57875 v1 THE WORLD BANK VOLUME ONE History THE WORLD BANK Its First Half Century DEVESH KAPUR JOHN P. LE\VIS RICHARD WEBB BROOKINGS INSTITUTION PRESS Washington, D.C. Copyright © 1997 THE BROOKINGS INSTITUTION 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036 All rights reselVed Library of Congress Cataloging-in-Publication data: Kapur, Devesh, 1959- The World Bank: its first half century / Devesh Kapur, John P. Lewis, and Richard Webb. p. cm. Includes bibliographical references and index. ISBN 0-8157 -5230-X (set). - ISBN 0-8157-5234-2 (v. 1). - ISBN 0-8157-5236-9 (v. 2) 1. World Bank-History. I. Lewis, John Prior. II. Webb, Richard Charles, 1937- HG3881.5.w57L49 1997 332.1'532'05--dc21 97-21093 CIP 9 8 765 4 3 2 1 The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences-Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. Composition by Princeton Editorial Associates Scottsdale, Arizona, and Roosevelt, New Jersey Printed by R. R. Donnelley and Sons Co. Crawfordsville, Indiana THE BROOKINGS INSTITUTION The Brookings Institution is an independent organization devoted to nonpartisan research, education, and publication in economics, government, foreign policy, and the social sciences generally. Its principal purposes are to aid in the development of sound public policies and to promote public understanding of issues of national importance. The Institution was founded on December 8, 1927, to merge the activities of the Institute for Government Research, founded in 1916, the Institute of Economics, founded in 1922, and the Rohert Brookings Graduate School of Economics and Government, founded in 1924. 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Johnson Vartan Constance Berrv Newman Chairman Teresa Macomla Brow~ O'('",nnor E Warren Hellman Sam uel Pisar Leonard Abramson Samuel Hellman Rozanne L. Ridgway Michael H. Annacost Robert A. Helman Judith Rodin Elizabeth E. Bailev Thomas W. Jones Warren B. Rudman Alan M. Dachs ~ A.nn Dibble Jordan Michael P Schulhof Kenneth W. Dam Breene M. Kerr Robert H. Smith Bart Friedman Donald F. McHenry Vincent J. Trosino Stephen Friedman Jessica Tuchman Mathe\\'S Stephen M. Wolf Henry wills Gates Jr. David O. MaxweU John D. Zeglis Honorary Trustees Vincent M. Barnett Jr. Robert F. Erburu J. Woodward Redmond Rex J. Bates Robert D. Haas Charles W. Robinson Barton M. Biggs Andrew Heiskell James D. Robinson III wills W. Cabot Roy M. Huffington David Rockefeller Jr. Frank T. Cary Vernon E. Jordan Jr. Howard D. Samuel A. W. Clausen Naunerl O. Keohane B. Francis San! II John L. Clendenin Thomas G. Labrecque Ralph S. Saul Wtlliam T. Coleman Jr. James T. Lynn Henry B. Schacht Uoyd N. Cutler William MeC. Martin Jr. Robert Brookings Smith D. Ronald Daniel Robert S. McNamara Morris Tanenbaum Bruce B. Da}ton Mary Patterson McPherson John C. Whitehead Douglas Dillon Arjay Miller James D. Wolfensohn Charles W. Duncan Jr. Donald S. Perkins Ezra K. Zilkha Walter Y. Elisha Foreword IN 1973, in connection with the World Bank's first twenty-five years, Edward Mason and Robert Asher wrote The World Bank since Bretton WoodY, the first major authorized but independent history of the institution. Some years later, the Bank's retired senior executive, William Diamond, proposed that an overall history of the Bank's first half century be prepared by authors who, like Mason and Asher, would have full access to the Bank's people and papers but would write free of institutional control. It was decided the study should be seated administratively at an external organization, and, as a matter of fresh choice, not tradition, the Bank and the Brookings Institution agreed that, like the study by Mason and A'lher, the new project would be based at Brookings. Again there were to be two authors, but this time one should come from the North, the other from the South. In 1989 John Lewis of Princeton University in the United States and Richard Webb of Peru were recruited. Both had long known the Bank but neither had worked for it at great length. Webb had been on the research staff for five years in the 19708 before returning to Peru as governor of its central bank; Lewis, a veteran of USAID and OECDIDAC, had worked for and with the Bank in various consulting capacities. As research associate to the project, Brook- ings employed Devesh Kapur, an Indian national then pursuing a Ph.D. in public and international affairs at Princeton's Woodrow Wilson School. By mid-1993 Kapur had become so indispensable and so engaged in the writing that, by common consent, he was graduated to coauthorship. For two components of this project the authors sought and gratefully accepted reenforcement. The record of the Bank's subSidiary, the International Finance vii viii FOREWORD Corporation, was important but substantially separate from that of the mother institution. Jonas Haralz of Iceland, a World Bank eeonomist earlier in his career and the Nordic executive director on the Bank board in the late 1980s, was well qualified to address the IFC. Robert Wade, Originally of New Zealand, later of the Institute of Development Studies in the United Kingdom, and currently of Brown University in the United States, wrote the chapter on the Bank's relationship with the environment. From the beginning all parties to the project-the authors, the Bank, Brookings, and the international advisory committee recruited to help guide the venture- agreed that along with the main volume of history for which the authors themselves would be responsible, the work should include a seeond volume (edited by the authors of the first volume) consisting of views of the Bank from various external perspectives. The perspectives-a dozen in number-are those of close observers of the Bank's work and relations with its major shareholders, its interaction with financial markets and its Bretton Woods sister institution, the International Mone- tary Fund, its standing with the profeSSion of development economics, and country and regional experiences with borrowers. Brookings extends its thanks to the World Bank for the freedom and accessibility it has afforded the authors and adds its gratitude to all those whose help the authors acknowledge in the preface. Brookings gratefully acknowledges funding for the project, which was provided in part by The Ford Foundation, The World Bank, The John D. and Catherine T. MacArthur Foundation, Deutsche Bank AG, The Japan Foundation, Japan Center for International Finance, The Life Insurance Association of Japan, The Federa- tion of Bankers Association of Japan, Nikko Securities Company, Ltd., Nomura Securities Company, Ltd., Yamaiehi Seeurities Company, Ltd., Daiwa Securities Company, Ltd., F. L. Smidth & Company A/S (Denmark), Haldor Topsoe AlS (Denmark), Landsvirkjun, The National Power Company (Iceland), Reykjavik Hot Water System (Iceland), Swedish Bankers Association, A/S Veidekke (Norway), Central Bank of Norway, Statkraft SF (Norway), Asea Brown Boveri AS, and Robert S. McNamara. The views expressed in this book are those of the authors and should not be ascribed to the organizations acknowledged above or to the trustees, officers, or staff members of the Brookings Institution or the World Bank. MICHAEL H. ARMACOST President July 1997 Washington, D. C. Preface THE FOREWORD has outlined the general development of the World Bank history project and the focus and organization of the two volumes. We wish here to elaborate a bit. It may be useful to know the division of labor in volume 1. John Lewis was the principal drafter of chapters 8-10, 17, and 18; Richard Webb of chapters and Devesh Kapur of chapters 11, 12, and 14-16. Kapur and Lewis collaborated on chapter 1. Robert Wade was chosen to write a chapter on the subject of the bank and environmental protection, not only because of his record as a policy analyst but also because he undertook the assigument without having a position on the issues. He wrote well and covered the subject thoroughly, but the chapter was long and the physical balance of the two volumes was better if we included it in volume 2. Its location there satisfies the concept of volume 2 well enough, but it should be read as an integral component of volume 1, analogous to the chapters on agriculture, poverty, and the social sectors. Half the contributed chapters of volume 2 focus on the World Bank's relations with particular member countries. Volume 1 grapples even more with these rela- tions. It was clear as we progressed that the Bank's overall experience and perfor- mance had to be illustrated by its transactions with individual borrowing countries. We could not possibly discuss the relations with each of them, but neither could we (!onvey the texture of the experience without digging into country cases. We have done so fairly widely, selecting countries arbitrarily if not randomly. The result is a richer view of the record, but a lumpy one. In volume 1, along with fairly intensive discussions of Bank relations with fifteen or so borrowing countries during various portions of the fifty years covered in the story, we have one long chapter on the ix x PREFACE most challenging geographic region (sub-Saharan Africa) and another on a region (Latin America) that was involved in a particularly traumatic episode (the debt crisis). As a result, treatment of other areas-China is a major example-is thinner than we would have preferred. We must record one particular regret. The biggest hole in the study's coverage is the Bank's experience since 1990 in eastern Europe and the former Soviet Union. That we would face a problem in this regard was evident when the subject surged into prominence well after our plan for these volumes, and related allocations of time and assignments, had become firm. Although we recruited a highly qualified author to write a chapter on the subject for volume 2, the deadline for submission was not met. By then it was altogether too late to contrive any substitute for the missing material. We apologize to our readers. We acknowledge some of the volume 2 authors-among them S. Cuhan, Catherine Cwin, Jacques Polak, and Nicholas Stem-whose final drafts were completed long before volume 1 was finished. The principal authors are most grateful to the World Bank for the combination of access and independence they have been afforded. It is hard to think of another instance in which a public or private institution has made its personnel, present and past, as well as its documents and files (recent as well as earlier, most of them nonpublic, many still explicitly confidential) so freely accessible to a group of outsiders and then exercised virtually no control over the conclusions of the re- search and the resulting publication. This is by no means to say that Bank people approved our work in all instances. Many objected to the drafts we presented and wrote dissenting commentaries that were enlightening. But there was no instance in which the Bank sought to overrule one of our interpretations. From the beginning the Brookings Institution also afforded us a very large measure of autonomy. What it and the Bank regretted was the length of time the study consumed. Like our two principal sponsors, we started out expecting the entire exercise to occupy four or five years instead of the more than seven that it finally consumed, and there were extra costs, opportunity and otherwise, to seeing it through. But there was no good way to anticipate how long a thorough job would take. Although not disagreeing much with the conclusions of Edward Mason and Robert Asher's The World Bank since Bretton Woods, which was published in 1973, we needed to address various issues that had their roots at the Bank's inception. That meant twice as much time to cover. And in its second quarter century the Bank had become more complex: its emphases had changed, and its membership, clientele, and staff and the variety of its portfolio, as well as the span of its external relations, had grown exponentially. Moreover, a researcher needed to be careful. As we pursued the rare opportunity to look into the recesses of the institution, it often took several trial drafts to get our narrative straight. PREFACE xi In one respect our exceptional access to internal Bank sources skewed the selection of subject matter and references. Historians of tbe Bank are bound to deal in some measure with the political, economic, geographic, and cultural con- texts in which the institution has operated. Some senior Bank personnel urged more attention to these aspects, and some academic readers would have preferred further citation of the nonofficial studies that bear upon many facets of the present work. As members of the nonofficial research community ourselves, we sym- pathized with such views. Yet if one really respects these studies, it is clear that no history of the World Bank can pretend to be an adequate review of issues involving general development and development policy. Besides, our comparative advantage was to tell outsiders some of the content of internal Bank thinking and debate that they cannot readily obtain elsewhere. Our research method has been commonplace: we conducted hundreds of inter- views; read countless memoranda, minutes, reports, and other materials; traveled to developing countries to investigate Bank operations on site; and cross-referenced readers' seminars and comments. Bank staff members' support for the project was uneven. Some did not welcome intrusions on their work or thought the time was inappropriate for investigative reporting or simply lacked interest. Some forgot the research was under way. But these were far outnumbered by the many who were curious and responsive and volunteered their help. We do have some complaints. Although we benefited greatly from the Bank's extensive and admirably managed archives, we suffered, as will other researchers, from the institution's lack of a clear policy about ownership of officers' personal HIes. Some senior executives of the Bank have, upon retirement, taken with them large quantities of papers that by rights, it seems to us, should remain with the institution. We were fortunate (and grateful) to gain access to some of these HIes. But the policy should be clarified. In addition, in its internal correspondence the Bank uses the classification "confidential" rather freely. This is understandable for facilitating operations, although greater restraint would be appropriate. What is less excusable is that there has been no regular regime for declasSifying papers after a specified time has passed or some other marker has been reached. In our work we have been counseled by two worthy committees. The first was a formal ad"isory committee formed at the start of the project that had three meet- ings and continued to comment on drafts and correspond with the authors. It consisted of Abdlatif AI-Hamad, Rodrigo Botero, Robert Cassen, William Dia- mond, Crauford Goodwin, Catherine Gwin, Gerald Helleiner, Takashi Hosomi, the late Philip Ndegwa, Widjojo Nitisastro, I. G. Patel, Helga Steeg, and John Williamson. The second ("guidance and closure") group was formed by Brookings to assist us in the final stages. It met quarterly during the later years of the project and consisted of William Diamond and Gerald Helleiner together with Jonas Haralz and Mervyn 'Veiner. We extend many thanks to the members of both committees. xii PREFACE At Brookings, we are grateful to fonner president Bruce MacLaury and former Foreign Policy Studies director John Steinbruner. For editorial work, we thank the staff of the Brookings Institution Press, Sam Allen, and Princeton Editorial As- sociates, and for verification, Christopher Dall, Maya Dragicevic, Gary Gordon, and Alexander Ratz. The volumes were typeset and indexed by Princeton Editorial Associates. In and around the Bank we are indebted to Jochen Kraske, before and after he became Bank historian, and to the godfather of the project, William Diamond, who has never lost concerned interest in it. The regional and joint Bank-Fund libraries, the Offices of the Secretary and General Counsel, the Opera- tions Evaluation Department, and the Bank's archives under Charles Ziegler are among the units to which we owe particular thanks. We would especially like to thank the staff at the Executive Director's Library (now renamed the Board Resources Center) under Kenlee Ray: Michael Dompas, Andrea Nash, and Herve Tien-Sing Young. We are also most grateful to Charles McCaskill for his help in steering us through the maze of data on the Bank's operations and William Silvennan on personnel data. Concetta DeNaro and Wil- liam Katzenstein (both in the Planning and Budget Department) also assisted our access to data. We much appreciate the counsel of our predecessor, Robert Asher. It is im- possible to name all the people of the Bank, of various vintages, who have helped. But we must list those who were exceptionally generous with their time and attention: Warren Baum, Robert Calderisi, Barber Conable, Richard Demuth, Stephen Eccles, Nicholas Hope, S. Shahid Husain, Benjamin King, Burke Knapp, David Knox, Robert McNamara, Barbara Opper, Guy Pierre Pfeffennann, Eugene Rotberg, Ibrahim Shihata, Ernest Stem, Willi Wapenhans, Christopher Willoughby, and Peter Wright. We also gratefully acknowledge the help of these other past or present Bank personnel and executive directors: Yoshiaki Abe, James Adams, Bilsel Alisbah, Gerald Alter, Robert Ayres, Jean Baneth, Bernard Bell, Munir Benjenk, Hans Binswanger, Nancy Birdsall, Shirley Boskey, Pieter Bottelier, Mark Bowyer, Aron Broches, Shahid Javed Burki, Sven Bunnester, Elkyn Chaparro, Roger Chaufour- nier, Russell Cheetham, S.H. Choi, Anneane Choksi, Lief Christoffersen, Anthony Churchill, A.W. Clausen, Kevin Cleaver, Roberto Cuca, P. N. Damry, Stephen Denning, Kemal Dervis, Dennis De Tray, Shantayanan Devarajan, Ashok Dhareshwar, Graham Donaldson, Robert Drysdale, Stanley Fischer, Edward Fried, Marie Gallup, Michael Gillette, Joseph Goldberg, Melvin Goldman, Mohan Gopalan Gopal, Julian Grenfell, Enzo Grilli, Ann Hamilton, Marianne Hang, Randolph Harris, James Harrison, John Holsen, David Hopper, Ishrat Husain, Gregory Ingram, Paul Isenman, Ruth Jacoby, Bimal Jalan, Frederick Jasperson, Edward V K. Jaycox, William Jones, Charlotte Jones-Carroll, Andrew Kamarck, Ravi Kanbur, Robert Kaplan, Shiv Kapur, Martin Karcher, Gautam Kasi, Basil Kavalsky, James Keams, Timothy King, Ciao Koch-Weser, K. P. Krishnan, Anne PREFACE xiii Krueger, Olivier Lafourcade, Luis Landau, Kenneth Lay, Mark Leiserson, Enrique Lerdau, Robert Liebenthal, J obannes Linn, Ricbard Lynn, Dirk Mattheisen, Oey Meesook, Paul Meo, Marisela Montoliu, Ricardo Moran, Gobind Nankani, Binod Nayak, Julio Nogues, Lester Nurick, Michel Petit, Robert Picciotto, Lewis Preston, V. S. Raghavan, V. Rajagopalan, Luis Ramirez, D. C. Rao, Martin Ravallion, Chris- topher Redford, Helena Ribe, Peter Richardson, Ronald Ridker, Andres Rigo, William Ryrie, Franeisco Sagasti, Joanne Salop, Hugh Scott, Marcelo Selowsky, Alexander Shakow, John Shilling, Gerardo Sicat, Richard Skolnik, Parita Soob- saeng, Davidson Sommers, Rainer Steckhan, Ashok Subramanian, Sachi Takeda, Wilfred Thalwitz, Rene Vandendries, Adriaan Verspoor, Paulo Vieira Da Cunha, Frank VogI, Harry Walters, Dennis Whittle, D. Joseph Wood, N gaire Woods, Hans Wyss, Lorene Yap, Montague Yudeiman, and Manuel Zymelman. Among the non-Bank people consulted, we acknowledge, in particular, Edward Bernstein, David Cole, Vijay Jagannadakan, Alexander Kafka, Gustav Papanek, Judith Tendler, and Paul Volcker. The project has had a very small staff to whom the authors are greatly indebted and who have served mostly in series: as secretary-office manager-research assis- tant: Polly Buechel, Laura Powell, Deborah Jaffe, Alison Bishop, Seiko Kyan, and Kurt Lindblom; as research assistants: Karen Semkow, Chris Watkins, David Brindley, Esther Benjamin, and Sachiko Kataoka. Despite all the help, final responsibility for the outcome lies with the authors. Contents of Volume One 1. Introduction 1 Poverty and the World Bank's Evolving Purpose: Chapters 2-7 2. The Bank for Reconstruction, 1944-1948 57 3. The Bank of the 1950s 85 4. Approaching the Poor, 1959-1968 139 5. Poverty Moves Up 215 6. Waging War on Poverty 269 7. Demotion and Rededication: 1981 to the mid-1990s 331 8. Agriculture and Rural Development 379 9. Policy-Linked Lending: I 449 10. Policy-Linked Lending: II 513 xv xvi CONTENTS OF VOLUME ONE 1l. The Latin American Debt Crisis 595 12. The Weakness of Strength: The Challenge of Sub-Saharan Africa 683 13. The International Finance Corporation 805 Jonas Haralz The Bank in the World Bank: Chapters 14-16 14. The Evolution of the World Bank as a Financial Institution 905 15. Riding the Credit Boom 951 16. Coping with Financial Turbulence 1019 17. IDA: The Bank as a Dispenser of Concessional Aid 1119 18. The Bank's Institutional Identity: Governance, Internal Management, External Relations 1161 Some Key Events in the History of the World Bank Group, 1944-1996 1217 Index 1235 Contents of Volume Two 1. The World Bank as a Development-Promoting Institution 1 Devesh Kapur, John P. Lewis, and Richard Webb 2. The Republic of Korea's Successful Economic Development and the World Bank 17 Mahn-Je Kim 3. Five Decades of Relations between the World Bank and Mexico 49 Carlos M. Urzua 4. The World Bank and Cote D'Ivoire 109 Jacques Pegatienan and Bakary Ouayogode 5. The World Bank in Africa since 1980: The Politics of Stmctural Adjustment Lending 161 Carol Lancaster 6. U.S. Relations with the World Bank, 1945-1992 195 Catherine Gwin "" I. Japan and the World Bank 275 Toyoo Gyohten xvii xviii CONTENTS OF VOLUME TWO 8. The World Bank's Lending in South Asia 317 S. Guhan 9. The World Bank as a Project Lender: Experience from Eastern Africa 385 Alex Duncan 10. The World Bank's European Funding 435 Hilmar Kopper 11. The World Bank and the IMF: A Changing Relationship 473 Jacques Polak 12. The World Bank as "Intellectual Actor" 523 Nicholas Stem with Francisco Ferreira 13. Greening the Bank: The Struggle over the Environment, 1970--1995 611 Robert Wade Contributors 735 Index 737 ONE Introduction SOME SEE the twentieth century as roughly divided in the middle. They see the fIrst half as an era of imperialism, emnomic fluctuation and mllapse, and massive global violence; the second half as a period of less trauma. Although the latter has been replete with searing regional wars and harsh rivalry between the mId war's Western and Eastern blocs, broad-scale peace has been preserved. Vast nations have bemme independent, and, despite gross, sometimes worsening, inequalities, average real incomes, health, life spans, and levels of schooling have risen in much of the world, including many of the poor countries of Latin America. Asia, and Mrica, collectively referred to as "the third world," during the decades of East- West rivalry. It is in this world that governments have tried to engineer develop- ment. Those intervening have included not only governments of the areas themselves but also external states acting through their own bilateral agencies and various multilateral institutions that governments have jOintly sponsored and partly owned. The formation of such multilaterals surged after World War II, and many of those created, whether or not beleaguered, have endured. The present work is about one of the postwar multilaterals that started quietly but that by the 1990s (whatever its future) had become one of the strongest of the group: the International Bank for Remnstruction and Development, commonly known as the World Bank To facilitate the telling of the Bank's story, it is useful to identifY the defining characteristics that would resonate during the Bank's first half century, shaping the experience throughout and in some instances changing it mnsiderably. 1 2 INTRODUCTION Abiding Traits of the First Multilateral Development Bank The new IBRD, the first "Multilateral Development Bank," was born in 1944 and opened its doors in 1946. It was a public sector institution. Then as now public affairs tended to be more highlighted in social discourse than private affairs. But this public institution was peculiarly linked to the private sector and private re- sources. Moreover (a distinguishable point, we shall be saying), the public sector World Bank would always appreciate the efficiency of self-adjusting markets for much of society's detailed economic decisionmaking. In a world dominated by nation-states, the new Bank was indeed a multilateral: it was owned and governed by national governments, and its clients were govern- ments, but it was not formally or legally the creature of anyone of them. Its owners did not like the thought of the Bank being "above" them. They were the prinCipals, and it was their agent. But, like a variety of post-World War II constructs, including its sister, the International Monetary Fund, the Bank was an intergovernmental cooperative. As to governance, the Bretton Woods multilaterals were rooted in political realism. The national representatives who drew up the Bank and the Fund, unlike their counterparts who formulated the United Nations General Assembly at San Francisco a year later, did not follow the jUridical theory that all states, large and small, rich and poor, were equal. The founders vested predominant ownership and control in the economically more powerful countries, which, it appeared, would have been unwilling to delegate as much voice and as many resources to the Bretton Woods institutions had the case been otherwise. Although the World Bank received less attention than its IMF "sister" at Bretton Woods, it became, for many, the world's premier economic multilateral. From the outset, the Bank's subject matter covered a broader span than that of the Fund, and over the decades, it expanded. Early on, events bumped the Bank aside from the first of its two mandates ("reconstruction") and prompted a determined commit- ment to development. Geographically speaking, this was a commitment across the totality of those economically developing countries that jOined the Bank and was in contrast, for example, to the limited spatial terrain of the regional development banks that would begin to appear about 1960. At the same time, the Bank had characteristics that outstripped those of such a universal multilateral as the United Nations Development Program (UNDP). The Bank brought to its client countries not only intellectual productS-ideas, information, institutional assistance, and policy influence-but also substantial flows of financial resources. Furthermore, the Bank could get such resources through channels that were fairly accessible politically. In the first place, with the wealthier-country governments contributing more in the way of national guarantees than direct finance, the Bank got most of the resources for its IBRD loans from private financial markets content to invest in IBRD bonds. Such operations inflicted minimal pain on taxpayers in the "donor" INTRODUCTION 3 countries. In the second place, the Bank's concessional transfers-that is, the International Development Association (IDA) credits (begun in 1960) that did have to be funded out of member governments' national budgets-were, in the eyes of reluctant foreigu-aid givers, still a safer bet than multilateral programs subject to one-flag, one-vote governance. In the fIrst fIfty years, the Bank did not begin to escape the charge that the United States had not only the heaviest weight but, compared with the legalities, a disproportionate one in the governance of the institution. At the outset, especially after the second hegemon-the Soviet Union- withdrew itself from consideration for Bank membership, the weighting could not have been othelWise. 1 As the world emerged from 'Vorld War II, when the new practice of national income accounting was just beginning, the United States was estimated to be earning an extraordinary fraction of global real income, and its exports dominated trade. Against a very mixed history on the matter, the United States projected international economic leadership that inclined toward trade openness. Its currency was the only major one yet convertible, and to repair the breakdown of private capital flows in the 1930s, it initiated an era of government-arranged transfers. Substantial fractions of these tranfers (as the 1960s approached) were meant to be concessional, for less creditworthy countries and less self-liqUidating activities. In the World Bank speCifIcally, these circumstances created competing tensions about and involving the United States. From 1960 onward, American governments of whatever party and preSidency would have a "burden-sharing" bias, seeking, when feasible, to scale down relative U.S. fInancial inputs to Bank activities, without diminishing the U.S. voice. Partisans of the United States sometimes argued that the country, as quasi boss of the Bank, was not a bad hegemon, as hegemons go. But the same partisans were unlikely to emphasize the windfall of low-cost influence that Bank dominance gave the United States, especially when the Bank's lead carried along other, including bilateral, donors with it. Within the Bank, however, the inside track that the United States enjoyed would be recog- nized as distinctive. Thus in 1985 a senior vice president would remark in a note to President A. W Clausen, "The Bank is an influential element in the international system. U.S. influence in UN organizations is weak; the ADB [Asian Development Bank] is dominated by Japan; the IDB [Inter-American Development Bank] by the borrowers. The U.S. does not control the Bank but, as the largest shareholder and in association with other like-minded OECD [Organization for Economic Co- 1. Although representatives of the Soviet Union participated in the Bretton Woods Conference, the USSR failed to ratify the Articles of the Bank, or of the International Monetary Fund, arguing at a 1947 meeting of the UN General Assembly that the Bretton Woods institutions were merely "branches of Wall Street" and that the Bank was "subor- dinated to political purposes which make it one instrument of one great owner." Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Brookings, 1973), p. 29, quoting a 1948 article by Klaus Knorr. 4 INTRODUCTION operation and Development] countries, [it] exercises an influence unmatched elsewhere."2 The Americans had a secure enough lead in the Bank throughout the half century to help it avoid the clutter of country quotas in its hiring, to recruit personnel on merit from the developed and developing countries alike, and to build a work force that some saw as comparatively denationalized and homogenous (although others, to be sure, perceived a set of nationality cliques). One unmistak- able factor that contributed to this homogenizing and that grew stronger over time was economics. As this work demonstrates, economics would become the Bank's hallmark scholarly discipline, and the economists who heavily shaped Bank opera- tions as well as its research were recruited from a wide array of countries. To a large degree, however, they were the product of the graduate economics departments of English-speaking, but especially American, universities. This fact, as it played into the Bank's consulting, research, technical assistance, and agenda setting, would enhance the U.S. role in the institution beyond the apparatus of formal governance. The full-time leader of a multilateral agency-president, managing director, director-general, or whatever-tends to be powerful vis a vis the representative component of agency government. Members of the agency board, even if full-time residents, as in the case of the World Bank, are unlikely to be deeply schooled or experienced in the substance of the program. But the pro-management tilt of power within the Bank was accentuated when, in 1947, the second preSident, John McCloy, imposed an agreement on the Executive Board that blocked it from taking operational initiatives. Henceforth, all loan proposals would have to come from the staff, that is, management. Under the Bank's constitution, the institution's headquarters was to be located in the capital city of the largest shareholder, but by convention this shareholder, which was the United States, also chose the preSident. The latter was a powerful preroga- tive; yet, as widely perceived, the United States, in using it, did not always try hard to serve the collective interests of the Bank's constituents. 3 Principally, this was because the Bank, albeit a "good deal" for the United States, was not as important to that country as it was to many others.4 2. Ernest Stem to A. W. Clausen, March 29, 1985. 3. The prerogative as to IMF leadership was traded off to West Europeans, collectively, and Fund executive directors, allowed more initiatives than the Bank's, have generally been perceived, compared with Bank executive directors, to identify more with the institution and less with the governments they represent. 4. On Sunday, June 9,1996, U.S. National Public Radio, as one of its one-liners for the day, remarked from Washington, D.C.: "Today is the 80th birthday of Robert McNamara, former secretary of defense." On both plus and minus grounds, McNamara was clearly a memorable U.S. defense chief, a position he held for seven years. But he was arguably the most memorable leader of the World Bank, which he served for nearly twice as long. Yet even McNamara himself dealt solely with Vietnam in his memoirs. Robert McNamara with Brian Van De Mark, In Retrospect: The Tragedy and Lessons afVietnam (Times Books, 1995). INTRODUCTION 5 The fact that the World Bank enjoyed, for the most part, good presidential leadership was more serendipitous than by design. Thus if one had asked the international development community what credentials a World Bank president should have, Robert McNamara would have been one of the least qualified. Other nominations, if more substantively relevant, were delayed by dissension within the United States, and, in particular, in the cases of George Woods (1963), A. W. Clausen (1981), Barber Conable (1986), and Lewis Preston (1991), were indif- ferent to the importance of chOOSing presidents clearly young enough to serve more than Single five-year terms. Autonomy has been a desire of every World Bank president, and, for the most part, the degree of freedom that management has sought has been freedom from control by the United States, both from the executive branch personified by the U.S. Treasury and, in particular, from micro management by the U.S. Congress, which, in contrast to the Westminster model, has an unusually independent voice in the American constitutional scheme. The autonomy that Bank managers ex- tracted from their owners was never more than partial, of course. But quasi autonomy grew significantly and steadily until tlle launching of IDA, with its taxpayer funding, gave the institution's owners an added stake in the oversight of lending decisions. Momentunl together vvith the pro-autonomy political skills and energy of McN amara kept the squeeze-down on management discretion largely at bay through the 1970s. But diminished autonomy, albeit resisted, was the trend from 1981. One of the continuing challenges for the institution over the years has been to fmd and sustain a proper balance between the Bank's intellectual products and its resource transfers. During the 19708, transfer volumes rose strikingly (see table 1-1), arguably in a way and to an extent that (along with changes in global conditions outside the Bank) inhibited the effective delivery of certain intellectual wares, notably influences on recipient policies. As the 1970s passed into the 1980s, powerful shifts took place in events both in the Bank and in the world surrounding it. Internally, the Bank had begun plaCing much more emphaSis on policy-based lending of a "structural adjustment" kind that involved an explicit bracketing of dollar transfers and conditioned policy reforms. Viewed in retrospect, structural adjustment lending overreached itself, partly because of its unexpectedly heavy use in connection with the 19805 debt crisis and partly because of the development crisis in Sub-Saharan Africa. In so dOing, it encountered procedural pitfalls. Furthermore, the volume of both IDA and IBRD lending plateaued, raising the question of whether, and how well, the mix of the institution's joint product could be shifted away from resource flows toward ideational stimulus, transfers, and interaction. Put differently, if the Bank could no longer buy itself a "seat at the policy table" in the old-fashioned way, would it tend to fallout of not only the policy game but the development game more generally? This remains a live question. The most defining characteristic of the World Bank as viewed in this history is that, from the beginning, whether the institution knew it or not, its pivotal issue was 6 INTRODUCTION Table 1-1. World Bank 1946-95 1946-49 1950-59 1960.