Choose!" said the robonurse.

"Choose!" echoed his entire world.
But either choice was impossible!

[Transcriber's Note: This etext was produced from

Infinity June 1957.
Extensive research did not uncover any evidence that
the U.S. copyright on this publication was renewed.]
That morning, when Larry awoke, the robonurse was standing at the
foot of his bed, smiling benignly. It made no attempt to help him into
his housecoat and give him his morning unworry capsule. Instead it
waited, poised delicately on its humming treads, making no motion
toward him.
"I'm awake," Larry said sourly. "Why aren't you functioning?" He
paused, frowning slightly, and added, "And where's my capsule?"
"This morning is different," said the robonurse. "This is your birthday,
young man!" It clicked twice, hissed, and rolled forward at last,
holding Larry's capsule-box in its grips. The box flew open as the
robot approached Larry's bed, and the boy saw, within its gleaming
interior, three capsules—one the usual light blue, the other two a
harsh green and a bright yellow respectively.
"What's this?"
"Choose," the robonurse said inexorably.
The trigger-word echoed in the room for an instant. "Choose," the
robot said again, and the repetition unlocked a chain of synapses,
unleashed data hypnotically buried in Larry's mind years before,
opened doors and brightened dark corridors.
Choose. The terrifying word held promise of conflict, pain, anxiety.
Larry's fingers quivered with terror for a moment; his hand hovered
over the capsule-box, wavered for a long second of indecision, while
a glistening bead of sweat rolled down his smooth face.
His hand grazed the light-blue capsule, the capsule that could end
the sudden nightmare forever. He fingered its glossy surface for a
moment, then shook his head and touched the bright yellow one. A
shudder of fear ran through him as he did so, and he swept up the
green capsule hurriedly and swallowed it.
"Okay. I've chosen," he said weakly.
The robonurse, still smiling, closed the capsule-box and rolled away.
It replaced the box on its shelf and said, "You've chosen, Larry—but
all you've chosen is postponement of final decision."
"I know." His voice was dry. "I—I'm not ready yet. But at least I took a
step forward. I didn't take the unworry drug."
"True enough," the robonurse said. "You can still go in either direction
—back to the unworry of childhood, or on to the full anxiety of adult
life."
"Let me think," Larry said. "That's why I took the middle capsule. To
think this out."
"Yes, let him think!" Larry glanced up and saw the stooped figure of
his father at the door of the bedroom. The robonurse scuttled away
hummingly, and Larry swung around in bed. His father's face, wrinkle-
etched, baggy-eyed, and despairing, stared intently at him.
The tired face broke into a feeble grin. "So you've arrived at the Age
of Anxiety at last, Larry! Welcome—welcome to adulthood!"