-69 1970.-79 1980.--89 1990--95 Commitments (annual averages) Nominal (billions of U.S. 0.22 0.39 1.05 5.36 15.69 22.03 dollars) Real (billions ofl995 U.S. 1.19 2.37 5.52 12.09 22.24 23.66 dollars) By regions (percent) Mrica 0 15 12 14 15 15 Asia 0 38 40 38 43 37 Europe 81 20 12 12 9 16 Latin America 19 22 28 24 26 25 Middle EastINorth Africa 0 5 7 11 7 7 By sectors (percent) Agriculture 0 4 13 28 24 16 Finance and industry 2 13 12 16 18 11 Infrastmchlrea 21 61 64 36 29 24 Socialb 0 0 4 13 15 26 Other" 76 22 8 8 15 24 By lending instruments (percent) Program and adjustmentd 76 21 6 5 18 20 Specific investment 2 53 67 56 46 60 Other" 0 2 11 17 16 10 Source: World Bank lending (LeI). a. Telecommunications, transportation, electric power. and other energy. b. Education. environment, population, urban development, water supply, and sanitation. c. Oil and gas, mining and other extractives, public sector management, tourism, multisector, and sector unclassified. d. Includes reconstruction, sector adjustment, structural adjustment, and other program loans. e. Debt reduction, emergency recovery, fmancial intermediation, and technical assistance. that of coping with poverty, both between countries and within developing coun- tries. Nearly the whole Bank experience can be interpreted under this proposition, as explained in chapters 2 through 7. During the years in which this work has been in preparation, the World Bank has been under a heavy cross fire of criticism and debunking. A common claim is that the Bank's importance has been exaggerated because its operations, whether measured by the amount of Bank lending or the numbers of its staff or other factors, have not been of world-class size. The dollar volume of Bank activity is said to have been far smaller than that of private capital markets, or particular commer- cial lending institutions, or bilateral official lenders, or even (as to current net lending) one or another of the regional development banks. Such commentary may encourage World Bank humility. But it compares apples and oranges. The World Bank has been important because of its strategic role in INTRODUCTION 7 the development promotion process. The Bank has been the one public sector, resource-weighted, multilateral that intervened throughout the developing world into a broad array of developmental and development-related issues. The scale of the Bank's resources has lent weight to the intervention. But the sheer size of other nonstrategically placed players has little relevance. To explore the Bank's role in the promotion of development, we have grouped the chapters in this volume of our history along thematic and sectoral lines. Within this framework, each chapter is organized chronolOgically. The present chapter, also a chronological treatment, draws from across the set. Before the discussion can go fOlWard, however, a word is in order about one other defining Bank charac- teristic. The Project Focus In the 1950s one of the Bank's more central characteristics came to full bloom: its mandated commitment to "project" lending. This would remain a defining feature of the institution in succeeding decades. One might wonder why, in fact, projects came to have so dominating a position at the Bank. Before 1944-46, "project" was a noun in common usage with a variety of meanings: such large civil engineering ventures as the Suez Canal and the Hoover Dam often were called "projects"; and commercial banks did a good deal of project lending. Indeed, mortgage financing of new construction could be called project lending. But the term was seldom associated with the varieties of lending . done by public financial institutions. Therefore, it might have surprised some participants when, at Bretton Woods, the British urged that the new Bank should be confined to funding "specific projects" (whether by loan or by guarantee). In preparatory drafts for the conference, the United Kingdom had taken this poSition, while the United States had envisioned loans for "programs and projects."5 And at Bretton Woods itself, the Americans insisted on the provision that other loans could be made under "special circumstances.''6 Thus at the outset-with the institution's leading owner tending to relax the project formula, and in the absence, even, of an agreed definition of what a project was-one might have guessed that the Articles' commitment to specific projects would prove largely cosmetic. What the country conferees, the United States included, sought to forestall, however, was a replay of the financial looseness of the 1930s. They did not want this new (multilateral) public sector lender to fall into the pattern of nonaccountability 5. Mason and Asher, World Bank since Bretton Woods, p. 24. 6. Warren C. Baum and Stokes M. Tolbert, Investing in Development (Oxford University Press, 1985), p. 7, which cites testimony by Har:ry Dexter White to the House Committee on Banking and Currency, Hearings on H.R. 2211, 79th Cong., 1st sess. (1945), p. 78. This, White told the U.s. Congress, would give the Bank "wider discretion." 8 INTRODUCTION that had become the norm in the years before the war. As soon as the Bank was launched, its American leadership had reason to embrace the project formula. It needed to demonstrate institutional creditworthiness to private lenders in New York, and, as noted in chapters 3 and 9, that demonstration had parallel require- ments. The financial community had to be persuaded that the Bank's sovereign borrowers were adopting competent policies. But once the context into which the Bank was lending passed muster, the New York lenders were reassured to have the institution do its own lending in concrete project packages that were identifiable and assessable. As the term took on technical meaning in the Bank's early years, "project loans" were seen as investments, mainly in physical assets that consisted primarily (in the early years) of infrastructure of one kind or another. In the 1940s and 1950s, the assets in which the Bank's borrowers invested were intended to generate income that the project entity would recover; thus the project could become self-liquida- ting. The most distinctive thing about projects, however, was their finiteness. They concerned limited, bounded pieces of the sector of activity-hydroelectric energy, rail transport, or whatever-to which they belonged. This boundedness of projects was politically important. It tended to make project loans less intrusive on the sovereign sensibilities of borrowing countries. At least as a matter of appearances, the project could be quarantined against the general meddling in national policies of which balance of payments loans common- ly were accused. To become a project specialist, the Bank needed to have-and needed to give the impression of-technical expertise. Proposed project loans had to be carefully vetted by sectoral specialists. At the very beginning the Bank thought it could hire the needed expertise from short-term consultants. But this did not suit the opera- tion it was building. As a matter of imagery as well as efficiency, the expertise needed to be in-house, and by the start of the 1950s the Bank began hiring technical specialists at a much higher rate than overall staff. Moreover, such expansion was not just a demand-driven phenomenon. It was facilitated by the growing availability of field-seasoned sector specialists previously employed by the colonial regimes of Asia and Africa. To be a brainy project lender also was politically circumspect. The Bank was mandated to be apolitical. The advantage that project lending offered in this regard became plainer as the cold war intensified. The conflict was for higher financial stakes than the Bank could table; in dollars and cents, the Marshall Plan was out of the Bank's class. But geopolitics also was taking a much harsher, more strident shape. For all its pro-West partisanship, the Bank as a multilateral institution thought it safer and more seemly to operate as a seasoned technocrat standing above the political fray. For these various reasons, by the end of the 1950s the culture of the Bank had become project-led. The Bank was admired as the most distinguished practitioner INTRODUCTION 9 of accomplished, appropriately deliherate project lending. Its cachet in the field was not sophisticated project analysis per se (in the 1960s, the latter made a back-door, never fully complete, entrance into Bank operations) but rather rested on an already entrenched reputation for high-quality project work performed by specialists of good professional pedigree. This project culture has had a marked effect on the Bank's history. Origins: 1942-47 In 1942 both the American and British governments were planning innovations that would prevent the international economy from Sinking back into the morass of the 1930s once World War II was over. In the United States, the leading planner was Assistant Secretary of the Treasury Harry Dexter White, although lively discus- sion also was going on in the State Department. In Britain, planning was dominated by John Maynard Keynes, the most influential economist of his generation, who had been made adviser to the Treasury and was just being elevated to the peerage. Both White and Keynes were mainly concerned with forming an institution that would maintain a system of fixed international exchange rates. But both also had a secondary interest in establishing an international bank to supplement finanCing that depression- and war-shocked. private financial markets would provide toward the reconstruction of war damage and toward the development of less economical- ly advanced countries (which was being urged by Latin Americans, in particular, at that time). In a remarkably efficient conference in July 1944 representatives of forty-four countries met in a New Hampshire resort hotel to implement the White-Keynes scenario. Although the IMF remained the focal subject, the founders built fateful features into the fledgling Bank. It was to obtain most of its money from the private money markets (initially, New York) making use of member government guaran- tees. The institution was given an endowment: at the outset, the equity consisted solely of paid-in capital, but it was gradually bolstered by growing reserves (in tum augmented by transfers from net income) and modest infusions of paid-in capital. These actions had two consequences. First, in its early years the Bank had to be preoccupied with "'>inning a high credit rating in the New York financial market; those who would sell its bonds were its most critical constituency. Second, from the beginning the Bank faced a soft budget constraint. As we say in chapter 18, "The Bank made money; it more than could pay its own way. It could go first class, and hire and develop the quality to justifY doing so." The young Bank took pains not to be profligate, but per million dollars lent, compared with most other public inter- veners, it "could employ more staff at higher average salaries, hire more consultants, commission more country studies, hold more seminars, issue more publications, and provide its functionaries better creature comforts" (chapter 18). 10 INTRODUCTION The (U.S.) Truman administration had trouble finding a president for the new institution. Finally, it settled on severity-year-old Eugene Meyer, fonner invest- ment banker and U.S. government official and currently president of the Wash- ington Post. The Bank opened in June 1946, and immediately Meyer, a partisan of cautious beginnings, fell into dispute with Emilio Collado, tlle young State Depart- ment official who had been appointed the executive director for the United States. They differed over the size and speed of operations but also over the balance of power behveen the Bank's management and its Executive Board. Collado favored an activist Board, with the president implementing the Board's policy initiatives. Meyer resisted bitterly, then decided the game was not worth the candle. He reSigned barely six months into his tenn, leaving the White House to face an even bigger appointment problem. The McCloy Imprint John J. McCloy, the Bank's second president, held the job only hvo years and three months, but he left a heavy imprint on the institution. McCloy had been a senior Washington official but now was aNew York la""yer. With his accession, New York took over the Bank. For vice preSident, McCloy brought in Robert Gamer, former commercial banker and now vice president of General Foods. And Collado was replaced by Eugene Black from Chase Bank. Most important, McCloy extracted an agreement from a reluctant Executive Board that henceforth it would be only a reactive body: a ratifier, occa~ionally a naysayer. But all lending proposals and other operational initiatives would come from management. By common consent, with the Board so circumscribed, its average quality diminished during the next hvo decades. McCloy preSided over a major shift in institutional focus that was driven more by circumstances than by choice. The Bank's first loans were non-project recon- struction loans to France, the Netherlands, Denmark, and Luxembourg in 1947, and there followed a trickle of such loans to economically developed countries. However, as cold war psychology became entrenched in 1947-48, the Western rationale for third-world development was powerfully reinforced. At the same time, the scale of the reconstruction need in Western Europe and Japan was quickly recognized to be far beyond the financial capacity of the young Bank. Reconstruction was taken on bilaterally by the United States in the Marshall Plan program launched in June 1947. President McCloy testified in the U.S. Congress in support of that program, but Simultaneously he was urging his colleagues to reeog- nize that the institution needed to tum to its second deSignated mission, development, rather sooner and more fully than had been expected. They all, he concluded, had much studying and traveling to do as they took up this relatively unfamiliar cause. John McCloy and his U.S. executive director, Eugene Black, worked as a team. McCloy, despite the strong lead he had quickly given the World Bank, wanted to INTRODUCTION 11 get on with other things, and he accepted an offer to become the u.s. high commissioner in Germany. One reason he could leave so qUickly was that both the Truman -white House and the Bank Board agreed that Black could take over without breaking stride. Mr. Black's Bank: 1949-59 Eugene Black's incumbency extended into the 1960s, but toward the end it changed character. The period running through 1959, in part building on starts under McCloy and fOCUSing on lBRD proper, contained the vintage Black years. Black was a charming autocrat. McCloy having tamed the executive directors, Black coddled them. Relying heavily for administrative management on his lieu- tenant, Robert Garner (and then, when Garner became president of the new International Finance Corporation in 1956, on Burke Knapp), Black hired an able, loyal, generally congenial staff. He recognized that the U.S. government had mastery of the Bank in the 1950s but insisted on dignity for the multilateral and fought a spirited turf war with the U.S. Export-Import Bank. At this time, the World Bank was heavily into physical infrastructure table 1-1). Agriculture, except for the great Indus and Aswan projects (discussed later in this section) had so far received little attention in the Bank. Meanwhile, industry was at the center of a heated debate: many borrowing countries wanted it in the public sector, wbereas Black, Garner, and their Board wanted it to be private. In any event, the Significant programmatic development of the decade was proce- dural: the Black Bank carried the craft of project lending to a new level. But there were costs as well to the Bank's deliberate operating style. In 1951 Eugene Black was visited by a panel of UN experts that included the future Nobel laureates Arthur Lewis and Theodore Schultz. Black brushed aside their proposal that the Bank quickly expand its rate of development lending to $1 billion annually. Four hundred million, he said, would do nicely. Moreover, the rapid bUildup of the institution's project process and mystique left some of those working on the re- gional, country-by-country, and country-policies side of the lending program ing they had been upstaged. They noted the contrast with the bilateral aid agencies beginning to emerge, and, indeed, with external affairs ministries and (for that matter) militaries, in which the "lines" of organizations, in contrast with their staffs, all ran through the geographically defined components. A Bank reorganization in 1952 establishing regional subdivisions was expected to put the projects-versus- policies issue to rest. But the matter would remain a sore point for decades to come. Aside from this one tension, Mr. Black's Bank plotted a comparatively serene, intelligent, self-contained course in the 1950s. Its greatest challenge, namely, to win AAA rating for the Bank's bonds in Wall Street, was essentially won by the 12 INTRODUCTION mid-1950s but remained elusive until 1959, in part because of the U.S. market's lingering bias against foreign lending and in part because the Bank's outstanding obligations were approaching the U.S. share of the Bank's callable capital. In 1959, however, there was a General Capital Increase (GCI) that doubled the Bank's capital, albeit without any increase in paid-in capital. The AM rating ,vas bestowed shortly thereafter, and the great credit-standing battle had been won. The Bank was also active intellectually. The effort on this front had begun under McCloy, with a push to learn about development through a series of searching one-off country studies manned partly by Bank staff, partly by specialists recruited for the purpose. Under Black, the studies proceeded vigorously, especially during the first half of the 1950s. In 1956 the Bank established the Economic Develop- ment Institute in Washington for developing-country officials and gave it a broader curriculum than the Bank's own lending program had yet attained. But in terms of the Bank's later research activities, those of Black's Bank were minor. And the economics mainly practiced and favored was of the workaday kind that was integral to country and project analysis. The Black Bank also took on three high-profile ventures of a mediational type that were almost out of character. The first was to reconcile differences over oil issues between the British and the 1951 Mossadegh government of Iran. The second V\las to mediate the Indus water dispute between India and Pakistan. The third was to secure Western (British, U.S., and Bank) funding for Egypt's Aswan High Dam. The first and third failed but in ways that brought little discredit to the Bank. The second was a resounding success that reflected dogged and imaginative work on the part of Black and his colleague William Iliff, and, in the end, consider- able flexibility on the part of the parties involved. i Together they added some dash to the Bank's rather circumspect progress under Black. For all of its soundness (some would emphasize, self-satisfaction), Black's Bank became discontented on two counts. The preSident, vice president, and others were unhappy with the way the Articles inhibited the promotion of the private sector in developing countries: they could not lend directly to private enterprises without obtaining politically hard-to-get and encumbering guarantees from host governments. Second, and more threatening to IBRD's future, the Bank was rapidly running out of the capacity to serve those developing countries that were exhausting----or had never yet achieved-creditworthiness. The most conspicuous examples in the late 19508 were India and Pakistan. At the start of the decade Eugene Black had been dead set against the idea of multilateral programs that would make conces- sional capital transfers (grants or loans at softer than market terms) to poor coun- tries. By the end of the 1950s Black had come to the view that, if there was going to be such concessional multilateral lending, it would be better for it to be done under the work habits and style of the Bank than of some New York-based UN agency. 7. All three have been described by Harold Graves in Mason and Asher, chapter 18. INTRODUCTION 13 But second, there was the strong positive appeal of widening the clientele for the Bank's constructive operations. Well before the end of the Black period, the Bank had acquired a habit that was seldom mentioned in polite official discourse. Project lending seemed to assume that an external lender could be selective, picking and chOOSing among activities to be supported, with the chosen ones being segregated from the rest of the recipi- ent's affairs. The pretense was that, when the Bank lent for a capital asset, say, a piece of infrastructure, that was the particular item the loan would help add to the borrower's capital stock. Yet it seemed self-evident that if, in the absence of the loan for item A, the recipient would have acqUired A anyway, the loan's effect was to enable the acquiSition of something else. The point did not escape policymakers in the early Bank. In fact, sometimes they spelled it out. The institution's Annual Report for 1949-50 addressed the issue head-on. ::-.Joting that Bank investment needed to be addressed to priority uses, the report remarked: "The Bank recognizes, of course, that by financing one particular investment project, it may be releaSing resources already available to the borrower for some other investment activity" (or, the report could have added, for extra consumption). 8 Indeed, Paul Rosenstein-Rodan, the Bank's star profeSSional economist from 1947 to 1952, reflected that he could never understand why bankers took the link between particular loans and particular assets so seriously.9 But in the eyes of the institution's management-and, most development promoters of the period-simple acceptance of unadorned fungibility as a doctrine would have proved too much; it would have undermined the importance of the transfers of information, tecbnical skills, and institutional tutelage that lenders linked to their particularized loans; it would have denied that the particularized resource transfers added thrust to the cognitive elements that accompanied them. Further, many of the Bank's stakeholders-lending and borrOwing governments, private financial institutions, and other members of the development community- shared the same view. It was their own practice to join the Bank in coupling specific funds with specific uses of funds. Fungibility became almost an unmentionable. The 1949-50 Annual Report's candor on the subject was seldom repeated. IDA and Black's Last Years Beginning in 1956 the Bank acquired various affiliates that came to be known as the 'World Bank Group" in the 19608 (later the term was less widely used). Among the lesser ones were the International Center for the Settlement of International Disputes (ICSID), established in 1966 to institutionalize the positive aspects of the 1950s mediation experiences, and the Multinational Investment Guarantee Agency 8. The passage was drafted by Richard Demuth and Benjamin King. 9. Paul Rosenstein-Rodan, interview, World Bank Oral History Program, 1961, p. 7. 14 INTRODUCTION (MICA), established in 1988. But the two ovelWhelmingly important members of the Croup were the International Finance Corporation (IFC, 1956) and IDA (1960). And of these, IDA was the affiliate that changed the whole history of the World Bank. 10 IDA's birth was one of those phenomena that underscore the role of hap- penstance in history. The scheme was strongly resisted by Eugene Black as well as by the first Eiscnhower administration, although it had somc keen American advocates, including Nelson Rockefeller. But the idea of IDA caught the eye of a determined U.S. senator, Mike Monroney of Oklahoma, who was able to sell the second Eisenhower administration and, for the reasons indicated, the latter-day Eugene Black, on the IDA scheme as a kind of fall-back strategy. The scheme changed the Bank as nothing up to that time had. It radically increased the Bank's roll of clients (that is, IDA clients) and its potential resources. As a consequence, the new IDA protected the Bank from impairing IBRD credit- worthiness by making unserviceable loans to poor countries that needed credit but eould not afford it on market terms. IDA quickly broadened Bank lending's substantive scope to include agriculture, water, and education. The newly accessible borrowers had these needs, and loans no longer had to be directly self-liquidating. Eugene Black in his last two years began to press such changes. He also began to urge higher rates of IDA finanCing than member countries had contemplated. The $1 billion figure for the agency's initial resources to which members notionally had agreed was extremely modest compared with the scales of multilateral concessional transfers that had been bruited about during the 19.508. Even so, when it came to putting up the money, the OECD-affiliated Bank members thought $750 of their convertible currencies was enough. \Vhen these initial funds were being drawn down over the space of three years, the same members, led by the United States, provided a first replenish- ment of only a sustaining amount, that is, 8250 million annually, for a further three years. Tbe members agreed to this quite readily, but with a deaf ear to Bank management's effort to raise the size of the effort. Nevertheless, when the next president arrived in January 1963, it was widely sensed that IDA was off to a fairly promising start. George Woods: Reforms and III Temper Although George Woods and Eugene Black were both New York bankers, they had different styles. Woods was unpolished, criticized staff harshly and publicly, and argued With, rather than pacified, his Executive Board. His demeanor may 10. As chapter 13 explains, however, the IFC experienced ,vide s>vings in its agenda (promoting private investment) and effectiveness during its first four decades. Only recently has it regained a position of considerable salience. I:"JTRODUCTION 15 have been aggravated by ill health; in his first year he suffered a life-threatening aneurism. Moreover, most of the Woods term was blighted by the Bank's first major experience with what became a recurring trauma for the institution: having to conduct an IDA replenishment exercise every three, or if the particular effort stalled, every four years. As indicated, the first two rounds of IDA money raising while Black was still president of the Bank, although rather disappointing in their yields, had been quiet. But then there was a change of leadership in the U.S. government. As secretary of the Treasury, Douglas Dillon, friend of development and of the Bank, was succeeded by Henry H. ("Joe") Fowler, much less of an enthusiast. Fowler told George Woods that henceforth the Bank could expect no pro-IDA fund-raising leadership from the United States; it would have to do its own money raising. The middle 1960s were an awkward time for the exercise; the United States was having to cope, in the first instance postwar, with a foreign exchange shortage, and other donors did not like Woods's tactics in, as they saw it, pla}ing favorites with the United States. The favoritism was scaled back to timing "IDA 2" inputs (as the new terminology had it) so that the United States was put at the back end of the queue. The whole replenishment episode was so protracted that the negotiation of IDA 2 did not finish until almost a year after the end of George Woods's term. Given his stylistic problems and preoccupations, it is remarkable that Woods did as much as he did in his five and a quarter years at the Bank. He sought radically to build up the strength of macroeconomic analysis, although in many eyes his impor- tation of Irving Friedman from the IMF for this purpose was ill-considered. Woods was prepared to have the Bank become an active influencer of recipient govern- ment policies: in Latin America, during Gerald Alter's directorship, the Bank brought "programs of projects" to bear on the need for macroeconomic reforms, and, in India, the Bernard Bell mission chalked out an extensive reform program. Moreover, Woods, unintimidated by the letter of the Bank's Charter, was prepared to use nonproject loans as well as loans for local currency expenditures as vehicles for transferring both resources and influence. Woods nurtured the IFC as a promoter of private investment and, Signaling the Bank's private sector preference, transferred to the Corporation the Bank's in- dustrial promotion activities. Woods's post-IDA focus on agriculture was far more serious than Black's; the growth rate oflending to agriculture under Woods (admit- tedly it started from a low base) was higher than any the Bank has since seen. Also Woods was not ideolOgically nervous about agricultural promotion; he was pre- pared to have the Bank favor serious land reform and do supportive lending around the edges of such an effort. He was also keen on educational support, and, instead of shunning the specialized United Nations agencies in these fields, he reached out to them with cooperative operational agreements with the Food and Agriculture Organization (FAO) and the United Nations Educational, Scientific, and Cultural 16 INTRODUCTION Organization (UNESCO). Woods went out of his way to make a supportive speech to the first meeting of the UN Conference on Trade and Development (UNCTAD) in Geneva in 1964. He started the Bank thinking about the need for more active agricultural research. And he left for his su<-'Cessor the idea for a grand assize reviewing the world community's development promotion effort, which became the Pearson Commission of 1968-69. McNamara-I: 1968-73 Robert McNamara "hit the ground" on April 1, 1968, in a way that accelerated the pulse of the Bank and re"wote its priorities to a degree not previously ex- perienced. But development pundits qUickly found themselves arguing over how Original the McNamara revolution was. Only a few months earlier, the man had been fighting a war, and before that he built automobiles. Meanwhile, in early 1968 the development policy world-in Washington, various European capitals, such developing-country capitals as New Delhi, and such United Nations centers as New York, Geneva, and Rome-was beginning an intellectual upheaval, the gist of which was that, although development had almost achieved the growth targets set for the "First Development Decade," the averages were not good enough. Perfor- mance had sloughed over too many distributional and equity problems. McNamara obviously was not the first author of these ideas, but he arrived articulating some of them, and he was a quick study. He crowded in a group of field visits to developing countries and was authoritatively verbalizing more quality-of- life concerns such as education, nutrition, and population restraint by the time of his first annual meetings speech in September (the series would become a major podium for the McNamara administration). Substantively, McNamara's range of sectoral concerns went beyond poverty as usually conceived. To be sure some concerns were more apparent in rhetoric than in operations. Environment, for example, was ostensibly added, at the time of the global environment conference in 1972, but its impact on Bank operations was quite minimal during most of the 1970s. But the overriding concern, along with poverty itself, was growth. McNamara was adamant that no trade-off was necessary between the goals of output growth and equity for poor countries. Within this broad advocacy of equitable growth, the new Bank preSident was doubly insistent about Bank growth: the institution had an almost unparalleled opportunity to do good, and it was obligated, while maintaining the high quality of its project lending, to get on with it. The scale of the McNamara expansion was formidable. Over the last four years of McNamara's presidency (fiscal 1971W51), compared with the five years before his arrival (1964-68), Bank lending expanded more than 3 times in real terms (IBRD lending, 2.8 times, IDA lending, 3.7 times); profeSSional staff rose fourfold. The administrative budget increased 3.5 times in real terms. INTRODUCTION 17 Personally, Robert McNamara was as engaged with the finaneing of his program as he was with its eontents. On the IDA side, he and his top executives lavished thought and time on maneuvering the politics of members' eoncessional funding. With respect to raising IBRD money in private markets, the president led a growing penetration of non-U.S. markets. The very first bond offering (in Switzer- land, following his radical speech at the annual meetings) failed. Stung, McNamara dropped the Treasurer and hired a~ his replacement Eugene Rotberg, a U.S. government lawyer who had caught McNamara's eye despite his limited relevant experience. It was a brilliant appointment: by the time Rotberg left the Bank in 1987, he would be something of a legend for having placed about $100 billion in IBRD security offerings. McNamara did indeed bring originality to his office, both in his energy and in the comprehensiveness of his personal grasp of Bank affairs. He took two key organizational steps: instituting Country Program Papers (CPPs) and vastly extend- ing the scope of the Programming and Budgeting Department. Yet dissatisfied with the institution's response to his guidance, especially on the poverty front, he launched the first major reorganization in two decades. This encouraged a further move toward country programming and a region-by-region deployment of most sectoral project work-but, as had been the ca,e in 1952, the tensions behveen project and area (that is, technical and regional) interests eontinued. One of Robert McNamara's lasting and strongest personal legacies to the Bank was a massive increase in the financial support and status of research. A foretaste of this had been McNamara's immediate recognition of tlle importance of Bank sponsorship of the Consultative Group on International Agricultural Research (CGIAR). But the decisive move was the recruitment of the distinguished develop- ment economist, Hollis Chenery, to run the Bank's research activity and to be its chief economist. Chenery was encouraged to build a research establishment that, as strong globally as any in the development economics field, would appropriately engage in basic research as well as feed analytical guidance to tlle institution's regional and country-policy economic staffs. The Chenery eomplex sustained a level of intellectual authOrity for the Bank that was higher than it othenvise would have had. Chenery was a leading example of particular hirings with which McNamara refreshed the organization. Not much of this needed to be self-conscious when the whole staff was expanding so rapidly, but yeast was indeed sought and prOvided, among others, by Mahbub ul Haq, who had eome to doubt the thrust of orthodox import-substitution industrial planning in Pakistan; by Ernest Stem, brought from USAID after serving as the deputy staff director of George Woods's "grand assize," which Robert McNamara organized and which became the commission led by Lester Pearson; and by Montague Yudelman, who, coming from a stint at OECD, impressed McNamara with the potency of a development strategy focused on the small farmer. Yudelman arrived in time to take over the rump central agricultural 18 INTRODUCTION and rural development staff that emerged from the 1972 reorganization when the bulk of the Bank's agricultural specialists had been dispersed to the institution's regional cadres, still residing in Washington. For a dynamic leader who had singled out poverty alleviation as at least one of his primary goals for the institution, McNamara had, by 1973, taken a remarkably long time to come up with a focused antipoverty program. Part of the difficulty was that, \vith such a preponderance of poor developing country populations still in the countryside, a focused program, it seemed, needed to be heavily rural and agricul- tural. And, as discussed in chapter 8, many rural development specialists felt that policy was failing to tackle the main problem in many rural developing areas if it did not plump for thoroughgoing, ownership-changing land reform. But some sup- porters of the Bank felt this was too radical a venture for the institution, and (more to the point) few developing country governments were inclined to welcome such interventions. What the small-farmer focus, picked up in McNamara's 1973 annual speech at Nairobi, pressed was that the largest fraction of rural householders already were landowners, of small, viable, potentially progressive farms. Antipoverty reforms could focus on their outputs and incomes and thereby quite explicitly marry growth with poverty reduction for a large class of the poor. McNamara-II: October 1973 to May 1979 The 1973 Nairobi speech marking the rhetorical culmination of McNamara's antipoverty, smallholder doctrine, was overshadowed in less than a month by the Yom Kippur War, which in turn launched events that triggered the oil shock issuing from the Organization of Petroleum Exporting Countries (OPEC) at the end of the year. The shock was severe: the price of crude oil rose fourfold in the space of three months. But what made it historic was the way the effects ramified. The OPEC countries received windfalls of political power as well as earnings. For the ones lightly populated and richest in oil, the dollar windfall was much larger than they quickly could spend; they put it in Western bank accounts. To developing countries of some creditworthiness-middle-income oil importers and, indeed, such newly expanding oil exporters as Indonesia, Mexico, and Nigeria -these banked earnings of the oil-rich exporters became windfalls for hire if the borrowers could pay the fees. The fees (real interest rates) were kept low by the hike in the supply of loanable funds and the oil shock's dampening of the credit demands of the OECD countries. The OPEC governments themselves set up new development assistance programs. These became additional financial sources for selected developing countries. The shock also had political dimensions. Just as some of OECD's members, in particular, the U.S. government of the day, were put off by the sudden outbreak of INTRODUCTION 19 OPEC affiuence, the members of OPEC were determined to maintain solidarity with the majority of developing countries for whom the main initial effect of the oil shock was a rise in the cost of oil imports. Those now wielding oil power rallied their less fortunate colleagues into a new North-South dialogue in behalf of a (South-favoring) "New International Economic Order" (NIEO) under UN auspices. With intermittent changes of venue, the dialogue would extend from 1974 to 1981 with few results. The World Bank could not stand clear of all this Oil-triggered turbulence. It did avoid most of the rhetoriC; it took care to avoid routinely joining either the North's or the South's debating positions. But there were practical effects. First, the Bank's immediate concern in 1974 was to provide and promote offsets to the losses of foreigu exchange that higher oil prices were imposing on oil-importing developing countries. Second, the Bank qUickly began to interest itself in investments in the exploration and development of energy-not only renewable kinds but also hydro- carbon energy-in developing countries seeking to escape oil's current scarcity pricing. The idea was frowned on by "Part I" members, especially the United States, who argued that ample private capital was available for these purposes. The oil shock's third impact on the Bank was the greatest. The shock generated relatively low-cost alternatives to Bank and IDA loans for many Bank borrowers. This occurred just when President McNamara was driving the institution to expand its lending. With great effort, the Bank maintained the expansion. But its customers (some of them also were experiencing more rewarding commodity sales) were less receptive to the Bank's policy coaching and reform guidance than otherwise would have been the case. (The alternatives to Bank loans not only were affordable but came without lectures.) This, as is spelled out in various country cases in this volume and volume 2, diminished Bank leverage. Nevertheless, the story of the latter 1970s is that within this weakened context, the growing Bank, under McNamara's leadership, carried on a lively, diverse, and on average productive program. The interventionist development community, if it had force-fed the president at the start of his tenure, had accepted his leadership by the middle of the decade. Having pushed redistributive, pro-employment, population, nutritional, and other reforms, the development-focused side of the community (in contrast to the contentious NIEO school) achieved a measure of North-South consensus in the "basic needs" conference of the International La- bor Organization (ILO) in 1976. The Bank had difficulty signing onto the basic- needs nomenclature. But in fact the proposition that such needs were to be met mainly by raiSing the productivity of the poor accorded with the thrust of the late 19708 Bank. As for the matter of agriculture and rural development, from McNamara's first years in the Bank, agriculture had been seen as a growth, not just an equity, activity. In the 1970s water management gains of different limited kinds were achieved in South Asian agriculture. Although agriculture faced a tougher slog in Africa, there 20 INTRODUCTION were some single, including commercial, crop successes there. The Bank extolled and propagated an improved mode of agricultural extension that had good results in several regions and countries. By analytic and informational interventions, the Bank helped smooth violent investment cycles in the glohal fertilizer industry. The institution's least sueeessful rural initiatives (it scarcely acted at all in such other fields as land reform and rural public works) were the integrated rural development projects that appeared to be the conceptual progeny of the Nairobi speech. These new-style projects, taken up also by a variety of other donors, were particularly popular and notably unsuccessful in Africa. Recognizing that the real world was complex, they sought to tackle many dimensions of rural underdevelop- ment simultaneously. They placed excessive demands on newly building national administrations, or, weakening the local bureaucracy, they hived off personnel and resources into project authorities that were donor-dependent enclaves. By the end of the 1970s it was widely agreed that donors, including the Bank, needed to retreat into Simpler partial ventures. They would need to rely on-and, as feasible, help- the development of institutional capacities that would allow countries to do their own assembly of the various pieces of altered societal systems. In the middle and later 1970s, the Bank made a run at asSisting borrOwing countries ,vith urban development. As several parts of this volume and also volume 2 attest, the 1970s' approach to industrial development reflected the president's view that government ownership of manufacturing and financial establishments, and (in Africa) parastatal conduct of processing and marketing activities, were less objec- tionable than the Black Bank had thought. What mattered more were the quality and independence of management. Bank research, as the decade wore on, pro- duced growing support for the salience of export promoIion as a growth strategy. As a considerable variety of country cases in both volumes 1 and 2 make clear, distinctive country-by-country analysis was characteristic of and valued by the 1970s Bank. Indonesia, the South Asian countries, Mexico, the Philippines, and Turkey are among the cases we examine. Indeed, for all its vigor, complexity, and preSident-driven goals, McNamara's Bank exhibited a good deal of intellectual pluralism. The institutional ear was tuned to fresh research and unanswered questions. This last docs not square easily with the complaint of many observers that the Bank buckled too easily to out-of-channels pressures from its country owners, especially the largest. The Bank's attitude to Allende's Chile became a cause celebre in this regard (see chapter 15). Late in the decade a U.S. congressional committee, threatening to kick over an IDA replenishment appropriation, pres- sured McNamara into forswearing early lending to Vietnam in a move that was at least procedurally flawed. He made a commitment that, rightfully, was only the Executive Board's to make. Management occasionally accepted similar interferen- ces from France with respect to Francophone Africa. Such improprieties were in fact rare, perhaps because of a McNamara house rule. He was, for a servant of owners, aggressive in pressing the economic needs, INTRODUCTION 21 indeed, the economic "rights" of his undeJ:privileged clients. But he was quite serious about insulating himself from both recipient and donor politics. One financial pOint belongs in this sketch of the later but not the last McNamara years. The commercial banks, recycling Arab oil earnings and pressed by competi- tion to charge their borrowers very low real interest rates, defended themselves against the risk of future rate increases by persuading their clients to accept variable (that is, indexed) rates. The World Bank, out of concern for its borrowers, did not do likewise. Hence the Bank was due for trouble-and belatedly it shifted to variable rates-after market rates started exploding in late 1979. The Great Bend in Events: May 1979 to October 1981 Nineteen hundred seventy-nine was a jarring year for the world. It started with the Iranian revolution in January, which, with a lag of a few months, led to the second oil shock. That shock, though not as extreme as its predecessor, saw the price of crude rise 160 percent in twelve months. Although the upward lurch in petroleum priees would subside sooner than most cxperts expected, in mid-1979 it triggered violent fiscal-monetary policy reactions in the OECD countries that caused the so-called Volcker Shock to interest rates. U.S. rates (with the rise reaching other currencies in different degrees) quickly outstripped oil prices in their claims on the foreign exchange budgets of developing countries. ll More was in store. In November came the taking of U.S. hostages in Iran, which helped not only Ronald Reagan's nomination but also his election in 1980. And in December the Soviet Union invaded Afghanistan. By prompting Jimmy Carter to lift the U.S. defense budget, this raised the defense budgetary bar that Reagan, once elected, would have to clear to demonstrate that he was a more robust nation defender than his predecessor. This, of course, aggravated the deep (government) deficit-generating problem of the Reagan presidency. In retrospect, the combination of Margaret Thatcher and Ronald Reagan would symbolize a sea change in economic ideology attributed to the period. Changes going on in the World Bank itself were sui generis but afterward blended with a swing in global fashions. The first internal change was that by 1979 Robert McNamara had decided-although he had scarcely yet told anyone-that he would retire in June 1981 when he reached age sixty-five. Meanwhile he would not rest on his oars; he would keep pace ,vith new operational thinking. But he also was not a personal participant in the con~ervative surge that later would be perceived to have been under way. Ernest Stem, Mc~amara's new operations chief after the retirement of Burke Knapp, also was not an ideologue. But he, with McNamara agreeing, albeit less 11. After assuming the chair of the U.S. Federal Reserve Board, Paul Volcker in October 1979 shifted the board's anti-inflationary regime from interest rate monitoring to control of the monetary stock-which sent rates sky-high. 22 INTRODUCTION vehemently, was quite dissatisfied with the way the Bank's project lending and its limited, ad hoc, weakly conditioned, nonproject lending were failing to motivate borrowing governments to undertake needed macropolicy refonns, especially to close unsustainable balance of payments gaps. McNamara included in a speech he gave to the UNCTAD conference in Manila in May 1979 the thought that the Bank should undertake some "structural adjustment lending" to facilitate and cushion developing-country reforms to promote exports. A few days later Stern produced a memorandum that became a kind of charter for structural adjustment loans (SALs); he was careful to point out sensitivities and pitfalls, as well as advantages. The SAL scheme was inherently double valued. It would use program loans to induce reforms, but it also would deliver to a borrower Significant negotiable resources. The second (transfers) function took on increased importance during the middle of 1979 as the impact of the oil shock heightened country appetites for qUick-disbursing foreign exchange. On the one hand, this prompted Bank mem- bers to become more favorably disposed toward the kind of lending innovation McNamara and Stern were recommending (the fonner put another statement about it in his September speech to the annual meetings, this time in Belgrade). But the stepped-up interest in nonproject transfers clashed with one of the prime ingredients of the original SAL design: these new loans were to be made very carefully only to governments, mostly of middle-income countries, that were con- spicuously ready and willing politically to institute major reforms and that had the bureaucratic capacity to do so. From the beginning of SALs, therefore, the Bank had to grapple with a tug-of-war between doing SA lending carefully and very well, on the one hand, and doing a lot of it, on the other. (The push toward quantity would be greatly aggravated by the onset of Latin America's debt crisis in 1982 and then by the urgency of Sub-Saharan Africa's need for financial rescue during the 1980s.) The SAL innovation, which quickly became the fashion in-house, was enough to stir up the Bank But there also were enough personnel changes to agitate any organization. Most important was the president himself. Not only was McNamara an inherently hard act to follow, but the need of two U.S. administrations, those of Carter and Reagan, to agree on a replacement narrowed the field. They chose A. W Clausen, an experienced, evidently successful commercial banker. But he knew very little about development and less about Washington. It was a chancy choice, especially when in the new U.S. administration senior White House and Treasury staffers would arrive with an a priori hostility to the Bank Several of McNamara's leading lieutenants left with him: William Clark, his public affairs chief; Mahbub ul Haq, his most visible and articulate progreSSive; and, in particular, Hollis Chenery. Given the new wave of neoclassical economic orthodoxy that was building in the intellectual communities around the Bank, Chenery's replacement was especially Significant. Clausen chose Anne Krueger, an able, unflinching neoclassical trade economist, and she, in turn, replaced large fractions of the Bank's central economics establishment until she had a highly compatible staff. INTRODUCTION 23 Representing the spirit of all this and yet semidetached from it was the so-called Berg Report of September 1981. As chapter 12 discusses, economic development in Sub-Saharan Africa (SSA) and the World Bank's interventions in its behalf were in disarray in much of the continent as the 19705 drew toward a close. The Bank accepted the request of its African governors to make a special study of the problem. Elliot Berg, an academic market-oriented development economist, was recruited to lead a team of four Bank staff and bimself. In their opinion, the problem they detailed was attributable in part (as official African views of the time had it) to adverse external factors. But the principal fault, said the Berg group, lay with flawed domestic policies. Thus, by implication, SAL was on the right track: it was right for the Bank to lever policy reform. But it was wrong to delay such reforms in Africa; they were needed now. The report had another facet with Bank-wide ramifications. It found African government-owned parastatals so hope- lessly corrupt and inefficient that it argued in effect for privatization. This marked the institution's de facto desertion of the McNamara doctrine that strengthening the market and the quality of management, not private versus public ownership, was the dominant industrial policy consideration for the Bank. The latter reverted to a Black-Garner view of the ownership issue. The renewed emphasis on the comparative advantage of the private sector would have obvious implications for the IFC. However, circumstances delayed their development. In 1977 McNamara had recruited Moeen Qureshi from the IMF to be executive vice preSident (that is, working head) of the IFC. Qureshi shared McNamara's view that, for purposes of industrial development, ownership was less important than the quality and independence of management as well as market flexibility. But then McNamara was so taken with Qureshi that he not only brought him over to the Bank proper in mid-1979 to succeed Peter Cargill in one of the two senior vice presidencies, that for finance, but, reflecting a limited regard for the IFC, the president did not replace Qureshi there. In other words, until the beginning of 1981 Qureshi wore two hats but spent most of his time at the Bank. The new appointee to head the IFC, Hans A. Wuttke, did not work out to his own satisfaction or that of others, and by the time President Clausen had found a SUCL'Cssor, Sir William Ryrie, the latter was not able to take over until October 1984. Thus, partly for lack of leadership, the IFC was slow in giving its full attention to the private sector opportunities the 1980s offered. The Clausen PreSidency and the First Phase of the Debt Crisis: 1981-86 The early post-McNamara years were a complex period for the Bank. This was the running-in time for structural adjustment lending, soon to be supplemented by a sectoral look-alike, sector adjustment lending programs (SECALs), which used 24 INTRODUCTION conditioned program loans in support ofless than macropolicy agendas. But a more telling point is that, procedurally, both SALs and SECALs were advertised to use comparatively specific ex-ante policy conditioning: recipients would not get follow- on transfers unless they had done what they had contracted to do when the loan in question was given. One reason for the procedural choice was that this kind of rigorous, verifiable conditioning was the type popularly a~sociated with the Inter- national Monetary Fund, and of the two Bretton Woods sisters, the Fund was the favorite of the larger Part I governments. Relations with the IMF would remain a preoccupation of the Bank The former would get the jump on responding to the 1982 triggering of the (mainly Latin American) debt crisis, but this was not simply because the Fund had quicker reflexes. The wishful but almost universal estimate was that the crisis posed a "liquidity" not a "solvency" problem, and the division of labor between the two agencies allocated such short-run matters mainly to the IMF. In the early 1980s, the Bank's foray into adjustment lending demonstrated a caution that steadily loosened as the decade wore on, and the balance of payments crisis of many borrowers worsened. With some exceptions, adjustment loans in Asia were few and far between. The Bank's standard, shelf-model, SAL procedures became most apparent in Africa and, later in the decade, in Latin America, where adjustment lending was most pronounced. SALs to larger, more assertive bor- rowers, generally had the strongest borrower "ownership," with the countries typically insisting on making agreed policy changes before loan approval, in order to avoid the domestic stigma of overt conditionality. The most promising client-in retrospect recording one of the most successful interactions of the World Bank with a borrower-was China. The accession of China into the World Bank had occurred toward the end of McNamara's tenure at the Bank. As the worlds largest nation sought to reintegrate itself into the world community after three decades, the Bank became an important facility for the Chinese leadership for under~1:anding the outside world. In the fiTh1: few years the Bank's role was primarily a didactic one of educating a cadre of senior Chinese officials in new economic ideas and technical systems, putting together comprehensive reports on the Chinese economy, 12 and using its early loans to rehuild a higher education system still suffering from the aftermath of the havoc wrecked hy the Cultural Revolution. At the aggregate level, the sectoral composition of the Bank's lending to China in the 1980s was similar to the rest of the Bank (ahout half for transportation and energy, a quarter for agriculture, a sixth for industry and finance, and ten percent for education). In agriculture, the Bank played an important role in accentuating reforms that had been we)] under way in the late 1970s before the Bank appeared on the scene. Using a half billion dollar investment loan for grain production, for 12. The Bank's Hrst comprehenSive report on the Chinese economy, China: Socialist Economic Development, released in 1981, became a primer for senior Chinese officials and went a long way in establishing the Bank's credibility in that country. INTRODUCTION 25 example, it helped elicit a decision to change urban grain price subsidies. Its credibility and quiet low-key approach meant that its many nonlending decisions were taken seriously by the Chinese authorities in the formulation of the country's public investment decisions. 'Whereas almost all private foreign investment was concentrated in the coastal provinces, the Bank's lending focused on poorer inland and deep interior provinces. At the behest of the central authorities, much of the Bank's lending was at the provincial level, which (unlike the situation in other large countries) was also responSible for repayment. This decentralized approach ap- pears to have played an important role in ensuring the high success of Bank operations in China. To be sure, nurturing the relationship reqUired all of the Bank's diplomatic skills. China's acute sensitivity regarding Taiwan was a continuous headache, whether over how it could be mentioned in Bank documents or the hiring of nationals from that jurisdiction. China demanded that any reference to Taiwan in any Bank document be deleted or state clearly, "Taiwan Province, China." The Bank, how- ever, recognized that the issue was so salient to the Chinese authorities that it had little choice in the matter, unless it was prepared to sacrifice the entire relation- Ship.13 Boundary disputes between the nvo giants, China and India, spilled over into strong exchanges on cartographic issues in Bank documents. Operationally, IDA allocation became a contentious issue. With overall IDA volumes stagnating and Africa's predicament worsening, China's IDA claims could only be accom- modated at the expense of another poor giant, India. The Bank gradually reduc:ed India's share over the decade, but even then, until the mid-1980s, China's insis- tence that its IBRD borrowing should not exceed its IDA allocation meant that the volume of lending to China did not grow as rapidly as anticipated. Still, the quite steady and substantial progress with China for most of the decade would be one of the Bank's prouder achievements in the 1980s. With very few exceptions, the intimacy and rapport between the Bank's Beijing resident mission and the Chinese authorities were unmatched in the Bank's history. The Clausen administration clearly did not accord the same overt priority to poverty and its several ramifications that McNamara had. 14 Clausen's admirers, however, valued the new president as a manager. He was far more careful, evidently, with 13. The minutes of a Managing Committee meeting, referring to a letter received from Minister Wang Bingqian, record that "The letter, . , is somewhat threatening to the Bank. It is also a threat to the Bank's independence in publishing." "Minutes of the January 25, 1982 Meeting of the Managing Committee," February 9, 1982. 14. At an informal Board seminar on a major internal exercise on the future of the Bank, Joseph Wood (who was leading the team), in pointing to the issues the task forces would not be looking at, referred to poverty alleviation as one example. The reason he gave was that "we are building on the consensus of the 1970's with regard to the development objectives of the institution. We are deliberately taking some things for granted .... [W]e do not see [this planning exercise] as involving questions about our fundamental purpose and objeCTIves." Board seminar, June 8,1984, 26 INTRODCCTION small-scale, lowercase housekeeping processes and administration. Furthermore, his formal decisionmaking style was consensual. Under Clausen, McNamara's weekly "President's Council" of seniors meeting to discuss the Bank's business at the upper management level became, instead of a committee to advise the presi- dent, a "Management Committee" with prepared papers and recorded votes that shared the president's decisions. Some of the players found the system cumber- some. More important, there was little easy consensus. The two senior vice presi- dents, Stem and Qureshi, headed two factions that managed to generate pervasive tension in the organization, which kept many, including the preSident, on edge. Under Clausen, the tone and substance of the Bank's message began to em- phasize the virtues ofliberalization. Although the often ideolOgical tones in which the Bank was transmitting its new gospel undermined the effectiveness with which it was perceived, there could be little doubt that in the areas where its message was most strident-trade liberalization and the importance of market forces-it an- ticipated the revolution that was sweeping much of the developing world. Another initiative launched by Clausen, and carried to fruition by the Bank's new general counsel, was the creation of a new Bank affiliate: the Multilateral Insurance Guarantee AuthOrity (MIGA). It would, however, only become a force in the next decade. The new U.S. administration, which took its place in Washington a few months before President Clausen, arrived \vith a hostility to the Bank that their nominee had little early success in quelling. Internally, even though the Bank had several staff units already studying the dangers of excessive developing-country debt, the Bank was taken by surprise by the Mexico collapse. The deflnition of the "debt crisis" as one threatening the global flnancial system rather than the well-being of borrowing countries determined its handling. The Bank did not seriously challenge the view. Thereafter the Bank was kept in its place by the severe uncertainty and risks posed to the global financial system. The principal actors in the G-7 (central banks, treasuries, and academia) quickly agreed on the liquidity diagnOSiS and on the consequent need-in both Mexico and other borrmving countries to which the crisis spread, as well as in the U.S.-centered global financial system-for a one-shot stabilization adjustment. This, once successful (conventional wisdom held), would allow developing countries and their supporters to get back to growth promotion. Policymakers were intent on maintaining reliable debtor performance and there- fore the system of trust on which the whole global credit system (and, indeed, the creditworthiness of such lenders as the World Bank) depended. The Bank's prin- cipal contribution was to keep a focus on those structural features of borrOwing country policies that needed to adjust to changing exogenous circumstances. The steep economic decline in the borrmving countries led to a revision in the debt strategy. OffiCially admitting that sensible debt and adjustment policy no longer could keep growth resumption on hold, James Baker, the new U.S. Treasury INTRODUCTION 27 secretary, signaled a shift at Seoul in October 1985. The Bank, along with the Fund, would have a major role to play in a formula that would use multilateral lending to nudge the private international banks back into fresh lending to highly indebted middle-income countries that were prepared to undertake further reforms to narrow their foreign and domestic deficits. Although the Bank welcomed "the Baker Plan," it was bruised by the way the United States issued the plan in Seoul as a kind of diktat, especially when at the same meetings Clausen was informed that the United States would not support his reelection the follOwing year. Within the Bank, serious misgivings about the Baker Plan mounted as it became apparent that private commercial bank lending was not going to resume to anywhere near the extent the plan contemplated. Although Bank analysts were beginning to entertain the need for debt reduction and fOrgiveness by the middle 19808, it was taboo to say so in public. But the leash had been loosened enough for the institution to begin gearing up its Latin American programs. Relations witb Mexico, in particular, became quite intimate. In the same vein, SSA countries had been forced by impending insolvencies into short-term borrOwing, especially from the IMF. Although the Bank had initially regarded the instrument as unsuited for most countries in the region, the depth of the financial crisis-and repayments due to the IMF-led it increasingly into quick-disbursing adjustment lending from 1983 onward. The weakness of most countries in the region would mean that as conditionalities swelled, their enforce- ment was necessarily weak. Barber Conable's Term: 1986-91 Barber Conable, erstwhile Republican member of the U.S. House of Repre- sentatives and taxation expert from upstate New York, was, during the first fifty years of the World Bank, the only profeSSional politician the United States nominated for the Bank preSidency. He says he was the Single nominee on whom James Baker, secretary of the Treasury, George Shultz, secretary of state, and Donald Regan, chief of staff to President Ronald Reagan, could agree. Wooed by Baker and a personal friend of Vice President George Bush, Conable expected to have friendly support from his government. Instead the United States voted ,vith those Bank members who refused to approve President Clausen's administrative budget just before his departure. Conable deduced from James Baker's explanation that Conable would need to commission a major reorganizational study of the World Bank (and then implement its findings) to regain the support of his Part I members. He hired a somewhat obscure consulting firm and, at the consultants' suggestion, put the in-house aspects of the study in the hands of a group of cerebral, fast-track young Turks in the Bank staff. The last deserve much of the 28 INTRODUCTION blame for a misjudgment for which, in their innocence, neither Con able nor the consultants were fully responsible. Is The reorganization effort advertised that the Bank payroll was going to be Significantly reduced. 