Behind Larry lay an entire seventeen-year lifetime of unworrying—

and behind that lay the three centuries since Koletsky's development
of the unworry drug.
It was tasteless, easily manufactured, inexpensive, and—despite its
marvelous properties—not permanently habit-forming. Adults under
the influence of the unworry drug found themselves free from anxiety,
from nagging doubts about the future, from any need to worry or grow
ulcers or to plan and think ahead. Koletsky's drug made them
completely irresponsible.
Naturally, the drug was highly popular among a certain group of
adults with low psychic resistance to panaceas of this sort, and for a
while the unworry drug was a considerable source of worry to those
still clear-eyed enough to look ahead. Hundreds of thousands of
people a year were yielding to the synthetic bliss of the unworry drug,
returning to childhood's uninvolvement with the world.
Naturally, one of the remaining worriers invented an anti-unworry drug
—and with that, a new social alignment came into being. The new
tablet provided gradual weaning from the unworry drug; it took four
years for the treatment to be completed, but once so treated a person
could never bring himself to touch the Koletsky drug to his lips again.
There was an inflexible guarantee against back-sliding built into the
bonded hydrocarbons of the drug.
This second discovery left the world in possession of two remarkable
phenomena: a soothing drug and its antidote, both of 100% efficiency.
A new solution now presented itself—a solution whose details were
simple and obvious.
Give the drug to children. Let them live in a carefree paradise of
unworry until the age of seventeen—at which time, apply the four-
year withdrawal treatment. At twenty-one, they were ready to step
into the adult world, unmarked by the horrors of childhood and
equipped to face maturity with a calm, if somewhat blank mind.
At the age of seventeen, then, a choice: forward or backward. One
out of every ten elected to remain in the synthetic dream-world
forever, thereby removing themselves from a world in which they
probably would not have been fit to contend. It was an efficient
screening process, eliminating those dreamers who would not have
withstood the grind, who would have retreated from reality anyway,
would have slipped into neurotic fancies. The remaining ninety per
cent chose maturity and reality—and anxiety.
The light-blue capsule was the way back to dreamland; the bright
yellow one, the first step in withdrawal. The third capsule was the one
most frequently chosen. It was a delayer; its effect, neither positive
nor negative, was to allow its taker's hormones to remain suspended
during the period of choice.
"I've got three days, don't I, Dad?" The terms of the situation,
implanted in each child's mind long before he could possibly
understand the meanings of the words, now stood out sharply in
Larry's mind.
Larry's father nodded. "You took the green one?"
"Yes. Was that wrong?"
"It's what I did when I was your age," the older man said. "It's the only
sensible thing to do. Yes, you have three days to make up your mind.
You can go on taking the unworry capsules for the rest of your life—or
you can begin withdrawing. You'll have to decide that for yourself."
Something fluttery throbbed in the pit of Larry's stomach. It was the
first sign of worry, the first agony of decision-making. He remained
calm; despite his lifelong use of Koletsky's drug, its peculiar
properties were such that he felt no need of it now.
Yet—how did he choose? In three days, how? Uneasily, he wiggled
his feet against the cool, yielding surface of the floor for a moment,
left the bed, crossed the room, threw open the door. Across the hall,
the robonurse was ministering to his younger brother. The sleepy-
eyed eight-year-old was sitting up in bed while the pseudomother
washed and dressed him.
Larry smiled. His brother's face was calm, relaxed, confident-looking.
"The lucky devil," he said out loud. "He's got nine years of happiness
left."
"You can have the rest of your lifetime, son."
Larry turned. His father's voice was flat, without any hint of emotion or
any trace of value-judgment.
"I know," Larry said. "One way—or the other."

Later that first day, he dressed and left the house. He crossed the
pedestrian-walk that led from his block to the next, feeling curiously
impermanent in his between-status status.
The pedestrian-walk was empty except for a wandering vendor
struggling along under a load of bubble-toys. Larry doubled his pace
and caught up with the man, a short, long-nosed individual with
worry-creases furrowing his thin face.
"Hello, son. Got your bubble-ship yet?" He held forth the inflatable
vehicle and smiled—a forced, slick smile that faded when the vendor
noticed the luminescent armband that told of Larry's status. "Oh—a
Changer," the vendor said. "I guess you wouldn't be interested in a
bubble-ship, then."
"I guess not." Larry took the toy from the vendor's hand anyway, and
examined it. "You make these yourself?"
"Oh, no, not at all. I get them from the Distributory." The vendor
scowled and shook his head. "They keep cutting down my allotment
all the time. I don't know how I'll stay in business."
"Why? Won't there always be a market?"
"There must be something new out," the vendor said gloomily. "The
young ones just aren't interested in bubble-toys these days. Things
were good last year, but—" he frowned dismally—"they're getting
worse all the time."
"Sorry to hear that," Larry sympathized. He felt vaguely disturbed—
the bubble-toys were vastly popular among his friends, and it was
upsetting to learn that the vendor was doing so badly. "I wish I could
do something for you."
"Don't worry about me, son. You've got your own problems now." The
vendor smiled bleakly at him and turned off the pedestrian-walk into
the side-road that led to the Playground, leaving Larry alone.
Those were strange words, he thought. He revolved them in his mind,
getting used to their feel. You've got your own problems. He looked
around, at the neat, clean suburb with its attractive little ten-story
units and carefully-spaced splotches of green garden, and shook his
head. Problems. To be or not to be. It was a line from an old play he
had found taped in his father's library.
The play had made no sense to him at the time, but now it troubled
him. He made a mental note to ask his father about it, some time in
the next two days, and walked on. He wanted to see as much as he
could of the adult world, before it was time to decide which he
preferred.
The City was a maze of connected buildings, redoubled avenues,
tangled byways and confusing signs. Larry stood in the heart of the
business district, watching the grownups zoom past him, each
walking alone, face set determinedly as he pursued some private
mission.
"Move along, boy," someone said roughly. Larry glanced around, saw
a man in uniform scowling at him. The scowl softened into something
like pity as the man noticed the badge of Larry's status. Hastily, Larry
walked on, moving deeper into the web of the City.