16 At the same time, in what looked like a romantic simulation of a free labor market, the exercise reorganized Bank staff from the top down. All jobs short of the president were theoretically vacated. Conable chose his top executives, four senior vice presidents, the principal result of which was to remove Ernest Stem as the powerful head of the operations complex and exchange his position with Moeen Qureshi as head of finance. Then the executives were able to bid competitively for whichever subordinates they wished, and the selectees for their subordinates, and so on. One effect was that the regional vice presidencies (likes chOOSing likes) wound up being somewhat more differentiated. But the whole exercise was also a game of musical chairs: a staff that had been enjoying privileged job security and, in some cases, were earning multiples of what they would at home, found themselves locked into heavy financial commitments while they faced a possible loss of jobs as well as their U.S. visas. Many panicked. The substance of the reorganization-in part a further entrenchment of country programming-had some merit. But the process followed was highly disruptive. Against this background, Bank morale during the balance of the Conable term gained surprisingly. The preSident, although careful to avoid formal ventures out of channels, was persuasive in winning pro-Bank funding from the U.S. Congress. In addition to IDA, obtaining agreement on a general capital increase (GCI) of the IBRD in 1988-the largest ever in the Bank's history-was a singular achievement, providing the institution with enough headroom to forestall the seeking of another capital increase for the foreseeable future. Given the strong pressures from the U.S. Treasury on the Bank to become more market and private sector oriented, the 1991 capital increase of the IFC should have faced easy sailing. But here again, as recorded in chapter 13, there was considerable acrimony. Still, when the dust settled, the financial capacity of the Bank Group was Significantly augmented in these years. Conable's affable style was effective with his shareholders, both borrowing and non-borrowing (the sole exception being the government that nominated him). There was a sense that under him the Bank reexhibited some of the heart that recently had been obscured. Poverty, culminating in the World Development Re- 15. At the same time, the president was more aware of the reorganizational issues than other folklore has suggested. Edward Kim Jaycox, chairman of the exercise's steering group and in-house task force, interview, World Bank Oral History Program. A key problem, Jaycox thought in retrospect, ,vas that Conable was not prepared to take charge of the institution- genuinely and hands on-to the extent required by the management model that the presi- dent, the consultants, and the in-house team all chose. 16. 'There was no numerical objective, but there wa~ the idea that we were going to clear out a lot of people in the process. We were going to cut a lot of costs of doing business and costs equal people." Ibid., p. 12. INTRODUCTION 29 port 1990, was once again "in." The adjustment umbrella with which the institution had been so preoccupied since 1980 was stretched in two ways--one, to protect the poor against adjustment shocks to their jobs and incomes, and two, to add to the macro adjustment targets an assortment of related matters that spelled out the quality of life for the poor and disadvantaged, among others. The Bank was pushed from outside on both kinds of amendments to its adjust- ment agenda. UNICEF, the United Nations Children's Fund, was vocal and per- suasive on the first (safety-net) count. Of the add-on subjects, Conable himself was very keen on environmental protection. But the challenge facing the Bank was the continuous expansion of the "environment" agenda beyond its earlier concerns with the health of the natural environment. Thus, because of particular interests both inside and outside the Bank, issues relating to resettlement and the protection of indigenous peoples, which could have been part of a poverty agenda, were instead subsumed in the environmental set. By the mid-1990s, "environment" had virtually become code language for groups frustrated ~ith the prevailing develop- ment paradigm, and therefore with the Bank as the flag bearer of the paradigm. As chapter 13 in volume 2 describes, the issue was pressed by first-world nongovernmental organizations (NGOs), who took on the Bank as an adversary. 'Vithin the Bank there was ambivalence; some, espeCially some of the economists, thought the environmental case was exaggerated. But the decision in 1987 was to go with pro-environmental reforms-whereupon implementation was impaired by prohlems in the formation of a new environment department. It also led to a decision by the Bank in 1988 to expand its work with NGOs. In addition to the programs of special emphasis identified by Conable-en- vironment, protections and improvements for women in development, the private sector-the Bank furthered its involvement in the social sectors (education, health, population, and nutrition). Meanwhile the continued poor performance of African countries led the Bank, at the urging of African intellectuals, to take the covers off and address more forthrightly the political roots of Africa's problems. Hemmed in by the Bank's Articles that mandated the institution to remain apolitical, the new "governance" agenda was initially a cautious attempt to address the political realities in many borrOwing countries while remaining within the bounds of the Articles. However, this period coincided with the end of the cold war; it proved increaSingly difficult to hold the line on sharp, narrow boundaries. As in the case of "environment," "governance" soon became a code word for quite varied agendas ranging from defense expenditures by borrOWing countries to human rights and political and administrative reform. All these policy targets had informed, motivated advocates in the Bank staff and Board. As more and more IDA deputies began taking a leaf out of the U.S. book, goal proliferation was not simply psychically rewarding, it was the grease that lubricated replenishments. For practically all subjects a good case could be made that the issue was important for development. But the steady expansion side- 30 INTRODUCTION stepped the thorny issue of institutional comparative advantage and the trade-offs involved: in budgets, institutional and borrower attention, and skills. Meanwhile, trying to enforce multiple preconditioned policy targets was sap- ping the seriousness of the Bank's adjustment lending. It was a kind of Catch-22. Targets had been added to adjustment exercises because they were good causes and it was administratively easy to do so. But procedurally the choice had been for preconditioning: borrowers entered into fairly precise contracts to do or not do things that were sufficiently measurable for nonperformance to be conspicuous. Review after review of adjustment lending wrung its hands over the proliferation of borrowers' agreed undertakings. In the second (1990) Review of Adjustment Lend- ing (RAL), the last under Conable, the average number of undertakings per adjustment loan was up to fifty-six, and it continued to rise. There was no way so many simultaneous agreements could be monitored, let alone enforced. The pro- cedure was committed to revealed ineffectiveness. It also was psycholOgically off-putting. By the mid-1980s Bank operatives were discovering the essentiality of persuading borrowers to make induced reforms their own, to take "ownership" of them. The growing judgment was that, procedurally, interactive dialogues between borrowers and lenders had a better chance of achieving reform ownership than did the imposition of ex-ante conditions. Even when stretched widest in the late 19805, in the aggregate "adjustment" covered no more than a minority of the World Bank's lending. There still was a large agricultural program, for example, despite the decline in the volume and quality of agriculture in the Bank's portfolio. Several factors seemed to be at work: the declining role of agriculture a~ some borrowers progressed into postagricultural phases of development; the poor performance of the agriculture portfolio and, relatedly, a weakening of the Bank's technical agricultural expertise; shifts to less micro-interventionist, more macro-market. freeing, modes of pro-agricultural poli- and finally. reflecting the pressures on the Bank, a shift in budgetary resources from agriculture into environment-related activities. The shifts in approaches in this large and troubled portfoho in the 1980s epitomized broader shifts in thinking and lending. There was more inclination to link agriculture issues and policies to central macroeconomic matters. It was increaSingly argued that, in many countries, "urban bias" was alive and well: the system of tariffs, other trade restrictions, and overvalued exchange rates imposed hidden taxes on agriculture that, together with direct taxes, placed formidable drags on fanning. Similarly, doubt was cast on the treatment of what had been the segregated realm of agricultural credit. Reformers who gained voice within the Bank in the later 1980s advocated raising farm interest rates to general credit market levels, eliminating subsidies, using rnral financial institutions to mobilize deposits as well as lend resources, and reducing the insulation of such institutions from the rest of the credit market. Third, and especially by the end of the decade, the Bank also began to backtrack on its earlier support for parastatals, calling first INTRODUCTION 31 for their reform and later for their elimination. Signaling a more eclectic approach, it began to be more overt in its support of land reform. And finally, by the early 1990s it was pushing its borrowers to adopt more decentralized approaches to rural development. The markets and private sector shift that began under Clausen continued under Conable. With the accent of structural adjustment continuing to be on economic liberalization, the Bank's role was in a broad sense to improve the "enabling environment" for the private sector, although not at a pace that satisfied the U.S. Treasury. The period marked a major rethinking within the Bank of its prinCipal lending instrument for the private sector: development finance companies (DFCs). Once the IFC was back on track under Ryrie, the Corporation again became a lively force both for direct lending and in support of capital market development. In this sketch of highlights, we revert to the unfinished debt crisis. Conable arrived to find the institution getting deep into lending of the Baker Plan type. But the plan was not working. The private banks had little appetite for fresh lending. Indeed, the Baker effect was to transfer major fractions of the commercial bank debt to the multilateral institutions. Pundits-whether academic, congreSSional, or journalistic-recognized the insolvency problem: they argued for debt reduction, as did the Bank's Treasurer, Rotberg, who had recently reSigned. Within the Bank there was little doubt that debt forgiveness was unavoidable (although there was still unease about how to structure and denominate action so as to do as little damage as possible to the institution's own credit). Until the U.S. government provided a changed Signal, however, the Bank had good reason to keep its head down. Nicholas Brady, Bush's secretary of the Treasury, seemed to have an embedded disinterest in the Bank. He left the whole matter to his undersecretary, David Mulford, who, although presumably with hroader goals, seemed to enjoy harasSing the institution. Thus matters remained in quasi suspension until Secretary Brady in March 1989 delivered the plan, far more realistic than Baker's, that bears his name, its draft (ironically) being the product of Secretary Mulford and his colleagues. In fact the plan had been largely anticipated during the preceding year by both the French and the Japanese. But the Americans accepted the credit, and while the implemen- tation of this scheme did not follow its script very well, the crisis, as our debt chapter says, finally seemed to subside out of sheer weariness, as well as to be dampened by external events, in particular, a sharp decline in interest rates, For Mexico, at lea'lt, problems would be resurrected follOWing the crisis of 1994-95. Alongside the debt issue, President Conable faced the perennial problem of the nature of interaction with the IMF. The book engages this matter in a number of places and contexts. Sibling rivalry was sometimes less than sororal, especially in Latin America and Africa, and relations came to a head over the stance toward Argentina in 1988 and 1989. One version of what happened is provided in volume 2 of this work by former IMF staffer, Jacques Polak, who sees the Bank as ill-advised 32 INTRODUCTION in an attempt to supersede the Fund's macropolicy conditioning of Argentina. Chapter 10 gives another version of the story. The hiatus in Bank lending to China following the Tiananmen Square repres- sion of 1989-at the behest of the G- 7-and the broad issue of "governance" that bubbled up in Africa, exemplified a gradual move by the Bank into its borrowers' politics. The changing political climate and pressures, as well as the reality of its borrowers' governments, meant that as aspects of the matter became subjects of Bank influence and loan conditioning, it would henceforth have to be somewhat acrobatic to maintain the consistency of its actions with the parameters of the Articles. After his rocky start, Barber Conable gave the impression of having gotten more or less on top of a complex job in a complex period. By the end of his tenure it appeared that the institution was back on track. Like a good politician, however, Conable had staved off pressures by various compromises that often added to the Bank's goals and commitments. That legacy would prove costly in the long term. Still, Conable had regained the confidence of shareholders and staff, as well as external pressure groups. His retirement, when in 1991 he probably could have won renomination by the Bush administration if he had so wanted, was therefore surprising. There were various factors, including other interests, but prinCipally he was weary of tlle lack of support he and his Bank had received from the American administration, despite his hitherto close political and personal ties with it. The Preston PreSidency: 1991-95 Lewis Preston's term as Bank preSident, cut short by his death in May 1995, was a troubled, stressful time for the World Bank More than anything, the end of the cold war changed the global environment and with it the political support the Bank had enjoyed in its major shareholders. Preston was widely viewed as the most distinguished commercial hanker to head the institution. His work of steering J. P. Morgan around the shoals of the debt crisis of the 19805 was much admired. He was a renowned manager. But Preston did not bring a substantive agenda with him. He picked up what he found. Programmatically and administratively, he was a fine tuner. He was distracted by personal tragedy and bad health. The troubles with which he had to grapple were less currently generated from within the institution than accumulations from the past and external pressures and matters of psychology and perception. One of Preston's first acts, in what had become a habit of all new chief executives at the Bank, was to tum his managerial talents to making various limited adjust- ments in the organizational structure. The most conspicuous and controversial was the installation of the same top structure he had used at Morgan, namely, a trio of "managing directors" just short of himself who ostensihly had no "line" respon- INTRODUCTION 33 sibilities but collectively, subject to his decision, had all of them. Managing direc- tors could, as needed, act for each other but all had areas of sectoral and regional specialization. TIlls structure cut sharply into the fiefdoms that had formed around the senior vice presidencies follOwing the 1987 reorganization. But the creation of new thematic vice presidencies reflecting institutional priorities (poverty, environ- ment, and the private sector) led to its O'wn set of problems, not least being their preoccupation with their own public relations. A key issue confronting the Bank was to gear up for operations in East Europe, while limiting the diversion of institutional energies from its traditional borrowers. Despite substantial pressures from its major shareholders, the Bank skillfully reconciled these competing interests. An increase in staff and budgetary resources ensured that, for the most part, the interests of old borrowers were not com- promised. In acceding to G-7 pressures for major lending to Russia, the Bank included clauses in its loans that curbed risks to the rest of its portfolio. In tenns of program, Preston emphatically reiterated, and in terms of institu- tional priorities, extended, Conable's renewal of poverty reduction as a central mission of the Bank The institution was in an active mode with respect to environ- mental protection. It became the key multilateral cooperator in the formation of the Global Environmental Facility. In addition the Bank was more forthcoming to NGOs, a process begun by Conable. For this preSidency it is not wrong to put matters of image high on the topical agenda. The Bank continued to be battered by the (mainly rich-country, particular- ly U.S.) environmental NGOs. Bank bashing hecame an easy blood sport for many media. There were disgruntled employees to quote and always disgruntled legiS- lators put off by the (tax-free) personnel costs the Bank incurred; its budget constraint was still soft. A set of random factors converged in the early 1990s. Chief, in fact, was the same chronological fact that gave birth to the present work The approach of the Bank's fiftieth anniversary raised its profile rather awkwardly. Any number of memorial exercises were launched, not all benign. "Fifty years is enough" became a rather shrill theme. There was some spillover from inaugural excesses of the European Bank for Reconstruction and Development in London. And the World Bank picked a bad time to be revealed in some serious constmction miscalculations and cost overruns in the constmction of its new headquarters building. Retrospec- tively, management controls and Board supervision had been weak This plainly was a problem Preston inherited. Yet he also looked too expedient in the way one vice preSident, with a long record of intelligent and worthy service, was sacrificed in institutional penance. The Preston Bank was given little credit for self-criticism. The press lionized the negative findings of the report of the task group on portfolio management in 1993 (named for its chainnan, the recently retired vice president Willi Wapenhans). The group concluded that the procedures and incentives of the institution tended to 34 IKTRODUCTION reward project and program design-and, indeed, lending-at the expense of implementation and follow-up. But external critics were slow to note that all of this useful (and, in fact, familiar) criticism of shortfalls was self-analyzed and self- revealed, not something thrown at the Bank from outside. Similarly, an inde- pendent 1994 study by a team chaired by Bradford Morse, former head of the UNDP, was critical of the Bank, the government of India, and the governments of three Indian states for their insufficient attention to the environmental and popula- tion-displacement aspects of a set of dam projects on India's Narmada River. The whole study, although inSistently promoted from outside (see the environment chapter in volume 2), was done at Bank behest. This was tbe first time the institution had brought in outside evaluators to make a major assessment of one of "its" infrastructure projects. One consequence was the setting up of a continuing inspection paneL The Narmada reactions deserve some elaboration. Critics charged that the problems stemmed from the "secretive" nature of the institution: more openness would have allowed stronger external scrutiny and, with it, better quality control. A new disclosure policy was now put in place and public information centers were opened. Yet it was also elear that the way these decisions were arrived at distorted outcomes. Bank staff and management discussed drafts of the disclosure policy with Washington-based NGOs before most executive directors saw the drafts; indeed, some executive directors first received the drafts from the NGOs. It was not surprising that the first center for information dissemination opened in Washing- ton, D.C., not in borrOwing countries. The establishment of an inspection panel also was a step to pacifY vocal critiCS. 17 It was evident at the time to both senior management and many members of the Bank's Executive Board that creating a new bureaucratic entity was not a real answer. The need WdS better accountability, both of staff and managers. More bureaucratic baggage was not what an institution already overburdened by a surfeit of rules and procedures required. Any new administrative mechanism would be inclined to assert its jurisdiction and inaugurate an inspection at any prompting by complainants. The Bank was now operating in a supercharged atmosphere, where appearance and moral posturing were all-important. The United States, pressed by a self-righteous Congress to link IDA to the creation of such an entity, was the principal force behind the panel. In the Board, the vote on the panel was a close one, sealed only after the United Kingdom reluctantly went along, trading its vote for U.S. support for the British drive to secure the 1997 Annual General Meeting in Hong Kong. In fact, nearly all the Narmada-related changes reflected unilateral pressure by the U.S. Congress, which used the leverage of IDA to force its preferences-and then retreated in its IDA contributions. Accountability was a one-way street. 17. Ibrahim Shibata, The World Bank Inspection Panel (Oxford University Press, 1994). INTRODUCTION 35 For the first time in many years, the state of Bank finances, in particular those of the IBRD and the IFC, was robust. The financial capacities of both institutions had been increased tremendously by the recently concluded capital increases, Profits were ample. And the IBRD had emerged as one of the cheapest borrowers, bar the G-3 treasuries. With the abatement of the debt crisis and the entry of East Europe, a strong demand for IBRD lending seemed likely. But instead such lending stag- nated, and loan repayments became as big a source of the institution's cash flows as market borrowings. The Bank's capital intermediation role waned even as its financial capacity and potential effectiveness flowered. Although booming private capital transfers and a reduced role of states (the Bank's principal customers) in economic activities contributed to the diminishing demand for Bank funds, it was still puzzling that demand was so weak for loans from an institution whose loans were still unmatched in financial cost and maturity. Part of the reason undoubtedly lay in the increased transaction costs of Bank loans that had been bartered over time with donors being persuaded to contribute to IDA. IDA replenishment exercises had lost whatever spirit of cooperation had motivated participants to reach for good collective results in the past. In December 1992, Ernest Stem, the Bank's representative at the IDA lO negotiation, told the Board that the final agreement of the negotiation reflected the diSintegration of the whole system of collective multilateralism. Burden-sharing had become the op- posite of collaboration. Projects and Project Quality In 1992 the Wapcnhans Report called into question the effectiveness of project lending, the very Signature activity of the World Bank. Perspectives on the ac- tivity-and on the quality of project performance-shifted during the 1970s, 1980s, and 1990s. Evolving Project Operations The Bank developed a standard set of loan-processing procedures that became known as the "project cycle." In the course of identification, preparation, appraisal, and supervision phases, Bank loans, to varying degrees, analyzed the economic, technical, institutional, flnancial, commercial, environmental, and SOciological im- pacts of its projects. The relative weight and quality of the analyses addressed to these several criteria differed by project type, but also over the institution's own life cycle. Thus although commercial and technical criteria were prominent in the early years of the Bank, environmental and SOciolOgical criteria became more important in later years. Whereas the borrower and the Bank exercised joint responsibility during the project cycle, the relative responsibilities among borrowers and at different stages of the cycle differed markedly. 36 INTRODUCTION The Bank's clearest responsibility-and involvement-was at the appraisal stage, which undertook to "examine and evaluate the economic and social objectives that a project is deSigned to meet, to assess whether the proposed project is likely to meet these objectives efficiently, and to recommend conditions that should be met to ensure that the purpose of the project will be achieved."ls Appraisal normally covered seven broad areas, although their relative weight varied Significantly with the sector and over time. 19 \Veaker borrowers called for a greater degree of Bank involvement, and in more extreme cases the projects literally were "Bank" projects. The institution's direct involvement in project identifIcation and preparation was particularly marked in Africa, where, more often than not, the project ideas govern- ments advanced were only peripherally represented in their official public invest- ment programs. The formulation of a full project concept was in most cases the product of Bank identification and preparation missions and work done by Bank- fmanced or Bank-supervised consultants, owing to the limited capacity of local public administration. 2o Similarly, during the implementation period (that is, while the investment was being physically made and shaped), technical assistance sup- plied by the Bank and Bank supervision missions were integral parts of the average project. The downside was that the institution's heavy involvement in the project cycle (and the concomitant light involvement by the local authorities) meant that the locals in many cases had little interest in the project's fate. All too often in weaker countries, projects were associated with their main external sponsor; they lost their identification with the national agency that should have been primarily responsible for their success or failure. The Bank's project work encompassed many issues. While the factors underly- ing the decision to finance a specific project were the most intellectually engaging, other matters-ranging from technical and financial questions to procurement- were also important. The financial issues included the share of total project cost to be financed by the Bank Group. Normally the shares were higher in poorer countries with severe domestic resource constraints. The Bank, however, felt that ceilings on its share helped ensure country "ownership." In addition, the lower the Bank's share, the more projects it could assist in a country. A related issue was the degree of financing of local costs. The scarcity of domestic saving often was as 18. Operational Manual Statement 2.20, January 1984. 19. These were: economics (project benefits, economic return); technical (engineering design and project costs); institutional (management, organization); financial (implementing agency and direct beneficiaries); c'Ommercial (procurement, marketing arrangements); en- vironmental assessment; and SOciolOgical aspects (for example, sociocultural factors, target groups, involuntary resettlement). 20. The staff intensity of the Bank's project cycle translated into higher administrative c'Osts. By the mid·1980s the administrative expenses of the operations departments for processing new loans amounted to about I percent of loan commitments (about 0.3 percent of average total project costs). SuperviSion costs were about 0.16 percent of the outstanding portfolio. INTRODUCTION 37 serious a constraint on investment as the shortage of foreign exchange. Yet the Bank's Articles, based on the hard lessons of the 1930s, had focused the institution's role on foreign exchange fmancing to deter countries from piling up foreign debt for purposes to which local resources coulU be deployed. Similarly, the financing of recurrent costs was severely restricted; they usually involved goods and services susceptible to local financing. The Bank's prevailing policies in these areas had been quite restrictive. During the 1980s, as the institution ventured increasingly into social sectors and many of its borrowers faced acute budgetary problems, it loosened its practice. Another object of attention was procurement. Activity involving expenditures also concerned contracts. Since Bank lending was largely to public entities, pro- curement issues on Bank contracts always entailed intense scrutiny. Although in its very early years the Bank did not have a system of international competitive bidding (ICB), this feature soon became integral to its loans. The ICB process became a prerequisite of Bank loans as borrowers learned how to employ processes for preparing bidding documents and evaluating bids. Borrowers often complained that the bidding procedures tended to steer contracts in particular directions. The Bank did indeed use ICB as a means for selling the institution to important developed-country constituencies: participating in the Bank was good not just for the soul, but also for the pocket. Many prominent executive director offices in developed countries kept a close tab on Bank projects and contracts therein, to help domestic firms in their constituencies. While close scrutiny maintained a certain discipline in the process, over time countries learned how to nudge out- comes to favor constituency firms. One such mechanism was the use of trust funds. Since the choice of consultants often affects ex ante the design and technical criteria that a project adopts, it was hoped trust funds would enhance the competi- tiveness of constituency firms and steer project procurement in their direction. Nevertheless, the large equipment and construction entailed in most Bank projects-especially in infrastructure-meant that established procedures pre- served a certain integrity in the awarding of public contracts. 2 ! Indeed, it was not infrequent for a worried public official to try to secure Bank funding simply to shield himself from political pressures. In larger countries, however, since Bank loans usually funded only small fractions of public investments, governments com- monly could steer the Bank away from sectors where particular interests were paramount. Furthermore, in recent years, \vith the Bank's infrastructural financing role waning, the benefits of its contractual integrity were diminished. The choice of projects was always guided by a mix of tangible and intangible factors. One view was to direct Bank projects into areas and sectors faced with the most critical "bottlenecks"; ports where importers and e;,:porters were paying high 21. This could not always be maintained. In the 1970s Bank officials grew suspicious at the inordinately high percentage of contracts on projects in Romania subject to IeB won by Romanian firms relative to their quite limited success outside Romania. 38 INTRODUCTION demurrage, power plants if there were severe power shortages, a highway connec- ter, and so on. A variant of this view held that the Bank should engage those institutions that were the worst run. This variant of the approach could offer high returns, as in the case of the Spanish railways in the 1950s. Yet, according to a contrary argument, to attempt to reform such institutions-PEMEX in Mexico, the Argentina railways-was to throw good money after bad. Instead, the institution should involve itself with those institutions and ministries that offered the greatest opportunity for a constructive relationship. The question of whether to concentrate on where the need was greatest or where projects had the best chance of succeed- ing was not confined to projects. It extended to regions within a country as well as to choices between countries. From the late 1970s onward the Bank was more likely to justify its involvement on the ground that a bad situation would be even worse without the institution. One consequence, as the Bank took up more difficult cases, was a worsening of the average performance of the Bank's portfolio. The rate of return was never the basis for choosing a project. It was an important element of discipline-a reality check-although in practice its principal purpose was either to ratify a choice or to reject unwise projects suggested by borrowers. The Bank was always aware that as a practical matter a rate of return could be, simply, one indicator. The benefits of dams plainly consisted in good part of externalities: effects on regional development. The psychological benefits-what it meant to a government to support a major development project while achieving at least a minimum rate of return-had other advantages. As it turned out, if positive externalities were overplayed in benefit-cost calculus, negative externalities usually were underplayed. Dams were a classic example. George Woods, himself an invest- ment banker, leaned toward broader assessments. "Little people," he said, "only think in rates of return."22 The analytical role of rates of return had been both strengthened and weakened in the 1970s. On the one hand, the techniques of cost-benefit analysis were becoming more refined, and by the mid-1970s the Bank's poverty thrust resulted in major efforts to develop and ope rationalize the techniques of social cost-benefit analysis. Such techniques, using poverty weights, were tried in a very few cases in the 1970s but almost never since. In the 1980s even shadow prices were used only sporadically.23 As a practical matter, it could not have been otherwise.24 A cost-benefit analysis of social cost-benefit analysis would yield low returns. The conviction grew that it 22. Roger Chaufoumier, interview, World Bank Oral History Program, July 22, 1986. 23. A report in the mid-1990s on the quality of economic analysiS in Bank project appraisals found that, with the exception of projects in China, there was little systematic use of opportunity cost estimates to reflect the value of nontraded items or foreign exchange. 24. For a contrary viewpoint, see 1. M. D. Little and J. A. Mirrlees, "Project Appraisal and Planning Twenty Years On," in Stanley Fischer, Dennis de Tray, and Shekhar Shah, eds., Proceedings ofthe World Bank Annual Conference on Development Economics, 1990 (World INTRODUCTION 39 was better to grapple with broader economy-wide distortions at their conceptual roots instead of trying to piece together the effects through individual projects. Rules of thumb such as spatially situating a project in a poor region went a long way, especially in countries where poverty was perva<;ive. There were technical difficul- ties in capturing the benefits of projects (or components of projects, as in rural development cases) that did not involve direct production. The problem became more apparent as the Bank moved into social sectors. Although the point was rarely made explicitly, there were those who felt "that some things had to be considered as absolutes although there \vas still very much the mystique of the rate of retum."25 The traditional project emphasis of the Bank was conSiderably downplayed in the 1980s, as institutional focus shifted to adjustment lending. Another, more modest, modification of the project emphasis was the sector approach. To a consid- erable degree, Bank projects were linked to broader sector investments and poli- cies. Thus in telecommunication and railway projects, a sector investment program usually was called a project; the Bank would establish broad sector conditions but at the same time make a technical appraisal of the proposed investments that composed the project. FollOwing the first oil shock, sector lending began to receive greater attention. In a note to the operations managers in 1974, Burke Knapp called attention to it as a suitable lending technique in those "situations when the Bank could use its staff more effectively and make a greater contribution to the development of the borrowing countries if it were to focus more on the achievement of over-all sector objectives, the improvement of sector policies and the development of appropriate institutions, and relatively less on the merits of specifiC investment projects."26 Requiring both a large investment program and an experienced and sophisticated borrower, sector loans were not a general-purpose tool. Knapp's note acknowledged that the Bank had made "very few sector loans" that included all the desired elements. Examples of those few included power loans to Mexico, Indian railway loans, and water supply loans to Brazil. Although D Fe loans appeared to have some of the elements of sector loans, they were not based on Bank analysis of specific projects; they were not predicated on reviews of sector programs; nor were sector conditions attached to them. But, noted the vice preSident, sector lending also was a convenient means for accelerating the disbursement ofloans "in cases where a rapid transfer of resources is essential," considerations that took on an added Significance in the light of the energy crisis and the expanded lending targets. Nevertheless, sector lending remained relatively modest. The Bank found few institutions capable of carrying out investment programs in accordance with the criteria established for invest- Bank, 1991), pp. 351-82. Further observations are offered by Glenn P. Jenkins, "Project Analysis and the World Bank," AEA Papers and Proeeedings, May 1997, pp. 38-42. 