He had never been here before. The City was someplace where
fathers went during the day, during the pleasant hours of school and
Playground, and from which fathers came, grimy and irritable, in the
evening. Larry had never considered going to the City before. Now it
was necessary.
He had no particular destination in mind. But after seventeen years in
the unworrying world, he would simply have to investigate the world
of anxiety before making up his mind.
A car buzzed by suddenly, and he leaped to one side. Out here in the
City, cars ran right next to the pedestrian-walks, not on flying skyways
above them. Larry hugged the side of a building for a moment,
recovering his calm.
Calm. Stay calm. Make a cool, objective appraisal.
But how?
Nine out of ten people picked this world. Larry ran his fingers over the
rough brick of the building, and felt the tension beginning to curdle his
stomach. Nine out of ten. Am I the tenth? Am I going to decide to go
back to a lifetime of unworry?
It seemed so. This dirty, hypertense, overcrowded place seemed
boundlessly undesirable. The choice was obvious.
But still....
He shook his head. After a moment of complete unthought, he let go
of the side of the building and took a few hesitant steps forward. He
was really frightened now. Suddenly, he wanted to be home, wanted
to know again the smooth placidity of an unworried day.
He started to walk faster, then to run. After half a block, he stopped,
suddenly.
Where am I running?
He didn't know. He felt trapped, hemmed in, overwhelmed by despair.
So this is the City? Sorry, I don't care for it.
"You're all alone, aren't you?" said a sudden voice from behind him.
"It's not wise, on your first day off the drug."
Larry turned. The man behind him was tall and narrow-shouldered,
with the pinched, baggy face of a grownup and a wide, sly smile.
"Yes, I'm all alone," he said.
"I thought so. I can tell a Changer when I see one, even without the
armband."
Larry glanced down at his arm quickly and saw that the identifying
armband was gone. Somehow, somewhere, he must have ripped it
off. He looked at the stranger, and in a hoarse voice asked, "What do
you want?"
"A companion for a drink," the stranger said affably. "Care to join
me?"
"No—I—all right," Larry said with a firmness that surprised himself.
"Let's go have a drink."

The alcohol stung his mouth, and the flavoring in the drink tasted
rancid, but he put the whole thing down and looked across the table
at the stranger.
"I don't much like that drink," he said.
"Not surprising." The other grinned. "It's one of our favorites."
"Our?"
"City people, I mean. Ulcer people. We gobble the stuff up. Not
surprising you don't like it."
Larry touched his forefingers lightly together. "I don't think I'd ever like
it, no matter how long I tried to get used to it."
"Oh?" The stranger's left eyebrow rose slightly. "Never?"
Larry shook his head. "Or the rest of the City, for that matter." He
sighed. "I don't think I'm the City type. I think I'm going to give the
whole thing up and go back home. The City isn't for me."
"Have another drink," the stranger said. "Go on—I'll pay. It'll take your
mind off your problems."
"There's a capsule that'll do it a lot more efficiently," Larry said. "I
don't need bad-tasting drinks to ease my mind."
"You're definitely cashing in your chips, then?"
"What?"
"I mean, you're definitely choosing Koletsky for life, eh?"
Larry paused a while, letting the images of the City filter through his
mind again. Finally he nodded. "I think so. I really do."
"Two full days more—and you've made up your mind?" The stranger
shook his head. "That'll never do, son. You'll have to think more
deeply."
"How deep do I have to think?"
"Tell me what anxiety is," the stranger countered.
Taken aback by the sudden and seemingly irrelevant question, Larry
blinked. "Anxiety? Why—worry, isn't it? Fear? Ulcers and
headaches?"
The stranger shook his head slowly and dialed another drink. "Anxiety
is the feeling that things are too good, that you're riding for a fall," he
said carefully. "It's a sense of things about to get worse."
Larry remembered the bubble-vendor and nodded. "But they have to
be pretty good to start with, don't they?"
"Right. You've got to have something pretty good—and be worried
that you're going to lose it. Then you fight to keep it. Challenge—
response. That's anxiety. Fear's something different. Then you creep
into the corner and shake. Or you hang onto the side of a wall."
"I think I'll take another drink," Larry said thoughtfully.
"You get what I mean? Anxiety pushes and prods you, but it doesn't
make you shrivel. You've got to be strong to stand up under it. That's
how our world works."
"So?"
"You haven't experienced any real anxiety yet, boy. Just fear—and
you're reacting out of fear. You can't judge your response to
something if you're really responding to something else."
Larry frowned and gulped his drink. It tasted a little better, this time,
though only imperceptibly so. "You mean I'm deciding too quickly,
then? That I ought to look around the City a little longer?"
"Yes and no," the stranger said. "You're deciding much too quickly—
yes. But looking around the City won't do. No; go back home."
"Home?"
"Home. Go back to your Playground. Look there. Then decide."
Larry nodded slowly. "Sure," he said. "Sure—that's it." He felt the
tension drain out of him. "I think I'll have one more drink before I go."