25. Chaufournier, Oral History, July 22,1986. 26. Memorandum, J. Burke Knapp to regional viee preSidents, "Sector Lending." June 10,1974. 40 INTRODUCTION ment, procurement, and disbursement by sector-lending standards. Moreover, countries that did have the capability-in Latin America, for instance-were un- willing to adhere to the Bank's sector loan conditions, given the easy availability of commercial funds in the middle 1970s. After going into abeyance in the 1980s (although elements of the approach were to be found in SECALs) sector loans resurfaced in the 1990s, the lOgic being that it was the sector, rather than the more particular activities ostenSibly financed, that really constituted the project. In their more recent rendition, sector loans have begun to pay greater attention to sectorwide expenditures (and not just invest- ments), as well as donor coordination in countries that depend greatly on aid. Process changes took the Bank along yet another new path: the Bank now put more emphasis on participatory approaches, which encouraged relevant groups to become involved early in lending operations. 27 Although the issue had seeped in as part of the poverty agenda of the 1970s, its effects on project design and execution had been limited. Borrowing countries were rarely eager to embrace the concept. Issues of participation were closely linked to those of decentralization, and in tum to the distribution of political power. Over the 1980s the issues of participation, NGOs, and decentralization all came to the fore and were soon joined by their cousins, "civil society" and "stakeholders." At the rhetorical level, the terminology became integral to the "environmental" agenda that gradually expanded beyond concerns for the physical biosphere to a broader emerging critique of the dominant development paradigm. Although some enterprising Bank staff seized on these new fashions to advance terminology (and themselves), other staff sought to use issues of participation and decentralization to address long-Simmering problems faCing Bank projects, par- ticularly those affecting large numbers of poor people. Bank projects in agriculture, population, health and nutrition, low-income hOUSing and urban upgrading, and water and sanitation were particularly affected by this shift. Equity considerations apart, painful experience had shown that there were sound reasons in these fields to expand the participation of beneficiaries if project effectiveness was to be improved, especially with regard to better cost recovery, expenditure patterns, and monitoring and maintenance of operations. Project Quality, Then and Now The high quality attributed to Bank project lending in its early decades rested on several factors. Borrowers were relatively capable technically, the choices of tech- 27. These changes were codilled in a series of memoranda: OPI0.00 (6/94), "Investment Lending"; ODs 4.00 (10/89), 4.01 (10/91), and OPIEP 4.02 (10/94), "Environmental Assess- ment"; OD4.20 (6/90), "Resettlement"; and 'World Bank and Participation," Operations Policy Department, September 1994. INTRODUCTION 41 nique were clearly defined, and measures of project performance were compara- tively unambiguous. Over time Bank lending moved into countries and sectors where all these factors were less favorable. Even as project goals and designs required more sophisticated administrative capabilities, these were lacking in- digenously. This discrepancy and its impact were most evident in rural develop- ment projects in Africa in the 1970s. Animated by desirable goals, the projects outreached prevailing local capacity. In the 1990s new goals, similarly worthy, posed similar questions. Thus although poverty targeting had much intellectual merit, borrowers rarely had the implementation capacity. For two decades (1952-72), quality standards in Bank projects were maintained by the Ccntral Projects Staff. This group ruled the roost with an iron hand. The 1972 rcorganization dispersed much of its staff and weakened its bureaucratic hegemony. As an institutional characteristic, the "quality" trait did, however, have trade-of£~: it incurred a quantity cost and imparted a reluctance to experiment. Many have criticized the McNamara era for an emphasis on quantity. But such complaints fail to acknowledge that conceptnalizing quality versus quantity as a zero-sum trade-off is false. One could always do a single project in a country and make it nearly perfect. But would that make a dent? The rapid expansion of project lending meant that current resources devoted to appraisal increased in relation to those going to supervision. Per se, the shift to the upstream part of the project cycle had merit. Repeatedly (most recently in the mid-1990s), internal analysis pointed out that quality at entry was a crucial deter- minant of project outcomes. Intensivc supervision of projects poorly conceived was akin to locking the stable doors after the horses had bolted. Still, by the mid-1970s staff were asking whether quality was being sacrificed in behalf of quantity. The Bank's senior management insisted there were no such trade-offs: no one was ever forced to bring for funding a project that he or she felt was not ready. Indeed, the authors have found little documentation of such behavior. However, the lending targets set for staff clearly placed them under pressure to deliver; even more, this was strongly perceived to be .the case. Questions about the quality of its projects were central to the Bank's psyche- and indeed those of its critics. Debates about the quality of Bank projects invariably drew upon the Bank's own internal analysis and evaluations, in particular, project evaluations of the Operations Evaluation Department (OED). In 1983, a decade after it was formed, the OED evaluated more than a thousand projects implemented over a ten-year period and involving more than $22 billion in Bank loans and about $67 billion in total investments. That review found that 86 perc'Cnt of all projects (and 90 percent by value) appeared to have achieved their major objectives and were judged to have been worthwhile. For project~ for which an economic rate of return was calcu- lated, the reestimated rate of return averaged about 18 percent. Over the next decade, however, evaluations of Bank projects, as determined by periodic OED findings, declined (table 1-2) and became a subject of much analysis, 42 INTRODUCTION Table 1-2. Assessments of Project Performance a Percentage satisfactory Sector and region 1974-80 1981-89 1990-94 Sector Agriculture 75 58 65 Energy 86 85 75 Finance 83 72 49 Human resources 86 74 85 Industry 83 61 69 Power 93 77 74 Program and policy 100 64 69 Technical assistance 100 56 43 Telecommunication 97 83 80 Transport 87 73 76 Urban 100 80 75 Water and sanitation 100 71 60 Region Sub-Saharan Africa 79 58 56 East Asia and Pacific 92 78 86 Europe and Central Asia 86 77 72 Latin America and Caribbean 85 62 66 Middle East and North Africa 89 78 72 South Asia 89 73 75 Bank-wide 85 68 69 Source: OED data. a. The time periods refer to the closing year of the project. that is, when all disbursements are completed. both inside and outside the Bank. In addition to a string of embarrassing setbacks in projects that earned the institution indictment by environmental groups (see volume 2, chapter 13), the issue was the subject of intense scrutiny, thanks to the 1992 report of a "portfolio management task force" (PMTF). The review had been prompted by the new president, Lewis Preston, who had been struck by the institution's preoccupation with preparing new projects, relative to managing its large portfolio of already approved projects in various stages of completion. The task force, headed by recently retired Senior Vice President Willi Wapenhans, produced a report whose analysis and conclusions were a landmark in the institu- tion's history, as much due to the external attention as any new revelations, since much of its findings had been documented by a series of internal reports during the 1980s. 28 28. World Bank, Portfolio Management Task Force, "Effective Implementation: Key to Development Success," September 22, 1992. In tum its fmdings were based on an analysis by the country operations staff, "The Relationship of Loan Processing to Project Quality," March 27, 1992, which in tum drew upon sundry OED reports and the Annual Review of Implementation and Supervision (ARIS). INTRODUCTION 43 Although the PMTF noted weaknesses in the appraisal process, it put the onus of weaknesses in project quality on supervision. That analysis had played well with the many who were by now convinced that institutional incentives had generated a strong "approval" culture, that one preoccupied with getting projccts approved by the Board, while giving limited attention to their implementation. Yet matters were not as simple as the PMTF made out. With reviews showing that the quality of appraisal was an important determinant in the success or failure of projects, perhaps the problem was still at the appraisal end of the process. 29 Another study covering projects approved in calendar year 1993 found that the quality of economic analysiS was poor in 13 percent and barely acceptable in 25 percent of the projects subject to cost-benefit analysis. This finding suggested that rapid progress had not been made in follOwing the PMTF's recommenda- tions. 30 For the Bank, the major embarrassment was provided by results in areas that constituted its core of infrastruct:ural lending: power, transport, major irrigation systems, water and sewage, and telecommunications. These were the areas on which the Bank had built its reputation. Most of the enterprises in them were state-O\vned monopolies, natural monopolies with economies of scale. Severe capi- tal market limitations and foreign exchange intensity had made these sectors natural channels for Bank lending. The key factors underlying success in earlier years had included the borrowing governments' strong commitment to maintain institutional autonomy and enforce fmancial covenants, Bank staff and managers whose technical and managerial competence was widely acknowledged, and favorable macroeconomic environ- ments. During the 19705 and 19805 all these factors had eroded, as was repeatedly documented in internal reports. 31 Foremost was the inability of the project en- tities and the Bank to enforce capital structure covenants (typically debt-to-equity ratios and debt-service coverage) as well as revenue covenants (concerning rate of return and internal cash generation). This inability was both cause and conse- quence of the enterprises' declining autonomy from government pressures. The 29. In the 1995 evaluation cohort, 85 percent of projects with satisfactory (or better) outcomes had satisfactory (or better) appraisals, while 57 percent of those with unsatisfac- tory (or highly unsatisfactory) outcomes had deficient appraisals. 30. World Bank, "A Review of the Quality of Economic AnalysiS in Staff Appraisal Reports for Projects Approved in 1993," Operations Evaluation Department and Operations Policy Department report, May 5,1995. 31. Examples include "The Bank's Role in the Electrie Power Sector," Industry and Energy Department, 1992; "The Bank's Evolving Policy toward Railway Lending, Infrastructure and Urban Development Department, 1991. Relevant OED reports include, "A Review of World Bank Lending for Natural Gas," 1992; "Water Supply and Sanitation Projects: The Bank's Experience, 1967-89"; "The Bank's Experience in Telecommunications Lending: An OED Review," 1993; "A Review of World Bank Lending for Irrigation," 1994; "Lending for Electric Power in Sub-Saharan Africa," 1995. 44 INTRODUCTION Bank itself, especially in its managerial cadre, was increasingly staffed by generalists who were poorly equipped to manage these issues credibly. Moreover, sector needs had shifted away from investments toward maintenance expenditures, matters that were more difficult to manage from outside. Though the Bank time and again pressed governments to follow good practice, they did so only sporadically. The institution's unwillingness to enforce project covenants over long periods of time reflected a dilemma: whether to endanger broad country relations over issues in particular sectors, especially when the country was reeling under external shocks (1970s) or delicate macroeconomic matters were under negotiation (1980s). Timidity, however, ill-served either the borrowers or the institution over the long run. A different problem arose from the complex institutional aspects underlying many project problems. Despite its mounting incantations of "institution building," the Bank had limited internal expertise in what admittedly always had been a most difficult area. Solutions invariably included large (and expensive) doses of technical assistance, studies, and analysiS, despite widespread acknowledgment of the severe limitations of such inputs. Technical assistance reqUired speCial skills not always easily available in the Bank or to the Bank, especially in the difficult environments in poor countries where it was most needed. Another factor that contributed to perceptions of declining project quality was unrealism in initial estimates of economic rates of return. Optimism biased various aspects of project estimation, running from price projections of specific project outputs to borrowers' administrative capacity to implement ambitious goals. Time and again, the unrealism was Signaled in various internal analyses and OED re- ports, with little effect. At the end of the 1980s, in fact, an analysis showed that the difference between ex-ante and ex-post rates of return had widened almost con- tinuously during that decade. The PMTF also Singled out high-Side bias as a matter needing improvement in the Bank's economic analysis.32 At the behest of the Board, another study examined the issue. 33 Recent OED reviews of evaluation results indicate that while the declining trend of past years seems to be stabilizing, about a third of 32. The postappraisal review of economic analYSiS, begun in early 1990 by the Working Group on Economic Analysis (ECON), was integrated into the Portfolio Management Task Force Report. It concluded, among other things, that substantial improvement in economic analysis was reqUired, given the findings that in only 55 percent of the reviewed projects was the economic analysiS rated acceptable or better, and in the remainder it was deemed to be barely acceptable or poor. 33. World Bank, "Project Appraisal: A Process Study-Approach Paper," p. 1 The study found that for projects subject to cost-benefit analysiS, the quality of the economic analysis was rated good or better in 20 percent of project SARs, average or ac(:eptable in 42 percent, barely acceptable or marginal in 25 percent, and poor in 13 percent. This was similar to the overall project ratings referred to in the PMTF Report. The rating criteria were speCially adapted for projects normally not subject to cost-benefit analysis, those in the education and population, health, and nutrition sector where the results showed that economic analysis was acceptable or better in 74 percent, and poor in 2 percent. JNTRODGCTION 45 projects reviewed at the end of the investment phase still had unsatisfactory outcomes.34 There was some evidence that the Bank in its haste to genuflect to environmental and social pressure groups was paying less attention to economic and technical aspects, thereby casting another stone at measured project quality. For all the hand-wringing over project deterioration, few questioned the fitting- ness of the standards being applied. Projects designed to first-world standards might be showcases radiating hest design and best practice. But they, including those in the social sectors, also could be overengineered. They could stick out as high-cost cases soon to he overwhelmed. Projects that kept only a few steps ahead of-and therehy led-good borrOwing country practice often were fundable and had better chances of replication. But in the Bank, the high-cost showcase projects were often pushed by interests in the Part I countries that were harshest concern- ing the Bank and could hold it to ransom. Borrowers with options began to exit. In a few others, notably China, which had both the domestic capacity and the size always to come up with mutually agreeable projects, projects flourished. But in the smaller poorer countries, the steady escalation of conditions and social standards meant that the dice were heavily loaded against project success. Three pOints stand out in these debates on the quality of Bank projects. First: they are based on the Bank's own assessments, whose limitations render simple judgments nearly impossible. The judgments are not based on a project's perfor- mance during its working life, but at a point in time when the Bank's financial disbursements ceased, typically at the beginning of the artifact's working life. Even trend~ are difficult to interpret: was it due to poor inputs, the Bank's venturing into more risky terrain (whether by country or sector), changed value judgments, or a more volatile glohal environment? Second, and this has been little emphasized, the Bank's lending effort was really the eqUivalent of venture capital in economic development. This meant risks, and with it, the risks of failure. For a venture capitalist, a record of two out of three is admirable. The problem of project failures was most manifest in those projects that not only did not deliver the benefits expected but did substantial harm, clearly violating a sort of Hippocratic code of development: above all, do no harm. On the other hand, in many cases the worst consequence of a low-return project was debt without development. In the IDA countries, where the Bank had greater respon- sibility, the debt itself was not financially very onerous. In the IBRD case where it was, the clients were more sophisticated and had to bear a greater burden of responsibility for their projects. All of this said, however, the Bank did not act like a venture capitalist, since it was little disposed to share risks with its clients in the event of project failure. Issues of accountability and diScipline were also complicated by the actions of the Board. Although management held the initiative for bringing projects to the Board and the Board never turned down any management proposal, it had in- 34. World Bank, "Annual Review of Evaluation Results, 199.'3," OED report, December 1994. 46 INTRODUCTION fluence before projects arrived and in collective discussion of future projects. If major shareholders held strong views about particular projects, these were dis- cussed quietly ahead of time. In more recent years, such backroom dealing became more intensive, especially as Washington-based NGOs used the mechanism to influence Bank projects. During Board discussions that body gave management a sense of direction, in particular regarding sectors and types of projects. More recently there has been so much partly conflicting guidance as to be enervating. We have dwelled on the complexities of project lending for the Bank because it has been the institution's prototypical activity. But in fact the same complexities inhered in most of the World Bank's first half century of operations, many of them designated as sectoral or other categories of project lending, some of them called differently. The project issues just discussed will reverberate through the rest of the book. A Half-Century Crisis The World Bank's fiftieth anniversary created a stir about whether the institu- tion should survive or not. Arguably, the fifty-years-is-enough concern simply was contrived by the calendar. The Bank long since had become a robust organization with an identity of its own; it was not about to expire qUickly. As the institution crossed its half-century mark, however, it seemed to face a middle-age crisis of confidence with the entry of East Europe, the sharply contrasting fortunes of East Asia and Africa, and the multiplication of small borrowers whose circumstances and needs were highly differentiated. The institution's predicament reflected, in part, the angst of its progenitors: nation-states-more particularly, the flagging power of central governments. Buf- feted by pressures for international cooperation and conformity on both economic and political matters, central governments were faced with difficult times, and disillusionment with them, almost inevitably, spilled over to their international creations: multilateral institutions. The formal levers of the Bank's governance-its Board of Governors, executive directors, and the preSident-have been increasingly undermined by a plethora of interest groups ("stakeholders" in more recent parlance): NGOs, financial markets, international business, bilateral foreign aid bureaucracies, and multilateral "do- gooders," the broader "intellectual" community (academics, think tanks, and the media), and, not least, the interests of the Bank's own staff and management. In contrast, formal Bank decision making continues to be driven by the financial and political structure of the past, especially by a dominant U.S. voice and over- weighted Europeans. Japan has managed to gain some influence, by overtly flexing its financial muscle in IDA as well as through the G-7. But other rising economic powers in East Asia, as well as the borrowers whose reflows in practice fund much INTRODUCTION 47 of IBRD and an increasing fraction of IDA, have little voice. The result has been a gradual erosion of activity through a retreat of both creditors and borrowers. Shareholders frustrated by their lack of influence on the Bank began to adopt one or another of two alternatives. One was partial withdrawal. Following a time- honored tradition begun with the IDB, in more recent years European govern- ments have been shifting their allegiances to the European Union and to the new EBRD. The "Tiger" economies of Asia simply inclined toward a policy of benign apathy. The other option, adopted by the Nordic countries, for instance, was to influence the Bank's agenda by supplementing its administrative budget by provid- ing, outside the regular budget process, "trust funds" that targeted particular activities and consultants. By the half-century mark the link between the Bank's funding and its gover- nance had weakened. From the early 1980s, the core of the resources-governance tie shifted to IDA and by the mid-1990s the nexus was in dire straits, squeezed between rising aid niggardliness, growing conditionality on IDA funding, and a more competitive relationship with other multilateral seekers of concessional funds. Quite apart from the financial needs of the poorest countries, the institutional impact on IBRD-pressures on its administrative budget and a weakening of an important financial buffer-was likely to be challenging. At the same time, there could be little doubt that, having made access to concessional funds an indispensable issue, the Bank had itself been a willing accomplice to the steady undermining of its institutional autonomy and effectiveness. An unwillingness to walk away from the triennial whee- dling and the inevitable compromises and Faustian bargainS the Bank had been making to retain access to conees~ional funds had become increaSingly damaging. More diffuse "ownership" was creating increasingly confUSing expectations of the Bank This was leading the institution to pursue public relations as a substitute for performance and to imbue its lending with more regulations. Furthermore, competition from other sources of finance-particularly flows with stronger risk- sharing characteristics (such nondebt finance as foreign direct investment (FDI) and portfolio flows) a~ well as (to a lesser extent) regional development hanks and other official lenders-began eroding the Bank's portion of external financing, and therefore also its external leverage. The results were a reduction in the demand for Bank lending, exit by stronger borrowers, and perverse selectivity in the institution's portfolio. At the same time, when the Bank's comfortable reserves and ample annual net income are coupled with the difficult fiscal atmosphere that major shareholders face, the distribution of the Bank's net income has emerged as the new bat- tleground among its shareholders. The institution's net income looks like a con- venient source for funding foreign policy objectives, such as those posed by the emergencies in Bosnia, Mexico, Palestine, and the former Soviet Union. 35 Even as 35. A "global public good" case could indeed be made in all the examples cited. Yet, there was no analysis whether alternatives-such as funding tropical disease research-would better serve global welfare. 48 INTRODUCTION late as the mid-1980s, during discussions surrounding the establishment of MICA, the United States argued that "decision-making should be based on a voting system which relates member voting power to financial contributions."36 Indeed, that was the prinCiple that distinguished the Bretton Woods system of governance from that of the United Nations. By the mid-1990s, however, as discussions on a capital increase for MICA were in progress, several C-7 shareholders, citing legislative helplessness, insisted that IBRD net income should become the principal source of paid-in capital. The influence that came with ownership had become less expen- sive, indeed almost costless, and therefore more attractive. A silver lining for the Bank, however, was the way the global demand for transnational problem-solving institutions grew. The Bank was better positioned than most suppliers to meet the demand; it promised to maintain a strong niche in the financial markets through its capacity to borrow at low rates and lend for the medium and long term. A common perception, moreover, was that the Bank had no near competitor as a purveyor of development wisdom. It was a reasonably disinterested, practical, well-informed, accessible, and generally respected source of economic development advice to governments. History, its Charter, its accumu- lated expertise, and its mind-set all pointed to a continuing, principal role as a lender cum adviser to central governments. Although political fashion as well as developmental needs justified a greater involvement with other entities, the Bank's real strengths lay in its government-related relationships. The record, to be sure, did indicate severe limits on the institution's effective- ness as a social engineer. When it tried to enhance its antipoverty impact through social assessments and associated conditionality, it seemed, still, to overestimate its ability to achieve good outcomes. Yet in these very difficult areas, the Bank had served a worthy role by being a moral gadfly from its "bully pulpit." It was continuing to put the hard issues on many borrOwing countries' agendas. Concluding Remarks One of the authors of the World Bank's first authorized history was preoccupied with whether the Bank would be able to "change its spots" from being mostly a bank to mostly a development agency.37 That question no longer is widely con- tested; the Bank, without abandoning some of its bankerly attributes, is generally 36. Letter, Bruce Thompson, Jr., assistant secretary, Legislative Mfairs, U.S. Treasury, to U.S. Congress, June 11, 1985. 37. "Can the leopard change its spots? Can an agency that at first closely resembled a bank and until fairly recently has continued to make noises like a bank, be transformed into an institution that could more accurately be termed a development agency?" Robert E. Asher, in J. P. Lewis and I. Kapur, eds., The World Bank Group, Multilateral Aid, and the 1970s (Lexington, Mass.: D.C. Heath, 1973), p. 21. INTRODUCTION 49 credited with having become, not just a but the leading development agency of its time. N ow that the institution has reached the half-century mark, another spot- changing question has arisen. The Bank is a multilateral; but could it-indeed, should it-change from one kind of multilateral to another? The Bank's owners are nation-states. They inevitably have large arrays of varied, theoretically unlimited, partially conflicted, purposes. The Bank is not like a private firm, which could be conceived in theory to be oriented to a single (profit-seeking) objective. The Bank has several goals, of which the pivotal, according to the present interpretation, is poverty alle\iation. But the total number of basic, animating institutional goals, while several, is small. Thus, the Bank has been a specialized institution over its first fifty years; it has been a functional multilateral; like the ILO, FAO, UNESCO, and, indeed, IMF, it has dealt \vith one slice of the array of issues that multilaterals compositely address. The Bank's strength lies in the depth of its specialized expertise. That has been the theory. But throughout much of its history and especially from the 1980s onward, the Bank has been under several internal and external pressures to proliferate its subjects and broaden its mission. Internally, the staff has consisted of able, energetic, highly purposed people who are inclined, in a chang- ing problem environment, to take on important new subjects. Broadening the Bank's work agenda seems to be a function of its emergence as the leader of the development cause. Moreover, the soft-budget constraint has made it easier to play the proliferation game. Externally, from time to time, a number of the institution's O\\'l1ers together with many of its NGO and other civil society contemporaries have added to the call for new subjects. And both inside and outside it is sometimes said that the Bank needs to HII a partial vacuum left by other multilaterals. The UN set of agencies includes some generalist components-the Secretariat, UNDP, ECOSOC, the General Assembly itself-with aSSigned attention spans and responsibility almost as varied as those of a nation-state. But as the century moves toward a close, the reputation of the generalist units has been sinking. This is partly unfair; it is the result, among other things, of delinquent support by the larger industrialized countries, especially the United States. Partly it is owed to the intransigence of developing countries in their insistence on hiring quotas. And partly the slide may be a matter more of perception than of fact. But the perception has been pulling the Bank toward substantive proliferation. It encountered a similar temptation in the 1970s, but the attraction then was weaker, and the institution's response was more circumspect than the slightly frantic rate at which the institution took up new causes in the 19808 and 1990s. By the mid-lWOs, substantive scatteration was posing a major threat to the quality of Bank interventions. POVERTY AND THE WORLD BANK'S EVOLVING PURPOSE CHAPTERS 2-7 ON DECEMBER 31, 1991, Lewis Preston, president of the World Bank, issued an instruction to be inserted into each staff member's Operational Manual: "Sus- tainable poverty reduction is the Bank's overarching objective."l Poverty reduction, his cover note added, would be the benchmark by which the Bank's performance as a development institution would be measured. Preston appeared to be announcing a new policy and, to some, even "serving notice of a cultural revolution," the most audacious aspect of which was a new form of conditionality. 2 Both the International Development Association and the International Bank for Reconstruction and Development would henceforth link loan approvals to a country's commitment to poverty reduction. The 1991 directivc and the expectations that it created raise several questions about the Bank's objectives. Does the Bank see poverty reduction and development as distinct objectives? How much of a change in policy did Preston propose? What is the Bank's mandate for this policy? If there is such a mandate, and if Preston was indeed launching a "revolution" in 1992, why had the Bank waited forty-six years to instigate it? Preston's directive provides a partial answer to these questions. "In the 1960s," it read, "the Bank focused on economic growth as the key to poverty reduction. 1. World Bank, Operational Directive 4.15: Poverty Reduction, The World Bank Opera- tional Manual (December 1992), p. 2. 2. Michael Prowse, "World Bank Links Loan Volume to Poverty Relief," "Financial Times (London), May 11, 1992, p. 4. . 51 52 POVERTY AND THE BANK'S EVOLVING PURPOSE During the 1970s, attention shifted first to redistribution with growth and later to satisfaction of basic human needs. In the early 1980s policy-based adjustment lending overshadowed the Bank's poverty reduction objectives." However, this phase of the Bank's operations "eventually enabled the Bank to address more effectively the relationship between poverty and the policy environment. In 1987 and 1988, the primacy of the Bank's poverty reduction objective was reemphaSized in task force reports," and subsequent reports "contributed to a further reaffirma- tion of the Bank's commitment to poverty reduction as its fundamental objective."3 These words suggest that the Bank made almost steady progress in learning about and addressing poverty. Yet they make no mention of the years 1946-59, which account for almost one-third of the Bank's life. If the Bank was trying to reduce poverty through growth during the 1960s (and presumably the 1950s), why were the poor, the very target of those growth efforts, seldom mentioned? After so much experimentation, "reemphaSiS," and "reaffirmation," why, in 1992, was the Bank compelled to introduce operational measures of such great import that outside observers took them for a cultural revolution?4 Was there any connection between Preston's initiative and the war on poverty waged by the Bank under Robert McNamara's leadership during the 1970s, a time when much of the world came to see the Bank as the standard bearer and champion of aid to the world's poorest populations? Should Preston's directive be understood as a recommitment to McNamara's priorities, or as an admission that new strategies were required to meet those goals? Over the decades, did Bank operations keep pace with these evolving battle strategies and managerial guidelines? The Bank's Articles of Agreement contain no references to poverty or to related notions such as social welfare or equity, and, to judge by the almost two thousand pages of published documents and proceedings of the Bretton Woods meetings, the conference debates paid only passing attention to the concept of relative need. The first twenty-six annual reports of the Bank barely touch on the subject of poverty, and the Bank's twenty-fifth anniversary history almost ignores the concept: its index lists "poverty" only three times (in each case, "rural poverty").5 That long silence on the subject is a startling contrast to the latter-day, ringing affirmations of social commitment and concern, such as the opening remarks of Armeane Choksi, Bank vice president, to a meeting at the United Nations in 1993: "Poverty reduc- tion is now at the top of the World Bank's agenda." Language has its fashions. Diffidence, even prudishness, about the embarrass- ing subject of poverty was more customary fifty years ago, certainly when bankers, 3. World Bank, Operational Directive 4.15. 4. Press releases and articles in the Bank's World during 1992 and 1993 reinforced the image of Significant change in policy toward poverty. 5. Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Brookings, 1973). In contrast to poverty, "Income distribution" makes a few more ap- pearances in the index. POVERTY AND THE BA);K'S EVOLVING PURPOSE 53 government officials, and economists were addressing one another. 'Writing in 1946, the Brazilian Josue de Castro spoke of "the taboo of huuger," a subject that "could not safely be discussed in public" because of "its explosive political and social implications.'''' During the Great Depression and World War II, poverty, and even hunger, were visible throughout the world, certainly in Europe, but even in the United States and Britain. Its very nearness may explain the circumlocution. Expressions such as "economic growth" and "development" served as adequate reminders, in polite company, of social realities that today are discussed more explicitly and graphically. The audience, too, has changed. To an increasing extent, what the Bank says no longer takes the form of discreet conversation with a few experts and public officials but is treated as a public announcement and is listened to attentively by a congeries of elected and self-appointed representatives of countries and groups around the world. Two additional factors have contributed to the elasticity of the Bank's statements about poverty. One is the rhetorical function of internal management's key words. Rhetoric is a whip to spur the troops; and the bigger the beast, the stronger the rhetoric needed to instill the organization ""ith values, a sense of pmpose, and meaning. Statements about poverty and other goals legitimize and reinforce the institution while affirming their objective, functional content. The other factor is the way the Bank handles its external image. The Bank's message about itself to the outside world has changed over the decades, from one emphasizing financial respectability to one concerned with social issues, in response to the winds of political changc in the donor community, but also in accord with the Bank's own life cycle. Image adjustment may explain in part the radical change in the Bank's expressed stance regarding poverty. Or, could it simply be that the Bank has been a slow learner? And that the eventual, and rather sudden, emergence of the poverty objective on the Bank's agenda was the result of a prolonged learning process, involving both reflection and field experimentation, during which the Bank came to a clearer perception of the mechanisms that cause growth and help reduce poverty? Or perhaps the learning occurred in the legal sphere, as the Bank gradually gained a clearer understanding of its own constitutional mandate? Learning surely did occur, as the Bank grew, as 6. Josue de Castro, The Geopolitics of Hunger (New York: Monthly Review Press, 1977; originally published in Portuguese in 1946 under the title The Geography of Hunger: Hunger in Brazil), p. 49. De Castro served as the first director of the Food and Agriculture Organization, established in 1945. David Knox, who would retire as Bank vice preSident for Latin America in 1987, was lecturing at the London School of Economics in the early 1950s. Although the subject matter was the poor countries, he was reqUired to call the course "Economic Problems of the Tropics and Sub-Tropics.~ "[It was] not only [the] Bank; most people [had aJ problem \vith calling a spade a spade [when it came] to poverty. We always bied to hide the true facts by the use of words that were less offensive to the poor." Conversation ~ith the authors, September 24, 1996. 54 POVERTY AND THE BANK'S EVOLVING PURPOSE economists around the world turned their attention to the developing countries, and as the development problem itself evolved, making it necessary continually to reevaluate the diagnosis. From its earliest days, the Bank has had a highly profes- sional staff, in terms of both education and experience, and has supported a large, information-gathering research effort. In the Bank's first decade, many of its staff members were former colonial administrators, wartime planners, and postwar relief managers. The Bank's slow arrival at the poverty objective was hardly due to protracted intellectual obtuseness, What the Bank has been prone to is intellec- tualizing. The dramatic turns in its agenda partly reflect the freedom with which staff have explored the realm of ideas and opinions, whereas lending operations have in practice been subject to a number of constraints. The account of the Bank's evolving poverty and social mission in chapters 2 to 7 begins with a puzzle: the apparent discontinuity between Bank rhetoric, on the one hand, and the constancy of the Bank's Charter and uninterrupted growth of its financial position and international reputation, on the other. As mentioned earlier, part of the explanation may lie in the fact that the Bank's day-to-day business has followed a steadier course than its rhetoric. Much of what appears to be a change in ends has perhaps been a change in the choice of instruments. If rhetoric is put aside, the Bank for the most part and throughout its history has seen the promotion of economic growth as its prinCipal means of bringing about poverty reduction. The Bank has encouraged such growth as much by financing the expansion of productive capacity as by seeking to improve the way in which capacity is used. Underlying these activities is the unwavering assumption that a rising tide lifts all boats. That is to say, growth in output eventually benefits a majority of the population or, at least, increases a nation's capacity to reduce poverty within its borders. Over much of its lifetime, however, the Bank has thought that it should and could do better than rely on economic growth and "trickle-down" to help the poor. Growth, it came to believe, could he made more poor-friendly by redesigning the geographical, sectoral, factor-mix, and other aspects of produc- tion so that additional output might accrne more directly to the poor. A com- bination of internal and external factors pushed the Bank in that direction during the 1960s. It was during the 1970s, however, that the institution set out in earnest on an ambitious path of poverty-oriented social engineering, seeking to improve on the economic and political processes that, in many developing countries, appeared to be shortchanging the poor when it came to the distribu- tion of benefits from growing production. Those efforts to help the poor, over and above the promotion of growth, came to be understood, in a stricter sense, as "poverty alleviation," a distinction that is the Simplest explanation for the discon- tinuity in Bank rhetoric. Whereas poverty reduction through growth has been the Bank's constant, if mostly implicit, pursuit, "poverty alleviation" in the more am- POVERTY AND THE BANK'S EVOLVING PURPOSE 55 bitious sense-of doing better than trickle-down-has followed a more eventful course in the Bank's history. This and the remaining chapters in part 1 provide an account of the Bank's changing and overlapping approaches to poverty alleviation and of the effort to relate those changes to ideas and rhetoric concerning the Bank's goals. TWO The Bank for Reconstruction, 1944-1948 HARRY WHITE'S first draft of a proposal for an international bank, written in early 1942, made no mention of development. This original proposal referred simply to a Bank for Reconstruction, designed "chiefly to supply the huge volume of capital ... that will be needed for reconstruction, for relief, and for economic recovery."l An April 1942 draft called for a "Bank for Reconstruction of the United and Associated Nations" and did include, at the end of a long list of other objectives, a reference to development, stating that the Bank would also "raise the productivity and hence the standard of living of the peoples of the member countries," but this draft failed to mention specifically the poorer or less developed countries. 2 Whcn Edward Bernstein, White's deputy at the U.S. Treasury, asked what they would do with the bank once reconstruction was over, White threw the question back: 'What do you suggest?" "Let's have it there for after," Bernstein said. It could lend to other areas that needed development. The draft, when it was subsequently circulated to other governments in November 1943, arrived 'with the words "and Development" appended to the institution's name. 3 1. First draft of the Bank plan. Richard N. Gardner, Sterling-Dollar Diplomacy: The Origins and the Prospects of Our International Economic Order (McGraw-Hill, 1969), pp. 74, 84--85. 2, U.S. Department of State, Foreign Relations of the United States Diplorrwtic Papers 1942, vol. 1, General, The British Commonwealth, The Far East (Washington, D.C.: U.S. Government Printing Office), p. 184. 3. Personal conversation with Edward Bernstein, July 1993. White's August 2, 1943, draft already stated in its introduction: "Asia, Europe, Africa and South America can for many 57 58 THE BANK FOR RECONSTRUCTION, 1944-1948 Bretton Woods, 1942-46 "Development" barely made it on board. In fact, it almost found itself on the wrong boat. The proposal for an international bank was in doubt until the last minute. 4 When the U.S. secretary of state in May 1944 invited forty-four govern- ments to send representatives to a conference at Bretton Woods, he said the meeting was "for the purpose of formulating definite proposals for an International Monetary Fund, and pOSSibly a Bank for Reconstruction and Development."5 The British, however, had expressed no interest in what thus far was an entirely Ameri- can idea. John Maynard Keynes's initial proposal envisaged a stabilization fund able to provide substantial overdraft facilities. Ansel Luxford, a member of the small U.S. Treasury team headed by Harry White, has suggested that the British dele- gation's sudden interest in such a bank at the conference was related to the larger Bretton Woods negotiations between the u.s and British teams, which, in essence, traded British sovereignty over domestic economic policy for U.S. funding. Both sides were also conscious of the need for formulas that would minimize expected u.s. congreSSional resistance to postwar foreign aid. The multilateral nature of the proposed bank and its perceived role as a guarantor rather than lender seemed to favor its chances of ratification. According to Luxford, In the early days, as long as Keynes had his $30 million where he thought it might be accepted ... the British delegation by and large manifested no interest in the Bank. ... When the British finally realized that they were not going to get this ... at that very point Keynes reversed himself and became a very strong proponent of the Bank. The logic of it is perfectly natural. He realized that he was not going to get an open check on the monetary side, that he was going to need reconstruction funds. 6 Roy Harrod, who assisted Keynes during the negotiations, says that the White plan "was conceived on a niggardly scale," but he defends the British from selfish motivations: "Keynes wanted a Fund so large as to give governments the con- fidence necessary to relax unneighborly restrictions."7 At the same time, be con- cedes that the British, painfully and correctly aware of their enormous prospective balance of trade difficulties, may have tended to strcss them too much, and thus have given the impres- sion that plans, which they had really deSigned for wider purposes, had been thought of years profitably use for the creation of capital goods $5 to $10 billion of foreign capital each year prOvided they can get it on reasonable terms." Quoted in Robert Oliver, Early Plans for a World Bank, Princeton Studies in International Finance 29 (September 1971), pp. 37-38. 4. Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Brookings, 1973), p. 12. 5. Ibid., p. 12. Emphasis added. 6. Ansel Luxford, interview, World Bank Oral History Program, July 1961, p. 7. Luxford joined the Bank's Legal Department as assistant general counsel in 1946. 7. R. F. Harrod, The Life ofJohn Maynard Keynes (Harcourt, Brace, 1951), p. 549. THE BANK FOR RECONSTRUCTION, 1944-1948 59 in the first instance primarily as means for helping Britain in her immediate post-war difficulties. The Americans, on their side, tended to think of any a~sets they might contribute to or acquire in the Fund, as a charitable "hand-out" to help their poor, benighted neighbours .... [Ilt was wrong to mix the two streams of thought. s In the cvent, Keynes took up the question of the Bank with colleagues from the British delegation and representatives from other countries while crossing the Atlantic on the Queen Mary to attend the Bretton Woods Conference. At the conference, he chaired the commission charged with drafting the Bank's Articles of Agreement. Burke Knapp has remarked on "how little attention was paid to the Bank in the pre-Bretton Woods planning or in the Bretton Woods Conference itself I suppose if one measured the time spent during those fourteen days of work at the Bretton Woods Conference, the Bank prohably didn't take more than a day and a half.''ll Doubts about the Bank's prospects continued even after Bretton Woods. The inauspicious birth was prolonged by difficulties over appointments and disagree- ments over the respective roles of the Executive Board and management. Clearly "an afterthought" at Bretton Woods, the Bank was by early 1947 "at its lowest ebb, its reputation c'Onsiderably tarnished, its accomplishments nil, and its problems mounting."lO When a plaque was placed outside the Mount Washington Hotel in Bretton Woods some years later to commemorate the conference, thc tcxt recorded the birth of the International Monetary Fund but failed to mention the Bank. There was some debate at the conference on the relative priority of the Bank's twin purposes, reconstruction and development. In his opening remarks to the first meeting of the Bretton Woods Commission on the Bank, Keynes stated: "It is likely, in my judgment, that the field of reconstruction from the consequences of war will mainly occupy the proposed Bank in its early days. But, as soon as possible, and with increasing emphaSiS as time goes on, there is a second primary duty laid upon it, namely, to develop the resources and productive capacity of the world, with 8. Ibid., p. 552. 9. Burke Knapp, interview, World Bank Oral History Program, July 24 and 30, 1975, pp. 40-41. Knapp, who had worked on the pre-Bretton Woods planning for the Federal Reserve System, attended both planning meetings and the conference. He joined the Bank in 1949, becoming vice preSident and chairman of the Loan Committee in 1956, a pOSition he held until his retirement in 1978. Aron Broehes, who was a member of the Dutch delegation and later the Bank's general counsel, reported to his government on the Bretton Woods meeting. Explaining the limited time given the Bank in comparison with that given to the Fund, he argued that it did not imply a lesser valuation, because the Bank and Fund were complementary institutions, for it was understood that the Bank's existence would protect the Fund from pressure for long-term financing, and setting up the Bank's Charter had been a much easier technical task. Communication from Jacques Polak, based on his translation of Broches's report. 10. Mason and Asher, World Bank since Bretton Woods, p. 49. 60 THE BANK FOR RECONSTRUCTION, 1944-1948 special attention to the less developed countries."ll In private, at the British Embassy in Washington, he put it more bluntly. \¥bile expounding on his vision that, with proper economic management, governments could have "a boom that would raise the standard ofliving of all Europe to the levels of America today," he was asked, "Does that apply also to India and the rest of the Empire?" Keynes replied: "That must wait until the reconstruction of Europe is much further advanced."12 The underdeveloped countries at the meeting, however, urged participants to give development greater priority. Both Venezuela and Mexico submitted amend- ments that would have put development first or, at least "on the same footing," in Mexico's words. Mexico argued that the Bank was meant to outlive reconstruction, and that European reconstruction needed the output of raw material and the markets that would be created by the development of other nations. If anything, the Mexican delegates suggested, priorities should be reversed: "'What we ask is only that ... in the event that countries requesting loans for development purposes do not use up the resources and facilities made available to them, countries requiring loans for reconstruction projects could have a claim on the unused funds."13 SurpriSingly, the most forceful effort on behalf of the developing countries arose not in Commission II, which was charged with drafting the Bank's Charter, but in the debates on the Fund. Speaking for the Indian delegation, Sir Shanmuk- ham Chetty stated that the Fund's Charter should "mention speeifically the needs of economically backward countries." Contrary to past practice, he said, interna- tional organizations should begin to "give due consideration to the economic problems of countries like India."14 Although the proposal was not accepted, Chetty's shot appears to have caromed into the Bank's Charter, which Originally stated that the Bank was "To assist ... member countries" ,\'ithout distinction but now included a direct reference to "less developed countries." When the commission on the Bank reported to the Executive Plenary, the phraSing was more diplomatic than that used by Ke}lles: "As for the purpose of the Bank, it should be noted that the Bank is established both for the reconstruction and for the development of the member countries, and these two objectives are to be pursued on a footing of equality."15 The final wording of Article I was a tactful 11. Opening remarks of Lord Keynes at the First Meeting of the Second Commission on the Bank for Reeonst.ruetion and Development, U.S. Department of State, Proceedings and Docum.ents of United Nations Monetary and Financial Conference, Bretton Woods, N.H., July 1944, vol. 1 (GPO, 1948), doc. 47, p. 84. 12. William Clark, From Three Worlds: Menwirs (Sidgwick and Jackson, 1986), p. xi. 13. Proceedings and Documents of United Nations Monetary and Financial Conference, vol. 2, p. 1177. 14. Ibid., p. 1181. 15. Georges Theunis (Belgium), reporting delegate, Proceedings and Documents of United Nations Monetary and Financial Conference, vol. 1, p. 1103. Dean Acheson recalls a morc sympathetic position by Keynes toward the developing countries in this debate, saying that he and Keynes favored an equitable consideration of both the reconstruction and development daims, against White's disagreement. Dean Acheson, Present at the Creation: My Years in the State Department (w. w. Norton, 1969), p. 84. THE BANK FOR RECONSTRUCTION, 1944-1948 61 compromise. It stated that the purpose of the Bank was "to assist in the reconstruc- tion and development of territories of members." Perhaps more to the point, the letter of the agreement left a comfortably wide margin for the Bank's management to exercise administrative discretion in lending decisions. As delegates generally understood, that discretion was to be exercised by an Executive Board and staff dominated by the United States, the only country with the capacity to guarantee or fund the institution's loans. Despite the diplomatic nod to the representatives of less developed countries and the broader political recognition of the development cause provided by the United Nations Charter, which called for "economic and social progress and de- velopment," the special claims of poorer areas of the world were far from the collective mind of the conference. IS Delegates focused firmly on the "wider pur- poses" of the meeting. They strongly felt that they all stood to gain from coopera- tion, and that their overriding priority should be to agree on a system that would ensure international monetary order, open trade, and capital flows. Many details of the proposal were abstruse and would normally have been the province of seminar room speculation. But it was not intellectual persuasion or the calculations of immediate self-interest that spurred the delegates. The energy that drove the Bretton Woods delegates to seize the moment and carry the plans through to final approval had its source in the palpable and shared experience of the Great Depres- sion and the world war still in progress, horrors that were widely associated with the collapse of international economic arrangements. Delegates feared, with good reason, that failure at Bretton Woods would result in a nightmare of postwar depreSSion and a new cycle of nationalism and war. When the conference did, for brief moments, descend from the higher spheres of global arrangements to consider particular countries, it was to discuss the reconstruction needs of those in Europe and the Far East. Pressing for reconstruc- tion capital and the creation of the Bank, Harry White said, "There is nothing that will serve to drive these countries into some kind of ism-communism or some- thing else-faster than having inadequate capital."17 But in 1944 White was think- ing about countries that were being destroyed by the war; what he had in mind was the reconstruction not the development function of the Bank. "Except in the most general terms, neither \Vhite nor his assistants had given much attention to the long-term implications of an international bank."18 The same could be said of Keynes, who forcefully disputed U.S. expectations that private international invest- ment would recover after the war. Since the Bank was Originally to be a guarantor rather than a lender, Keynes's pessimism on postwar private capital flows meant 16. Roosevelt's 1941 proclamation of four freedoms, including "freedom from want ... everywhere in the world," was perhaps a more Significant pointer. 17. John Morton Blum, The Morgenthau Diaries: Years of War 1941-1945 (Houghton Millin, 1967), vol. 3, 1967, p. 272. 18. Alfred Eckes, A Search for Solvency: Bretton Woods and the International Monetary System 1941-1971 (Austin: University of Texas Press, 1975), p. 131. 62 THE BANK FOR RECONSTRUCTION, 1944-1948 that he envisioned a limited role for a postreconstruction hank. Keynes was in effect undercutting the raison d'etre for the Bank's proposed development pur- pose: "He had long held the doctrine that nations which invest their savings abroad are never likely to recoup them in total; they are only able to keep the bOITO\ving nations in play by always re-Iending,"l9 Keynes's attitude toward the conference seemed to combine a Single-minded pursuit of the broader monetary and stabilization arrangements with an imperial distaste for the democratic charade of an international agreement. Meeting pri- vately with White in 1942, he had argued against a conference and for direct negotiations between the United States and the United Kingdom alone, but White had insisted on the broader meeting. 20 In a later dispatch to the British Treasury, Keynes expressly objected to the participation of less developed countries. Twenty-one countries have been invited which clearly have nothing to contribute and will merely encumber the ground, namely, Colombia, Costa Rica, Dominica, Ecuador, Sal- vador, Guatemala, Haiti, Honduras, liberia, Nicaragua, Panama, Paraguay, Philippines, Venezuela, Peru, Uruguay, Ethiopia, Iceland, Iran, Iraq, Luxembourg. The most mon- strous monkey-house assembled for years. To these might perhaps be added: Egypt, Chile and (in present Circumstances) Yugo-Slavia. 21 Opening the first session of the conference commission on the Bank, after referring to the Bank's development purpose, he went on to make development appear to be a means for international stabilization, rather than its end. The Bank's second duty, he said, "is to develop the resources and productive capacity of the world, with special attention to the less developed countries, to raise the standard of life and the conditions of labour everywhere, to make the resources of the world more fully available to all mankind, and so to order its operations as to prorrwte and maintain eqUilibrium in the international balances of payments of all member countries. "22 Perhaps what both White and Keynes were striving for was best expressed in a personal anecdote told by Roy Harrod in which he describes his elation on receiv- ing a draft of the U.s. plan in early 1943. The proposed "scarce currency" clause confirmed that "the Americans were admitting the prinCiple of joint [deficit and surplus country J responsibility for disequilibrium" and that American and British planners shared the same internationalist vision. He read the draft sitting in a dark railway carnage crowded with soldiers. 19. Harrod, The Life ofJohn Maynard KEynes, p. 566. 20. Oliver, Early plans for a World Bank, p. 44. 21. Donald Moggridge, ed., The Collected Writings of John Maynard KEynes, vo!' 26 (Macmillan, 1980), p. 42. Cited by Gerald M. Meier and Dudley Seers, Pioneers in Develop- ment (Oxford University Press, 1984), p. 9. Keynes could not foresee that, by March 31, 1994, IBRD membership would total 177 countries. 22. Proceedings and Documents of United Nations Monetary and Financial Conference, vo!' 1, p. 85. Emphasis added. THE BANK FOR RECONSTRUCTION, 1944-1948 63 I felt an exhilaration such as only comes once or twice in a lifetime. There were the dishevelled soldiers sprawling over one another in sleep; and here was I, tightly pressed into my comer, holding these flimsy sheets. One had the urge to wake them all up. "Here, boys, is great news. Here is an offer, which can make things very different for you when the war is over; your lords and masters do not seem to have realised it yet; but they soon will ... I know that you set great store by the Beveridge [Welfare State1scheme; but that is only written on a bit of paper; it will all fall to pieces, if this country has a bad slump and trade difficulties. Here is the real thing, because it will save us from a slump and make all those Beveridge plans lastingly possible.,,23 Harrod's "message" to the soldiers, that world order and recovery had to precede plans for social welfare and redistribution, was the implicit message of the entire Bretton Woods Conference to the less developed world. During 1943-44, an unusually severe famine killed several million people in Bengal. 24 Hunger and epidemiCS of cholera and malaria kept the death rate high through the first months of 1944, just prior to the conference. On April 15, 1944, the Economist painted a picture of "pauperism, disease, extortionate landlords, streets strewn with corpses and garbage, persistent muddle and chronic ignorance of the facts among officials."25 Dramatic as the Bengal famine was, mass starvation was not uncommon at the time. Major famines were often in the news, but the greater tragedy was chronic hunger, or in today's parlance, absolute poverty. At the time of Bretton Woods, probably 50 to 60 percent of the population in the under- developed countries lived in absolute poverty as defined today.26 Life expectancy for the poor was hventy-five years in India and about forty years in Colombia and Mexico. In India 90 percent of the population aged ten or older was illiterate, and in Mexico the figure was 50 percent. 27 The absolute poor were almost entirely 23. Harrod, The Life ofJohn Maynard Keynes, p. 545. 24. The estimate is by the official Famine Inquiry Commission, preSided over by Sir John Woodhead, cited in Jawallarlal Nehru, The Discovery of India (New York: John Day, 1946), p. 496, but refers only to Bengal. Nehru called it the "biggest and most devastating famine in 170 years of British Dominion." The Department of Anthropology of Calcutta University, 'using sample survey techniques, estimated 3.4 million deaths by famine in Bengal. Though the famine was centered in Bengal, other areas in eastern and southern India were also affected. 25. During the final stages of the famine, in April 1944, a young American army major, Robert S. McNamara, was aSSigned to a British base in Kharagpur, seventy miles west of Calcutta His assignment: to carry out a statistical analysiS of the logistics of airlift operations over the "Hump" to China. 26. Authors' rough estimates, based on backward extrapolation of World Bank figures for 1970-90 and other sources on poverty incidence and levels and on CDP trends. The povcrty line was defmed as the 1990 purchasing power of $1 per person per day, 27. United Nations Statistical Yearbook, 1948; International Bank for Reconstruction and Development, The Basis of a Developnumt Program for Colombia (Johns Hopkins Univer- sity Press, 1950), p. 171; Angus Maddison and Associates, The Political Economy of Poverty, Equity, and Growth: Brazil and Mexico (Oxford University Press, 1992), p. 185. 64 THE BANK FOR RECONSTRUCTION, 1944-1948 dependent on agriculture, were vulnerable to continually recurring natural dis- asters and plagues, and were locked into poverty by technological backvv'ardness, illiteracy, systematic coercion and extraction practiced by layers of political over- lords, and the inability of institutions to deal with disasters such as famines. 28 In the 1940s the economically less developed areas of the world were entering a period of unprecedented change and dislocation caused by population grmvth, urbanization, new technology, and, in most areas, political revolution. Many such areas, especially in Latin America and Africa, had been in the early stages of these changes for decades. In the 1930s gross domestic product had grown at the rate of 4.8 percent a year in Chile, 4.2 percent in Colombia, and 3.6 percent in BraziJ.29 By the mid-twentieth century centralized government, taxation, export crops and mines, railroads, and urban growth had appeared in Sub-Saharan Africa and had transformed much of the region; over the same period Latin America experienced a spurt in industrialization, large-scale settlement of new farmlands, and substantial expansion in primary production. The rate of change accelerated follOwing the war, primed by high prices for raw material, rising levels of investment, and a decline in mortality. These upheavals were only in small part a direct consequence of economic growth. New political regimes, medical breakthroughs, advances in communica- tion, and urbanization were thrust on nations independently of their individual economic advances. One result was that the poor came to be a moving target in several respects: their number began to increase, they migrated (especially to towns and cities), and their needs changed. In addition, governments were trans- formed by independence, granted by or wrested from imperial powers, and by communism, war, a revolution in transport and communications, and the gradual spread of democracy. These upheavals would add to the burden of development but also create opportunities for progress. Peasant society-the modus vivendi of almost all the poor at the time-was, in essence, a culture, a complex and sophisticated web of economic, social, and political life that had developed as an accommodation to particular circumstances over centuries, even millennia. Despite the variety of peasant societies across continents, valleys, and even neighboring villages, each was a construct of produc- tion techniques, religiOUS beliefs, social obligations, and political rules, all woven into one cloth or particular culture. The separate threads that might correspond to the theoretical categories recognized by a neoclassical economist were barely discernible to outside observers. The economy was opaque: implicit prices in barter, right~ over factors of production, and obligations to the needy, to the 28. Jean Dreze and Amartya Sen, Hunger and Public Action (Oxford: Clarendon Presa, 1989). Josue de Castro, a Brazilian medical doctor, made the same point with considerable descriptive force and empirical references in The Geopolitics afHunger (New York: Monthly Review Press, 1977). 29. Vittorio Corbo, "Development in Latin America," Occasional Paper 22, International Center for Economic Growth, San Francisco. THE BANK FOR RECONSTRUCTION", 1944-1948 65 powerful, and to collective tasks were all melded in with, and hard to distinguish from, the religious, social, and political aspects of family and communal Iife. 30 "Attacks on rural poverty" were destined to be carried out with little understanding of the very society that was to be transformed. That ignorance was shared by elites in the poorer countries and by foreign economists and officials who would even- tually design foreign aid efforts. Because the social life of the poor was complex, it was also easily disrupted. A fifty-year program for poverty alleviation deSigned in 1946 might have attached as much importance to the survival of human cultures as some of today's social programs place on the survival of biological species and the physical environment. In addition to having intrinsic worth, human cultures played a vital economic role. Consequently even small changes, or "developmental improvements," posed a threat to the survival mechanisms of interrelated villages. As it happened, the next half century brought unplanned change on the scale of an avalanche. Although deliberate interventions formed only a fraction of the upheaval, the planning and design of those interventions appear to have been as blind as the much more powerful social, technolOgical, and market forces at play. Peasant societies were reduced to SOciolOgical and statistical abstractions-"village SOCiety," "the rural poor," "the bottom 40 percent"-and became quantitative "targets" for the delivery of ditches, seeds, visiting experts, and health clinics. By the 19905, Western civiliza- tion had by and large completed its onslaught. Today, most of the social and economic effects of rural transformation have already been incurred, and the need for policymakers to understand them is no longer as urgent as it was, or should have been, fifty years ago. At the same time, the human costs and benefits of those changes raise questions about past attitudes toward poverty alleviation. 