The Playground was crowded on the second day of Larry's three-day

period. Small children played happily near the shimmering wading
pond, older ones gathered for games in the playing-field farther on,
and, far in the distance, a group of permanent unworriers sat
complacently in the sun, neither thinking nor moving. Humming
robonurses threaded here and there through the Playground, seeing
to it that no one got into any trouble. They were necessary, of course
—because the unworried children would have no fear of leaping from
a tree head-first or walking into the path of a speeding baseball.
Larry stood at the edge of the Playground, leaning against the
confining fence, watching. His friends were there—the boys he had
played with only two days before, still happily occupied with their
games and their bubble-toys. Walking carefully, in order not to be
seen, he skirted the side of the playing area and headed for the green
fields where the Permanents were.
There were about a hundred of them, of all ages. Larry recognized a
former playmate of his—a boy of about nineteen, now—and there
were older men, too, some well along in middle age. They sat quietly,
unmoving, most of them, smiling pleasantly.
Larry entered the field and walked to the nearest bench.
"Mind if I join you?"
The man on the bench grinned. "Not at all. Sit right down, friend."
Larry sat. "You're a Permanent, aren't you?" he asked suddenly.
A shadow seemed to cross the man's face. "Yes," he said slowly.
"Yes, I'm a Permanent. Who are you?"
"I'm Changing," Larry said.
"Oh."
The Permanent studied him idly for a moment or two, then leaned
back and closed his eyes. "It's nice here," he said. "The sun's warm."
Larry frowned. "What do you do when it rains?"
"We go indoors," the Permanent said.
"Look! I think it's starting to rain now!" Larry pointed at the bright,
cloudless sky. "There'll be a terrible thunderstorm any minute!"
"The robonurses should be here, then."
"Yes!" Larry said. "Where are they? Why aren't they here?"
"They'll be here," the Permanent said blandly.
"I don't think so. I don't think they're coming. They're going to let you
get wet."
The Permanent shrugged. "They wouldn't do that," he said.
"Of course not," a new voice said.
Larry glanced up, startled. The copper-alloy face of a robonurse
looked down at him. He goggled confusedly.
The robonurse's grips seized his shoulders gently. "You'll have to
leave here, boy. We can't have you disturbing these people."
Larry stood up. "All right," he said. "I'll go." He had seen all he needed
to see.