31 If the Bretton Woods delegates seemingly gave little attention to mass poverty in the world, it was not because their monetary and trade agenda precluded the subject. It was less the subject and more the timing. Had the agenda been drawn up five years later, development would have had a seat at the table. In his opening remarks to the eonference, Franklin Roosevelt had said: "Economic diseases are highly communicable. It follows, therefore, that the economic health of every 30. Yet faith pierces the dark Jose Carlos Marlategui, an influential Peruvian socialist, writing in 1930, described Andean peasant society as being based on "collective" values that should be protected from capitalism, in Siete Ensayas sabre la Realidad Peruanll (Santiago de Chile: Editorial Universitaria, 1955). Others, such as Sol Tax, who studied a Guatemalan village in 1950, saw "penny capitalism." By the 19705 economists were applying the X-ray powers of multi\'ariate statistical analysiS to discover "market response" in the behavior of villagers. 31. "Mopping-up" operations continue. Decades of colonial effurts to end Masai com- munal land ownership are being continued by the current Kenyan government. George Monbiot, 'The Last Warriors, Betrayed, Defeated, Dispossessed," Financial Times (Lon- don), November 19-20, 1994, sec. 2, p. 1. 66 THE BANK FOR RECONSTRUCTION, 1944-1948 country is a proper matter of concern to all its neighbors, near and distant." Roosevelt was ahead of his audience and of tbe political mood in 1944. But by 1950 it was becoming clearer that the stability and development of poorer countries were necessary parts of the larger security and economic picture. With the onset of the cold war during 1946--47, attention began turning to the poorer areas of Europe, and then to other regions, as national security moved beyond a reliance on the atom bomb immediately after the war to a policy of containment, and sub- sequently to a competition for allegiances among political philosophies. Wbat had delayed the emergence of this awareness of poverty was that in the early 1940s the poor countries did not yet exist as a category. In 1942 the greater part of what is now called the third world consisted of colonies or "dependent territories." This covered practically all of Africa, the Indian subcontinent, most of the Caribbean, and much of East Asia. 32 The main exceptions were China, Central and South America, Thailand, and parts of the Middle East. Colonies were com- monly referred to as territories rather than countries. Despite some indigenous entrepreneurship (including a well-developed industrial sector in India), develop- ment policy in concept and practice consisted prinCipally of colonial administra- tion. At Bretton \Voods, colonies were the backyards of member countries, not a subject for diplomatic commentary. Furthermore, some areas that are now part of the developing world were thcn perceived, correctly, as being highly developed. Most notable among these were Argentina, Uruguay, and Venezuela, which had higher per capita incomes than much of Europe. 33 Even the Belgian Congo--Iater Zaire-was at times referred to as "an advanced country," in view of its small population, rich mineral resources, and paternalistic social welfare system, at least in urban areas, which included high levels of primary school enrollment. 34 Before 32. In that year, Liberia was the only truly independent nation in Africa. Italy lost control of Ethiopia in 1941, but Allied military control continued through the war. Libya became independent in 1951. India, govemed under the British Colonial Administration and Wel- fare Act, was represented at Bretton Woods. 33. United Nations statistics cited in Harold Wilson, The War on World Poverty: An Appeal to the Conscience of Mankind (London: Victor Gollancz, 1953), pp. 11-13. 34. John Gunther wrote in 1955 that the Congo "is indeed highly advanced in some respects, but even today no road exists between Leopoldville [now Kinshasa], the capital, and Stanleyville, the third most important town in the country." And, "This is a rich country in almost all senses of the word. Its exports come close to being worth three billion dollars a year (as compared to less than $60,000,000 for Kenya, as an example) and the trade balance is fat and favorable. One should also mention, I daresay, such facts as that [the] Congo has fewer than five hundred doctors of medicine for more than 12,000,000 Africans, and that its university ... has at the moment exactly twenty-eight students." Inside Africa (Harper and Brothers, 1955), p. 647. As late as 1962 Barbara Ward wrote: "For centuries, for millennia, the East had been the region of known and admired wealth. . . . Today, for instance, Indonesia seems obviously better endowed . . . than are some European countries- one might perhaps pick Norway." The Rich Nations and the Poor Nations (Norton, 1962), p.39. THE BANK FOR RECONSTRUCTION, 1944-1948 67 television, cheap air travel, roads within the poor countries, and the mass produc- tion of census, health, and other statistics, Europeans and North Americans knew little about these regions except for factual tidbits remembered from school, occasional newspaper reports of natural disasters, and romantic accounts in travel books and magazines. The war provided an unprecedented geography lesson for the general public, especially in the United States. This state of affairs is clearly reflected in the League of Nations' World Economic Survey for 1938, which reported on the state of business activity in the world. The document devoted twenty-six pages to the United States, Europe, and Japan; one paragraph to a set of nine "primary prodUcing countries" (Australia, Canada, New Zealand, Argentina, Brazil, Chile, Hungary, Rumania, Yugoslavia); one paragraph to the rest of South America; and one sentence each to the Balkans and the Dutch East Indies. Africa, the USSR, and the rest of Asia were not mentioned. 35 There was a corresponding gap in economic science when it came to develop- ment and gro\\th. When Hans Singer was persuaded in 1947 to take a job at the United Nations, he was assigned to what had been his last choice for a research topic: the underdeveloped countries. Arriving in the United States, he visited his former professor, Joseph Schumpeter at Harvard University, to share the news of his appointment. Singer recalls, "When I told him that my work in the U.N. was to be on the problems of the underdeveloped countries his surprised-and surpris- ing-response was: 'but I thought you were an economist!"'36 Paul Samuelson's first edition of his classic introductory textbook, Economics, published in 1948, con- tained less than three sentences on development. This lack of scientific attention dated from the middle of the nineteenth century when, with British industrialization well on its way, mainstream economics turned from broader questions of development over the long rnn to economic fine-tuning. With Marshallian microeconomics bestriding the profeSSion, Anglo-Saxon aca- demia focused on allocative efficiency and business cycles, unaware of or indif- ferent to the contemporary growth-starting concerns of Japan and much of Europe. Even as economists in British and American universities between 1850 and 1940 busied themselves with refinements to allocative and business cycle theory, Japan, Russia, Germany, and the Nordic countries were intensely involved in the struggle for economic development, debating and experimenting with institutional reforms, industrial protection, five-year plans, mass education, vocational training, credit allocation, and state-financed acquisition of technology. Yet, when one of the authors of this volume chanced to meet Evsey Domar at Harvard University in 1947 and asked him what he was working on, he was astonished and perplexed by 35. H. W. Arndt, Economic Development: The History of an Idea (University of Chieago Press, 1987), p. 33. 36. Hans Singer, "Early Years, 1910-1983," in Alec Caimcross and Mohinder Purl, eds., Employment, Income Distril:nttion and Development Strategy: Probl~ of the Developing Countries, Essays in Honour of H. W Singer (Holmes and Meier, 1976), p. 6. 68 THE BA:-lK FOR RECONSTRUCTION, 1944-1948 Domar's answer, "economic growth." At that time, growth and development were rarely mentioned in mainstream economics. 37 Paradoxically, in the 1940s poverty and basic needs were high on the academic and political agendas of the industrialized countries. Great Britain was caught up in debates and proposals, including the Beveridge Plan-slighted by Harrod in his railway carriage story-that would soon produce the welfare state. British scholars and politicians could look back to several centuries of Poor Law debate and experiment, and Sweden was already a role model for modem welfare legislation. 38 The president of the United States in 1933 bad proclaimed a New Deal, and Secretary of the Treasury Henry Morgenthau, in planning for the Bretton Woods Conference, "envisaged a kind of New Deal for a new world."39 In Europe, Chris- tian Democmts and Social Democmts were preparing postwar political programs that would go a long way toward meeting and thus undercutting leftist demands. In the industrialized world, social needs were being studied, new institutions were being proposed, and basic human needs were on the way to being accepted as rights. This activity created both an intellectual precedent and potential inspiration for a future response to poverty and social problems in the underdeveloped world. Indeed, social welfare goals figured large in the agenda of the International Labor Organization and other international organizations soon to be born. During the 1950s and 1960s, however, meeting the social needs of underdeveloped countries \-vas seen as "consumption," to be attended to where political emergency required, but for the most part to be postponed. Aid efforts were designed to bring about overall economic growth in national economies, rather than to proVide a more immediate response to poverty or social needs. Development arrived almost by accident and played a bit role at Bretton Woods, but it got on the books, becoming part of the Bank's name and official purpose. The strength, meaning, and direction given to this objective would be determined by a host of factors in the follOwing decades. Meanwhile, several themes of the Bretton Woods conference served, from the beginning, to nurture and shape the still embryoniC development mission of the Bank. One of those themes was internationalism, in the sense of international par- ticipation in dedsionmaking. Despite Keynes's preference for a summit, Bretton 37. One factor that prompted David Knox to move from the London School of Economics to the World Bank in 1963 was the school's refusal to allow him to include development, along with allocation, as course subject matter. He was told by Lionel Robbins that development "was not a respectable topic." Personal conversation, September 24, 1996. 38. Costa Esping-Andersen, Politics against lvfarkets: The Social Derrwcratic Road to Power (Princeton University Press, 1985); and Peter Mathias and Sidney Pollard, eds., The Industrial Economies: The DetJelopment of Economic and Social Policies, the Cambridge Economic History of Europe, vol. 8 (Cambridge University Press, 1990). 39. According to his biographer, John Morton Blum. Cited in David Rees, Harry Dexter White: A Study in Paradox (New York: Coward, McCann and Geoghegan, 1973), p. 138. THE BANK FOR RECONSTRUCTION, 1944-1948 69 Woods was organized as a "United Nations Monetary and Financial Conference." Key rules and institutions that would govern the postwar world economy thus came to be decided by an international agreement signed by forty-four small and large nations. This was White's contribution. From the beginning, he had insisted that the Bank must be trnly international and that "it must not be a rich man's club."4() Admittedly, there was an element of charade in all these remarks, of token respect to internationalism, and also an element of politics; the United States sought Latin American participation as a source of support on key issues against the United Kingdom. The hard fact is that the agreement was negotiated by the British and Americans, and it was their idea. Nonetheless, the international character of the Bank, part real and part appearance, imbued the organization with a degree of legitimacy and authority that, over the decades, has contributed in an important degree to its fund-raising capacity and to the influence that it has exercised over development policy. A closely related theme at Bretton Wood~ was that of international interdepen- dence, in the economic sense. This idea was best expressed by President Roosevelt in his remarks about the importance of the "economic health" of one's neighbors, a phrase that had both a practical and a moral dimension.4i The two concepts, international decisionmaking and economic interdependence, worked to legitimize the development objective. As Secretary Morgenthau pOinted out, "Prosperity, like peace, is indivisible," and "poverty, wherever it exists, is menacing to us all."42 The idea of economic interdependence, firmly imprinted on everyone's mind by the depression and the war, was of course the driving force for the entire Bretton Woods project, a mantra repeated constantly up to the final ratification of the agreement. But no one went on to state its corollary with regard to aid, namely, that development assistance was in the self-interest of the giver. There were allusions to the importance of developing the resources available in undeveloped areas, by which delegates meant, principally, raw materials. The Mexican delegate, when arguing the case for development lending, reminded his colleagues that raw ma- terials were needed for reconstrnction. In the middle of a war, he was playing an ace. And Morgenthau's formulation of the interdependence argument-"Poverty ... is menacing to us all"-would be echoed later in the cold war argument for development assistance. A third notion needs to be mentioned mostly because of its absence at Bretton Woods: moral obligation. Roosevelt's opening message to the conference, justifYing "concern to all its neighbors near and distant," was glossed over at Bretton Woods. The collective commitment to reconstmction was certainly an expression of soli- 40. Oliver, Early Plans for a World Bank, p. 5. 41. Proceedings and Documents of United Nations Monetary and Financial Conference, vol. 1, p. 71. 42. Ibid., p. 81. 70 THE BAl\iK FOR RECOl\iSTRUCTIOK, 1944-1948 darity, especially since this was decided well before the cold war. But even reconstruction was justified by reference to economic interdependence and the need to recreate a dynamic world economy. Morgenthau mcntioned China only to point out the export potential of its 450 million people, noting in passing that "good customers are prosperous customers. "4:! To reiterate, the case for development lending by the Bank was argued more on grounds of general world recovery and interdependence than human solidarity. This appeal to business, rather than moral obligation, was probably good, indeed necessary, politics and, over the long run, has probably been the best stance for the Bank.44 Moral obligation would not have sold the Bank's bonds. Even public purses, which funded the Bank's capital and most of the IDA's annual lending, have been more responsive to a businesslike Bank than they would have been to an institution strongly motivated by charity or notions of economic justice. At the time, the opportunity to borrow at Wall Street interest rates and long repayment periods, all eventually augmented with technical assis- tance, amounted to a substantial benefit. The appeal to economics rather than ethics at Bretton Woods has colored the Bank's development efforts. But it is also true that the arrival of the IDA in the 1960s and the concern with "basic needs" in the 1970s, followed by an emphasiS on social safety nets, women in development, disaster relief, and other objectives that are debatably"noneconomic," if not frankly welfare or ethical goals, have gradually worn down the Bank's strictly business facade and increased the weight of ethical considerations in Bank decisionmaking. Moreover, because it transfers funds and expertise from the rich to the poor, the Bank can be said to exist for a moral purpose, though it has chosen to operate as a business. But throughout the Bank's history, the necessary and predominant justification for its specific operations has been economic rather than ethical. When it did finally venture into education, health, women-in-development, and social emergency programs, it had in each case first persuaded itself and the development community that it had found another highly productive investment opportunity. From Reconstruction to Development, 1946-48 Close to three years shpped by after the conclusion of the Bretton Woods Conference while signatory countries ratified the agreement, president and staff were appointed, and policies, procedures, and organization were decided. It was 43. Ibid., pp. 80-81. 44. Public and congreSSional opinion in the United States was running against additional foreign expenditures, and Roosevelt faced elections in 1944. Truman's haste in 1945 to accommodate opinion probably caused his cancellation of the Lend-Lease blunder. In 1946 efforts to approve a postwar loan to Britain almost failed, and the 1947 Marshall Plan proposal to Congress was stuck until the February 1948 communist coup in Czechoslovakia. THE BANK FOR RECONSTRUCTION, 1944-1948 71 not until May 1947, a year after its official opening, that the Bank made its first loan, a $250 million reconstruction crcdit to France. In the ensuing year and a half, lending was almost entirely for reconstruction: loans were approved for the Nether- lands, Luxembourg, and Denmark. Similar financing for Poland and Czecho- slovakia was discussed, though loans did not result. By late 1948 the Bank had lent $497 million (approximately $2.0 billion in 1993 prices) for reconstruction pur- poses and appeared to be fully engaged in what Keynes had defined, implicitly, as its primary duty, that of assisting countries in the task of reconstruction made necessary by the war. The Bank's first two annual reports, dated September 1946 and September 1947, reflect that purpose, commenting prinCipally on the progress, and lack of progress, recorded on the reconstruction front. Despite the Bank's continuing emphaSiS on reconstruction, it did take some early steps to promote development. For one thing, it accepted loan applications from Chile, Mexico, and Iran, the first such requests from underdeveloped countries. For another, it began reflec1:ing on the nature of the development problem, and on the contribution that the Bank could make to finding a solution. The 1980s resonate with those refleetions: the need to settle debt arrears, establish sound monetary and fiscal policies, and rely on private investment. What the authors of the 1947 annual report could not foresee was that the Bank's reconstruction role, barely launched, was about to end, even though Bank officials had become involved in fonnulating alternative funding plans for Europe. The 1947 report does express some unease, admitting that an unexpected gap had arisen between the supply of and need for financial assistance in Europe, in part because of the delays in launching the Bank, and in part because of the underes- timation of reconstruction needs. As the report saw it, 'When the Bank's charter was drafted at Bretton Woods in the summer of 1944, high hopes were held that the Bank would prove to be the principal instrument for restoring the war-tom nations of the world to economic life .... We now know that the problem is deeper and more difficult than was envisaged at Bretton Woods."45 American-funded relief efforts, especially through the United Nations Relief and Rehabilitation Adminis- tration (UNRRA), were being used to help fill that Furthem1Ore, a speech on June 6 by Secretary of State George Marshall had implicitly raised questions about the Bank's role, questions that were expressed in the same report. "Because the requirements are greater than anticipated, because the scope of activity and loanable resources of the Bank are limited, it is manifest that the Bank can provide only a part of the answer to the problems which confront the world today."46 Nevertheless, these glimpses of a changing world had not yet developed into a realization that the Bank's original and "primary" reconstruction purpose was about to be cut short. If 45. International Bank for Reconstruction and Development, Second Annual Report to the Board of Gocernors for the Year Ended June 30, 1947, p. 7. 46. Ibid., p. 7. 72 THE BANK FOR RECONSTRUCTION, 1944-1948 the Bank was to be only"a part of the answer," it still expected to be a major, even the principal, part. The Bank admitted to a performance gap in its reconstruction efforts caused by administrative delays and statistical underestimates, but, understandably, by September 1947 it had not yet come to realize that a new world war was beginning. A turning pOint had occurred six months earlier, in March 1947, when President Harry S Truman, responding to rapidly escalating distrust and friction between the Soviet Union and its wartime allies, and more immediately, to a British pullout from the civil war in Greece, where a communist victory looked possible, an- nounccd the U.S. government's commitment to intelVene in support of "free peoples." Against the grain of traditional U.S. foreign policy, which advocated neutrality until provoked, Truman was engaging the country in a plan of active resistance to, or "containment" of, perceived communist aggression; in effect, he was announcing the start of the cold warY An almost immediate consequence would be a drastic change in the purpose, size, and mode of foreign aid. This foreign policy about-tum occurred less than two years after Truman's sudden cancellation of Lend-Lease, on the eve of Japan's surrender. The un- diplomatic abruptness of that act was a measure of America's wartime opposition to foreign aid. In fact, as chairman of the CongreSSional War Investigating Committee in 1942, Truman had himself taken a hard line on assistance, insisting that Britain repay Lend-Lease aid in raw materials after the war.4B He partly reversed his July 1945 order, authOrizing the continuation of Lend-Lease to China, and later called the cancellation the "worst decision" of his presidency, but American sentiment approved the move at the time. 49 The anti-foreign aid mood in the United States was even more apparent when Truman endorsed Britain's July 1945 request for a loan, though not before extending negotiations over six months and cutting the amount from $6 billion to $3.75 billion. Thc request was submitted to Congress in January 1946. After a hostile debate, Congress finally voted in favor, but not until July 1946, a full year after the original "emergency" request by Britain. Its final approval was due as much to the rapid deterioration of relations with the Soviet Union, which had issued threats in Iran and Europe, as to the emergency postwar needs of America's closest wartime ally. The American people, says Richard Gard- ner, felt that they "had provided their allies with huge sums to aid in winning the war; they had given additional sums to aid in winning the peace. In their view, it was 47. Walter LaFeber, America, Russia and the Cold War; 1945-1992 (McGraw-Hill, 1992), pp. 38-39, argues that Josef Stalin's February 9, 1946, election speech, stating that war was inevitable as long as capitalism existed, and Winston Churchill's Iron Curtain speech in Fulton, Missouri, one month later, may be considered the "two declarations" of the cold war. 48. Gardner, Sterling-Dollar Diplomacy, p. 172. 49. Gregory A. Fossedal, Our Finest Hour: Will Clayton, the Marshall Plan, and the Triumph of Democracy (Hoover Institution Press, 1993), p. 182; Gardner, Sterling-Dollar Diplomacy, p. 186. THE BANK FOR RECONSTRUCTION, 1944-1948 73 high time to end controls, reduce taxes, and return to 'normalcy.' ... Surely the rest of the world, with the assistance the United States had already given, would now be able to look after itself."50 Foreign aid was not the only, nor the principal victim of this citizen rebellion against continuing sacrifice. Between January and June 1945, while the U.K. loan was being debated, the American economy was hit by strikes in various quarters, including the steel and automobile industries and dockyards. The "Truman Doctrine" was thus announced against a background of strong opposition to further domestic sacrifice, foreign aid, and foreign involvement. In his policy statement, Truman asked Congress for $400 million in aid for Greece and Turkey. This request wa~ the tip of the iceberg. Two months later, Dean Acheson hinted publicly that "the facts of international life ... mean that the United States is going to have to undertake further emergency financing" of foreign countries, whose needs "may be of a type which existing national and international institutions are not equipped to handle."5l A few weeks later, in June 1947, Secretary of State George Marshall used an address at Harvard University to expand on this message: "The truth of the matter is that Europe's requirements for the next three years for foreign food and other essential products-principally from America-are so much greater than her present ability to pay that she must have substantial additional help." A week later he estimated that "the Marshall Plan" might cost $5 billion to $6 billion a year ($21 billion to $25 billion in 1993 prices) for several years. These figures, which would have been mere fantasy only months earlier (as Truman's $400 million request suggests), were now an admissible point of departure for debate. Public opposition to Truman's policy continued during 1947, even after the August communist takeover in Hungary. In September, Marshall insisted on the need for assistance to Europe to reduce hunger and cold during the coming winter, and he drew attention to the distress already caused by serious droughts, a severe winter, and restrictive financial measures. 52 With preSidential elections scheduled for 1948, a hostile Congress continued to block a plan described as an "international W.P.A." and a "bold Socialist blue-print."53 Public and congressional resistance ended, however, with the communist coup in Czechoslovakia in February 1948, and on April 13 the government passed the Economic Cooperation Act, authorizing an initial $5 billion ($21 billion in 1993 dollars) for financial assistance to Europe. Although the IBRD had been conceived as a tool for peacetime economic rebuilding and development, in 1947 it and other instruments of foreign aid became a potential weapon. As Originally conceived, European reconstruction was 50. Gardner, Sterling-Dollar Diplomacy, p. 188. 51. Ibid., p. 302. 52. Charles L. Mee, The Marshall Pian: The Launching of the Pax Americana (Simon and Schuster, 1984), pp. 200-201. 53. Stephen E. Ambrose, Rise to Globalism: American Foreign Policy since 1938 (Penguin Books, 1985), p. 92. The WPA (Works Progress Administration) was a New Deal "'make-work" program. 74 THE BANK FOR RECONSTRUCTION, 1944-1948 to be a humanitarian act that also made long-term economic sense for the United States. And, in keeping with those low-key objectives, the rebuilding was to have been financed almost painlessly through credits on commercial terms issued by the World Bank. But almost ovemight, between March 1947 and March 1948, European reconstruction became the most urgent objective of American national security. Economic disruption, shortages, and hunger throughout Europe came to be as- sociated with communist-led strikes and riots, and with threats of communist takeovers or electoral victories in France, Italy, Greece, and other countries. In short, "political health in Europe depended on economic medicine. "54 The Bretton Woods vision-a world of open trade, capital flows, and monetary stability anchored on the Fund and encouraged by World Bank credits and guarantees-was put aside and subordinated to the requirements of an intensive program to rehabilitate and integrate Europe under the Marshall Plan. As Richard Gardner has pOinted out, The new measures devised to deal ,vith the post-war disequilibrium soon overshadowed the financial institutions designed in the war. The normal objectives of the International Monetary Fund were gradually subordinated to the immediate requirements of European recovery. In the year beginning 1 July 1947 the Fund abandoned its conservative lending policy and extended $610 million in aid to member countries. Many of these loans could hardly be considered for short-tenn stabilization purposes, but they did serve to fill the gap until the new measures of European aid were passed by the American Congress. The operations of the International Bank also yielded priority to the new programme of reconstruction [but], [i]n practice, the Western European countries preferred Marshall Aid to assistance from the Bank, since the former carne as grants or loans on easier credit terms than the Bank could make available. Therefore, as the Marshall Plan gained momentum, the Bank moved out of the reconstmction field. It turned instead, somewhat modestly at first, to the job of helping underdeveloped countries. 55 In fact, all four reconstruction credits, negotiated in previous months, were Signed after Marshall's June.5 speech, beginning with a $250 million loan to France on June 7. The fourth and last reconstruction loan, for $12 million to Luxem- bourg, was approved on August 28, 1947, almost three months after the an- nouncement of the Marshall Plan. But this three-month spate of reconstruction lending ended in August, pending a resolution of the continuing debate on the Marshall plan. As the September 1948 annual report explained, "So far as European reconstruction is concerned, substantial loans by the Bank have been precluded primarily because of the uncertainties which have existed, first with respect to the shape and content of the European Recovery Program and later with respect to the manner in which loans by the Bank could best be brought into harmony with that program."56 54. Robert A. Packenham, Liberal America and the Third World: Political Development Ideas in Foreign Aid and Social Science (Princeton University Press, 1973), pp. 33, 34. 55. Gardner, Sterling-Dollar Diplomacy, pp. 303--4. 56. IBRD, Third Annual Report to Board of Governors, 1947-1948, p. 5. THE BANK FOR RECONSTRUCTION, 1944-1948 75 A virtual lending pause of seventeen months followed the Luxembourg operation.57 In that period the Bank made only three small loans, for a total of $28 million: two in March 1948 to Chile totaling $16 million, the first Bank loan to a less developed country; and one in August to the Netherlands in the amount of $12 million, for iInIXlrts. This was a difficult time of waiting, outside criticism, and defensive explana- tions. nlOUgh observers saw indecision and inactivity, it was, in fact, a decisive period, during which, by saying no, the Bank protected its financial respectability. From the day it opened, the Bank had been beSieged by European governments and some members of the American administration who pressed it to relieve urgent European needs for foreign exchange, raw materials, and food. Speaking at the Bank's inaugural meeting in 1946, U.S. Secretary of the Treasury John Snyder had said that "if there were any keynote that he wished to make it was speed to get the Bank and the Fund in operation at the earliest moment."58 In part, the pressure was a consequence of the ambitious claims that had been made for the Bretton Woods institutions by members of the U.S. administration, as they strove to obtain congressional approval for ratification, and later, for the postwar loan to Britain. When the loan was questioned on the grounds that the United States could soon be faced with additional requests for reconstruction aid, the administration replied that the Bretton Woods institutions would make available "some fifteen billion dollars."59 The pressure increased during 1947, as approval of the Marshall Plan was delayed and conditions in Europe worsened. Before he resigned, in December 1946, the Bank's first president, Eugene Meyer had been moved to state that "the Bank was not a relief agency. "60 Nine months later President John McCloy thought it necessary to state publicly that the Bank was not in the stopgap business. 51 At a Board meeting on October 15, 1947, Vice President Robert Gamer commented that "responsible" members of the American government understood that the Bank did not exist for relief operations, implying that other officials were being irresponsible in urging the Bank to move in this direction. 62 Pressure for quick lending also came from the less powerful but nonetheless audible voices of repre- 57. From August 1947 to January 1949. John McCloy was president through this period, from March 17, 1947, through May 18,1949. 58, August Millry, interview, World Bank Oral History Program, January 19,1973, p. 14. Maffry worked for the Department of Commerce and attended Bretton Woods as an adviser. 59. Gardner, Sterling-Dollar Diplomacy, p. 292. The United Nations Assembly had also been encouraged to believe that ample postwar financial assistance would be forthCOming from the Fund and the Bank, with an explicit reference to the $15 billion figure. Press release no. 78 by the U.S. delegation, November 14, 1946. 60. Kai Bird, The Chairman: John J. McCloy, The ,"l\cfaking of the American Establishment (Simon and Schuster, 1992), p. 283. 61. Ibid., p. 293. Originally cited in the Washington Post, September 11, 1947. 62. Meeting of Executive Directors, October 15, 1947. 76 THE BANK FOR RECONSTRUCTION, 1944-1948 sentatives of underdeveloped countries both in the Bank and in the United Na- tions. Victor Moller, the Chilean executive director on the Bank's Board, protested that large-scale lending to Europe threatened its future capacity to make develop- ment loans. 63 The Bank did not succumb to these urgings and criticisms by becoming, as the Financial Times had speculated, a universal soup kitchen. 