The stranger in the City had been right, Larry thought, as he made his
way back to his home. The place to look had been in the Playground.
He had seen something even more frightening than the City.
His father was waiting for him as he entered.
"Well?"
Larry sat down heavily in a pneumochair and knit his hands together.
"I've seen the Playground," he said. "Yesterday the City, today the
Playground. What's left to see?"
"You've seen it all, son."
Larry studied his father's pale, harried face for a moment. "I thought
the City was pretty horrible. I decided yesterday I'd become a
Permanent."
"I know. Your Watcher told me."
"Watcher?"
"You know—the man who took you in for drinks. You don't think I'd let
you go into the City alone, do you?"
Larry smiled. "I thought it was too neat, the way he met me and sent
me back. But—but—"
He looked up helplessly at his father. "Today I saw the Playground,
Dad. And I don't know what to do." His voice trailed off indistinctly.
"What's the trouble, son?"
"Tomorrow I have to make my choice. Well, the Playground seems to
be out—they turn into vegetables there—but am I ready for the City?"
"I don't understand, Larry."
"I was sickened by the place." He leaned forward and said, "Dad, why
are children raised on the unworry drug?"
"We try to spare you," his father said. "Seventeen years of tranquility
—it's good, isn't it?"
"Not when it ends. It's the worst possible preparation for a life in your
world, Dad. I'm not ready for it—and I never will be! My childhood
hasn't taught me how to worry!"
Suddenly, his father began to chuckle, first deep in his stomach, then
high up in his throat, a ratchety, rasping laugh.
"What's the matter?" Larry asked angrily. "What's so funny?"
"You say you don't know how to worry? Why, you're practically an
expert at it!"
"What do you mean by that?"
"Suppose you tell me what you've been thinking of, the past two
days. Everything."
Larry stood up, walked to the door. The robonurse was waiting in the
next room, patient, unmoving. After a moment, he turned to his father.
"Well—I've been thinking that I don't like the City. That I'm afraid I
wasn't properly prepared for it. That I think raising me on the unworry
drug robbed me of any chance I'd have to learn to stand the strains of
City life. That even so I don't like the Playground either, and I'm
caught between." He checked each item off on his fingers. "That—"
"That's enough, Larry. You've analyzed it nicely."
Slowly, the truth opened out before him and an embarrassed grin
widened on his face. Resistance to strain could be acquired overnight
—by nine out of ten. Nine out of ten didn't need a long, grueling
childhood to prepare them for adulthood; the tenth would never grow
up anyway.
"I've been worrying," he said. "I'm the worrying kind. I've been
worrying since yesterday, and I didn't even know it!"
His father nodded. Larry took the capsule-box from its shelf, opened
it, stared at the three different kinds of capsule inside. "There never
really was any choice after all, was there?"
"No. Your choice was made yesterday morning. If you didn't have the
stuff for City life, you'd have grabbed for the unworry capsule the
second you saw it. But you didn't. You stopped to make a decision—
and won your citizenship right then and there. You proved it to us—
and by fighting with yourself over the decision you thought you still
had to make, you proved it to yourself."
Larry's smile spread. "Sure. The ability to worry is the measure of
successful City life," he said. "And I'm a regular worry wart already."
The excitement of the past two days still thumped in his stomach—
and it was only the beginning. "I belong here. Why—it won't be long
before I'll get my first ulcer!"
His father was radiant with paternal pride. "Welcome to your heritage,
son—the heritage of the civilized man. You've got the makings of a
first-rate citizen!"
 *** END OF THE PROJECT GUTENBERG EBOOK AGE OF
ANXIETY ***

Updated editions will replace the previous one—the old editions will
be renamed.

Creating the works from print editions not protected by U.S.

copyright law means that no one owns a United States copyright in
these works, so the Foundation (and you!) can copy and distribute it
in the United States without permission and without paying copyright
royalties. Special rules, set forth in the General Terms of Use part of
this license, apply to copying and distributing Project Gutenberg™
electronic works to protect the PROJECT GUTENBERG™ concept
and trademark. Project Gutenberg is a registered trademark, and
may not be used if you charge for an eBook, except by following the
terms of the trademark license, including paying royalties for use of
the Project Gutenberg trademark. If you do not charge anything for
copies of this eBook, complying with the trademark license is very
easy. You may use this eBook for nearly any purpose such as
creation of derivative works, reports, performances and research.
Project Gutenberg eBooks may be modified and printed and given
away—you may do practically ANYTHING in the United States with
eBooks not protected by U.S. copyright law. Redistribution is subject
to the trademark license, especially commercial redistribution.

START: FULL LICENSE