64 Both the first, brief administration, under President Meyer, and more particularly the second, under McCloy, Garner, and U.S. Executive Director Eugene Black, were of one mind on the need to preserve the Bretton Woods design for a multilateral and respectable fmancial institution capable of self-financing in the market. McCloy's determina- tion was most likely hardened by a weakening in the market for World Bank bonds during the summer and fall of 1947, prompted by speculation that the Bank would be forced into a relief role in Europe. At a Board meeting on November 19, 1947, at the peak of uncertainty and speculation regarding the Bank's future, McCloy asked what position the Board would take if the United States were to offer more funding in return for the Bank's active participation in the European assistance program. Such possibilities had in fact been raised in discussions between the Bank and the U.S. government and included a proposal that the Bank use all of its borrOWing capacity to lend $3.1 billion exclUSively in Europe, which had been reported by McCloy to the Board two weeks earlier.65 In McCloy'S opinion, any such offer would mean turning the Bank more and more into an American or- ganization: "The real sixty-four dollar question is do we lose our character as an international organization and do we lose the chance of accomplishing what we were formed for, a..<; an international banking agency, if we accept a substantial amount of additional aid from one member?" The British director, Sir Gordon Munro, seconded McCloy's concern: "Unless we are very careful we definitely may lose our international character as an international bank.'>66 For McCloy, however, multilateralism was in all likelihood more of a device for gaining institutional-and personal-autonomy than a concession to non-U .S. authority. '\Then he reaffirmed the Charter provision that there would be no "political loans," he defined these as "loans inconsistent with American foreign policy."67 63. Meeting of Executive Directors, August 22, 1947. 64. Bird, The Chairman, p. 283. Originally cited in the Financial Times (London), December 9, 1946. 65. Meeting of Executive Directors, November 5, 1947. At an earlier, August 1947, Board meeting, McCloy said that he refused to throw the Bank out like a baby into the snow from the back of a sled. 66. Meeting of Executive Directors, Kovember 19, 1947. Emphasis added. By contrast, the Indian delegate, Mr. Sundaresan, insisted that greater U.S. influence should not inhibit the Bank from accepting more funds. HI don't think we should attach importance to that. In this world, only a country like the United States can come forward to help. We must accept." 67. Quoted by Thomas Alan Schwartz, America:s Germany: John J. McCloy and the Federal Republic of Germany (Harvard University Press, ]991), p. 27. McCloy was con~ THE BANK FOR RECONSTRUCTION, 1944-1948 77 It was above all the insistence on being a bank, as the Charter had intended, that detennined the character of the institution. By depending on the market, McCloy and Munro went a long way toward preserving the Bank's international character. At the same time, market discipline, which was first imposed, later served manage- ment as a whipping boy for the Bank's exacting pr~iect standards and country policies. If a bank's first building block is a hard cash investment, all further additions to the structure are made out of a less substantial material: confidence. It was the World Bank's challenge to win financial trust, beginning with that ofV.S. investors, and to do so despite its odd character as an international, public sector institution, and, what was an even greater challenge, to do so despite its mandate to make overseas sovereign loans. Sovereign lending had ended with the depreSSion. By 1933, as Karin Lissakers has written, countries were in default on more than $20 billion [approximately $180 billion in 1993 dollars], and interest arrears exceeded $12 billion. Eighty-two percent of Latin America's dollar bonds were in default, as were 40 percent of U.S. loans to Europe .... This ... debt debaele was followed by a hiatus in private foreign lending of more than twenty years during which few cowltries had access to commercial finanCing outside their o\vn borders.68 It is hardly surprising, then, that the Bank proceeded gingerly. Nor that its first three preSidents were men with close Wall Street connections. Eugene Meyer had been the head of a successful investment banking house as well as chairnlan of a Federal Reserve bank; McCloy had been a lawyer in New York who worked closely with banks; and Black, for most of his life, had been engaged in banking and in the marketing of securities. Vice President Gamer had also spent more than twenty years at Guaranty Trust. And many of the first officers had worked in government treasury departments or central banks. Even the Bank's first chief economist, Leonard Rist, was a banker with little training in economics. When approached by Meyer in 1946 to become the Bank's treasurer, he asked instead to be appointed head of the Economic Department, though admitting that his command of economics was limited to banking matters. According to Rist, Meyer accepted, saying "that was exactly what he wanted.'",g Robert Cavanaugh, who joined the Bank in March 1947 to head the Finance Division, which dealt with the borrowing of funds, recalls the difficulties that the Bank faced in placing bonds: tinuously involved in U.S. foreign policy before, dUring, and after his term at the Bank. He is the only Bank president who has testified before a congreSSional committee. During his tenn he participated in the planning for what became the Central Intelligence Agency and for the Marshall plan and left the Bank to become u.s. high commissioner in Germany. 68. Foreign Bondholders Protective Council, Annual Report of1934 (New York: Foreign Bondholders Protective Council, 1935). Cited by Karin Lissakers, Banks, Borrowers, and the Establishment (Basic Books, 1991), p. 15. 69. Leonard Rist, interview, World Bank Oral History Program, July 1961, p. 4. 78 THE BANK FOR RECONSTRUCTION, 1944-1948 Many people said that, , , American institutions and public would not buy World Bank bonds because the World Bank was a foreign organization, , .. Nobody knew how the Bank was going to be operated and whether it was going to be a soundly run organization or not, but they did trust McCloy and Black and the people who were together in the World Bank at that time. 70 Another witness, Richard Demuth, remembers Meyer's first meeting with invest- ment bankers in Kew York. "They were thoroughly unenthusiastic .... [The Bank] smacked of having to do with foreign lending, which at that time was in very bad repute." The Bank was seen as a "do-good institution, a wild idea."7l And when Gamer consulted a banker friend about the offer he had just received from McCloy to join the Bank, in 1947, the banker said he thought the institution could be useful, but "I wouldn't touch your bonds with a ten-foot pole."72 As Mason and Asher put it, the task of making bonds eligible and attractive to the most conservative U.S. investors, "reinforced pressures toward caution .... Procedural safeguards that delayed the granting of loans, or limited the purposes for which they could be granted, or required ancillary modification of the bor- rower's policies as the price for their approval could all be justified as essential in order to gain and hold the confidence of private investors."73 Chile was the first developing country borrower to exverience those "safe- guards" in the flesh. Chile's $40 million loan application for a package of industrial and power projects had been filed shortly after the Bank opened in 1946. 74 In those first months of operation, a power struggle was being waged between the Board of Executive Directors, led hy the U.S. representative Emilio Collado, and President Eugene Meyer. Collado had worked closely with Harry Dexter White in Treasury and then in the State Department and shared White's vision of a Bank that would rapidly playa large role in postwar reconstruction and development. At the State 70. Robert Cavanaugh, interview, World Bank Oral History Program, June 1961, pp. 66, 67. 71. Demuth accompanied Meyer on his Hrst trip to New York as Bank president to meet investment bankers. He remembers that the bankers were "thoroughly unenthusiastic about giving any financial support for the Bank" and that "there was an amazing discrepancy between the attitude of the bankers and the expectations of Bretton Woods, where it was believed that the Bank could easily borrow up to the total amount of its subscribed capital, reserves and surplus." Richard H. Demuth, interview, World Bank Oral History Program, August 1961, p. 12. 72. Robert L. Garner, interview, World Bank Oral History Program, December 1972, p. 206. 73. Mason And Asher, World Bank since Bretton Woods, p. 54. 74. The Chileans had applied mst to the Export-Import Bank, where they were estab- lished customers and which was lending at an interest rate below that of the Bank. But the National AdviSOry Council, a U.S. government coordinating agency, had decided that, at the next application from Chile, the newly created World Bank should be put to work. When Vergara, the Chilean representative arrived at the Export-Import Bank in September 1946, the preSident, Bill Martin, said, "You have to take your application over to the World Bank." THE BANK FOR RECONSTRUCTION, 1944-1948 79 Department he had worked many years on Latin American affairs. Collado pushed the Bank to go out and issue bonds on the market qUickly and disagreed with Meyer that a great deal of educational work should be done first. Demuth recalls that, when the Chilean request arrived, Collado told Mr. Meyer that the Bank was damed well going to make this loan by December 1946 or he'd know the reason why. Meyer pointed out that we knew nothing about Chile's economy or anything about the projects. Collado said he knew Chile, he'd known them for a long time, and they were good for $40 million and the Bank was darned well going to make the loan. 75 Collado, who dominated the Board and had close connections with U.S. govern- ment officials, might have forced through the loan, but Meyer resigned in Decem- ber without approving the application. His successor, John McCloy, put a firm end to Collado's influence and liberal ambitions for the World Bank: he accepted the preSidency-after first refusing-on the understanding that Collado would be replaced by Eugene Black, and he obtained from the Board of Directors an understanding that, henceforth, only "management" (a term that McCloy intro- duced into the Bank's jargon) would present loans for approval to the Board. He also brought in Robert Garner to be his vice president. McCloy'S coup was a positive signal to Wall Street, where former colleagues had seen his rumored appointment as an opportunity to wrest control of the World Bank "from the New Deal crowd." "The American Banker, a mouthpiece of the investment-banking community, applauded Collado's removal as a sign that the Bank would now ... minimize political considerations and maximize economic factors in making its 10ans."76 That view was shared by Richard Demuth, who had joined the Bank in July 1946 as Meyer's assistant and saw the issue as one of "whether the Bank was just going to be an institution to hand out money to governments or whether it was going to be a real investment banking institution."77 McCloy promptly turned his attention to the preparation of the Bank's bond issues, delegating lending policy to Gamer, but joined Garner in the negotiation of the Bank's first reconstruction loan, to France. The new Bank team took a tough stance with the French, cutting the proposal from $500 million to $250 million, insisting on fiscal and monetary diSCipline, demanding a "negative pledge" that France would not offer collateral without securing the Bank equally, and imposing Vergara said, ''Why do we have to be the guinea pigs?" Martin replied, ''Well you're such experienced borrowers it would make it easier for them." The Chilean representative then drove over to Meyer's office at 1818 H Street, in Washington, D.C., and presented his application. Half an hour later Meyer called Martin to say, "We just got a loan application. What do we do now?" Bernard Bell, interview, World Bank Oral History Program, Novem- ber 13, 1990, p. 3. 75. Demuth, Oral History, August 1961, p. 5. 76. Cited in Bird, The Chairman, p. 289. 77. Demuth, Oral History, August 1961, p. 5. 80 THE BANK FOR RECONSTRUCTION, 1944-1948 elaborate procedures to control the end use of Bank-financed imports. The last condition led the French to accuse the Bank of infringing upon their sovereignty. The Freneh minister asked, indignantly, "Mr. Garner, you expect me to identifY every lump of coal as to which boiler it's going into?" Garner rephed, "No. I just want to be sure it is not being diverted to Paris nightclubs. I want it to be used in French industrial aetivity.,,78 Though it was first applied in the French loan and in the subsequent three reeonstruction loans, Garner made end-use supervision a key feature of what would later be the Bank's dominant mode of lending, the investment project. 'We would have control of disbursements against specific requests for specific purposes. That pattern has been followed by the Bank throughout its history, and I think has been one of the things that has given people confidence in the Bank"19 Testifying before the Senate Committee on Foreign Relations during hearings on the Marshall Plan, on January 16, 1948, McCloy explained that the reconstruc- tion loans had, at the same time, a "productive" purpose. BO Thus tbe loans to France, the Netherlands, and Denmark had been earmarked for locomotives, steel rails, steel for the building of bridges, stocks of raw materials, and agricultural equipment, wbile disbursement of the Luxembourg loan was tied to improvements in a stecl mill, "a very key spot in that area of the European economy." Mr: McCloy. [The Luxembourg loan) is a very productive loan. We must have productive loans or we can not stay in business .... Senator Connally. You will probably get that money back. Mr. McCloy. I believe we are going to get all our money back. Senator Connally. That is a very frugal country. They will pay you back. Mr. McCloy. We must by our charter, as well as by the necessity of appeahng to hard-headed people who are responsible for the savings in this country; convince them that their money will be paid back. McCloy added that repayment was assurcd not only by the produetive purpose of loans, but by the Bank's system of supervision. Mr. McCloy. There is one other aspect ... the emphasiS that we pla<.'e upon follOwing the proceeds of our loans ... to see that the proceeds are dispensed in the manner in which they were approved. . if there is any diversion they must have our consent. ... I think this a very beneficial provision ... to avoid, if possible, the unfortunate consequences of the English loan .... [P )eople got the feeling that that was an ineffective loan largely because they did not know what it was being used for. The Chairman . ... Is that process you now describe the result of any statutory language in your Charter or in the law? 78. Robert Garner, interview by Robert Oliver, July 19,1961, p. 10. 79. Ibid., pp. 10-11. BO. Bank staff members assisted United States government officials in preparations for the Marshall Plan. This cooperation became the one occasion on which a Bank president has testified before any national legislature. THE BANK FOR RECONSTRUCTION, 1944-1948 81 Mr. McCloy. No, it is a matter of policy that we have adopted. It is an implication, I think, of the fact that our loans must be productive, which is a statutory requirement .... Chairman [of Senate Committee]. That one single protective device put into ERP [European Recovery Program] would do more, I think, to satisfY American public opinion than any other single thing I know 0£81 Neither McCloy nor the senators raised the question of substitutability or fungibility of funds within the budgets of borrOwing countries, that is, of the difficulty, indeed perhaps the impossibility, of determining the true or ultimate use of additional aid funds. It was a question that troubled Averell Harriman, the Marshall Plan's special representative in Europe. That year Harriman cabled Dean Acheson: "French spending in Vietnam was about as much as we are giving them in Paris." Acheson rebuked Harriman for not minding his own business. 82 McCloy and the senators had no such misapprehension about their respective "businesses": their schemes for tracking the use of funds had less to do with an ultimate accounting than with satisfYing American public opinion, on the one hand, and with reassuring buyers of World Bank bonds, on the other. McCloy was well aware that his European reconstruction loans were riSky.83 Waxing confident about end-use control and productive investments, he was putting the best face on the situation. By the time Chile's application was taken up again, a year later, and despite the reconstruction and program loan character of its lending thus far, the Bank had established many of the procedures and precedents that would shape its future development lending: close scrutiny and discussion of proposals; conditionality related to monetary, fiscal, and balance of payments policies that would bear on a country's capacity to repay; supervision of the use of funds; and a negative pledge.&! All of these procedures came to bear on Chile's application, along with a significant additional condition: that Chile settle with the holders of $150 million in Chilean government bonds in default since the 1930s. After the initial discussions of Chile's proposal in 1946, and Collado's failure to push it through the Board, the request had been set aside on grounds of financial instability. In May 1947 the Bank informed Chile that its "unbalanced budgets and deficit financing, its need to lilnit non-essential imports and build up foreign exchange reserves ... unsatisfactory system of multiple foreign exchange rates ... 81. Memorandum from Secretary to Board, no. 335, January 20, 1948, pp. 14-16. Attached statement by President John McCloy to the u.s. Senate, Committee on Foreign Relations, Washington, D.C., Friday, January 16,1948. 82. Averell Harriman memo, June 28, 1971, Harriman Oral History Truman Era, cited by Bird, The Chairman, p. 296. France had agreed to NATO on the condition that the United States accept French rule in Indochina. 83. Demuth, Oral History, August 1961, p. 14. 84. Until much later, the Bank preferred de facto conditioning oflending on macroeconomic policies that the institution considered adequate. In the 1980s it adopted the International Monetary Fund's practice of contractual, or de jure, conditionality for some of its lending. 82 THE BANK FOR RECONSTRUCTION, 1944-1948 unsatisfactory tax and exchange relationships with foreign enterprises ... [and] unsettled defaults [were] cause for grave concern."85 It was only in November 1947, over a year after the original submission, that management reported to the Board that, in its view, the improvement in the financial and budgetary situation of Chile was sufficient to "feel that maybe progress can be made."86 Before the loans were made, Chile had reached an agreement with the International Monetary Fund. In the eourse of the negotiations, several missions visited Chile; the Bank made suggestions about the financial plan, contributed to the economic analysis of the proposed projects, suggested engineering changes, and helped study measures for improving the organization of the company that was to carry out the projects. End-use supervision ,was made easier by rejecting the semi- program nature of Chile's request, a package that included power generation, forest development, port equipment, railway modernization, and urban transport. In the end, the $40 million request was cut down to a $13.5 million loan for a hydroelectric plant and transmission lines and 82.5 million for agricultural machinery. At the same time, in keeping with what would come to be standard practice, the Board was told that the remaining items in the loan application had not been rejected but rather were being investigated for future consideration, that independent engineers were in Chile studying the railway electrification project, and that the Bank was collaborating in sending engineers on the forest industries projects. 87 The prinCipal sting in the conditions was the requirement that Chile reach a settlement with the holders of defaulted prewar bonds, the Bank arguing that it "does not see how [it] can make loans in the face of widespread dissatisfaction in financial and investment circles to whom the Bank must sell its own honds."86 The Chileans were "very annoyed," as Black later put it, but finally agreed, and the two loans were announced on the day after the settlement with the foreign bond- holders. 8l1 The Bank's 1947-48 lending pause became a step toward its development purpose in a second and more direct way: during this period the institution set out to discover the less developed world. Davidson Sommers came to the World Bank from the U.S. Defense Department in 1946 and selVed the institution, in the Legal Department and then as vice preSident, until 1959. He remembers that "when the Bank started, people in the West didn't know much about the developing world 85. World Bank, Memorandum from Seeretary to Board, no. 379, April 6, 1948, pp.1-2. 86. Meeting of Executive Directors, November 18-19, 1947. 87. Memorandum from Secretary to Board, no. 379, April 6, 1948, p. 2. 88. Mason and Asher, World .Bank since Bretton Woods, p. 157. Originally cited in notes in Bank files on meeting of May 21, 1947, of Garner and Burland (for the Bank) with Pedregal, Santa Cruz, and Levine (for Chile). 89. Eugene R. Black, interview, World Bank Oral History Program, August 6, 1961, p. 6. THE BANK FOR RECONSTRUCTION, 1944-1948 83 exeept as colonies. They didn't know much about development lending, didn't know much about development economics."oo Yet the notion that its mission was about to change was dawning on the Bank. At the November 5,1947, Board meeting, McCloy stated, "I think we are going to be driven into a very different field sooner than I thought, into the development field."91 McCloy went on two two-month trips, first to South America and then to Central America; senior officials were dispatched to visit foreign lands; consult- ants were engaged to help man large survey missions to several countries; and data collection and research were begun. The Bank multiplied its contacts with potential borrowers, explOring possible projects, and it began to coordinate with other international organizations. By September 1948 it could report that active project discussions were under way with twenty member countries, and that its travel and contacts had produced "a much clearer understanding" of its development role. For the first time, it published income estimates for dif- ferent parts of the world, indicating that whereas income per capita in the more highly developed countries of North America and Europe was in excess of $1,300, in the bulk of the underdeveloped countries it was only about $100. The report went on to discuss underdevelopment and the potential role of the Bank in development. A year later, at the Bank's fourth Annual Meeting in September 1949, the first section of its annual report was titled, as in previous reports, "Role of the Bank," but it now carried a subtitle, "EL'Onomic Development," drawing attention to its changing role: "An outstanding feature of the year under review has been the increased attention given to the problem of economic development."92 The report ,maly-zed the causes of underdevelopment and of "the general conditions of poverty in thc underdeveloped areas," including, 'With surprising candor, the difflculties arising from the social structure of many of the underdeveloped nations where there are wide extremes of wealth and poverty. In such cases, strong vested interests often resist any changes which would alter their position. In particular, the maintenance in a number of countries of inefficient and oppressive systems of land tenure militates against increase in agricultural output and improvement in the general standard ofliving. 93 This analysis was followed by an impressive account of loan approvals, project discussions, and visits by senior Bank officials to eighteen countries in Latin America, to eight in other underdeveloped regions, and to the United Kingdom 90. Davidson Sommers, interview, California Institute for Technology Oral History, July 18, 1985, pp. 1, 10-11. 91. Meeting of Executive Directors, November 5, 1947. 92. International Bank for Reconstruction and Development, Fourth Annual Report 1948-1949, p. 47. 93. Ibid., pp. 8-9. 84 THE BANK FOR RECONSTRUCTION, 1944-1948 and France for talks regarding assistance to their colonies. Finally, attention was given to the Bank's first steps in the field of technical assistance, mostly to its poorer member countries. Those steps were said to be a response to "a substantial number of requests ... from member countries,"94 and they were linked to the January 1949 announcement of the Point Four program. g5 As the report pointed out, The increasing importance of this aspect of the Bank's activities has resulted in part from a growing recognition by the Bank that, if its loans are to be sound and productive, it must aid its underdeveloped member countries to analyze their development problems and potentialities, to formulate practical investment programs adapted to their particular needs and to mobilize their resources and othetwise strengthen their financial position. 96 By 1949 the Bank was aware that technical assistance-which it took to mean a range of guidance, from project specifics to wider investment programs to poliCies that bore on national creditvvorthiness--was an integral part of the business of being a development bank. Over the brief "lending pause" period, between the middle of 1947 and the end of 1948, the Bank readjusted its objective from reconstruction-principally in Europe-to economic development across the world. Knowing little about the less developed world, it went a considerable distance to educate itself about those countries and to formulate a working model for its future role as a development bank. At the same time, it set out on a course of financial respectability, ignoring what it saw as the unrealistic expectations of the Bretton Woods delegates and turning a deaf ear to pressures for quicker, large-scale financial assistance. But- tressed on one side by a multilateral shield against the political whims of anyone owner and on the other by an operational diScipline that established the practice of well-studied, conservative lending for viSibly productive investments in creditwor- thy countries, the Bank began to acquire a reputation for hard-headed banking and disinterested expertise. Over subsequent decades, that reputation was to unlock an unprecedented flow of development lending. 94. Ibid., p. 10. 95. Most readers of the Fourth Annual Report's reference to the Bank's "response" to the Point Four initiative were probably unaware that McCloy had opposed the Point Four proposal to provide bilateral loans and grants to underdeveloped countries, a position shared by Garner, who wrote in his private diary that Truman's speech was "another indication of impulsive bungling." Ironically, the authorship of Truman's proposal was at first attributed to McCloy. Bird, The Chairrrwn, p. 299. 96. !BRD, Fourth Annual Report, p. 10. Emphasis added. THREE The Bank of the 1950s FROM THE resumption of lending in January 1949 to the approval of the first International Development Association credit in April 1961, the World Bank operated as a development bank, lending $5.1 billion in 280 loans to fifty-six countries, all, offiCially, for development purposes. But the meaning of "development bank" vis-a.-vis sovereign lending was defined along the way. Neither history nor economics nor the Charter prOvided a blueprint for this role, though all helped to shape the character of the Bank's objectives and operations. For the most part, a succession of managerial responses to financial and political circumstances defined the particular character of the Bank's role. Those circumstances evolved con- tinuously during this twelve-year period, and, as in the making of common law, the Bank's rulemakers practiced gradual adaptation, relatively unencumbered by for- mal terms of reference or by the operational oversight of a higher authority. The eventual drift of that adaptation was a cautious change in emphasis in the phrase "development bank," as the accent shifted from "bank" to "development." Nonetheless, the Bank of the 1950s did have a conSistency that was partly a reflection of the popular wisdom about development but was mostly the result of the institution's dependence on market funding. The need to project creditworthi- ness to a skeptical postdepression and postwar Wall Street was a major constraint on the Bank's operations and rhetoric. This need was acute in the first years and lessened rapidly early in the decade; still, the exclusive dependence on private savings lasted the decade and, in any case, hy the early 1950s the Bank's operations and development thinking had been set into a banker's mold. Though the mold began to dissolve almost immediately, the process was barely perceptible until the 85 86 THE BANK OF THE 19505 Table 3-1. World Bank Development Lending before IDA Billions of U.S. dollars Gross commitments Net lending 1948--61" 1956--61b 1948-f:nc Total development loans 5.1 2.8 3.9 More developed countriesd 1.7 0.9 1.1 Coloniese 0.5 0.3 0.4 Less developed countries f 2.9 l.7 2.3 Power and transportation 2.4 1.4 2.0 and 0.1 0.1 0.1 Saure",: World Bank,linnual Reporl1961. All figures exclude reconstruction loans. Sums may not total because of rounding. a. Commitments from March 1,1948, through April30,I96L b. Commitments from July 1, 1956, through April 30, 1961. c. Gross commitments from March 1. 1948, through April 30, 1961, less repayment of principal. cancellations, and participations and sales from portfolio to other investors. d. Australia, Austria, Belgium. Denmark, Finland, Iceland, Israel, Italy, Japan, :'>Ietherlands, Norway, and South Africa. c. Algeria, Belgian Congo (Zaire), Cilte d'Ivoire, Gabon, Kenya, Mauritania, Nyasaland (Malawi), Nigeria, Northern Rhodesia (Zambia), Ruanda-Vrundi (Burundi), Southern Rhodesia (Zimbabwe), Tanganyika (Tanzania). and Uganda, £. Brazil, Burma (Mvanmar). (Sri Lanka), Chile, Colombia, Costa Rica, Ecuador, EI Salvador, Ethiopia, Guatemala, Haiti, Honduras, India, Irag, Lebanon, Malaya (Malaysia), Mexico, Nicaragua, Pakistan, Panama, Paraguay, Peru. Philippines, Sudan (after independence in 19.56), Thailand, Turkey. United Arah Repuhlic (Egypt). Uruguay, and Yugoslavia. 1961 appearance of a powerful solvent, in the form of IDA tax money. Periodic fiscal grants to replenish the IDA fund reduced the Bank's subjection to balance sheet criteria, making room for the political objectives of donor governments, and for the experimental and ethical leanings of the Bank's own management. l When the Bank first sought to define itself as more than a bank, it found an answer in the postulated catalytiC effect of public utility investments. Chosen properly, Bank investments would act as multipliers, an idea that was loosely justified by concepts such as "development priorities," "bottlenecks," and "precon- ditions." Investment planning and engineering expertise became key tools in the search for investment opportunities, and, as it happened, the resulting list of potential projects consisted mainly of public utility projects, such as electric power, transportation, and otber economic infrastrncture. An additional reason was that such investments were conventionally expected to be in the public sector; borrow- ing governments were reluctant to guarantee loans to the private sector, while private firms were equally reluctant to accept government guarantees. Power and transportation projects carne to dominate the loan portfolio, accounting for more than half of lending during this period, and the proportion rose to 78 percent in poorer countries (table 3-1). The Bank's size and credit terms were favorable for 1. The Bank inVariably jibed at the term "ethical." The more acceptable term was "socially oriented." THE BAKK OF THE 1950s 87 the financing oflarge-scale and long-lived capital facilities: interest rates, including commission, averaged 5.3 percent, and twenty- to twenty-five-year terms, with two years of grace period, were standard for infrastructure. More important, the development role came to be associated with technical assistance in the broadest sense, extending to project supervision and conditionality. The Bank settled qUickly into the role of a heavily interventionist lender, assisting with project preparation and implementation, dispensing economic and technical advice, and conditioning its lending on specific behavior by borrowers. There was a strong link between the Bank's advisory role and its concentration on infrastruc- ture: because of the potential for waste in large, capital-intensive projects, there were few areas of activity in which Bank expertise and persuasion could produce so high a return. President Eugene Black, endeaVOring to explain the Bank to a group of Cana- dian investment dealers in 1950, described it as a new departure for an international fmancing institution, but one that was analogous to the U.S. government's program of supervised credits to poor farmers during the depreSSion. Recounting the many precautions taken by the U.S. program to ensure repayment, he appeared anxious to convince his listeners that tough standards and hands-on lending could reconcile doing good with good business: 2 As a result of this close combination of financial and technical assistance, practically all the loans were repaid, the fertility of millions of acres was restored, and many thousands of people were transformed from a drag on the economy into self-respecting and self-supporting producers. What the International Bank is trying to do is quite similar.... Technical advice alone is not sufficient ... nor is financial assistance. What is needed is a combination of the two:3 The rationale for the Bank's tutelary role and interventionist style oflending was developed in successive speeches and annual reports. The 1954 report devoted a major chapter to "collaboration in project preparation and execution" with bor- rowers. By 1956, speaking at the Annual General Meeting, Black had shifted the 2. "If the land was too poor, or on too steep a slope, or too remote, or too small in area, the loan was refused on the ground that it would simply saddle the farmer with a debt he could never pay and which could only leave him worse off in the long run. [The supervisor] might conclude that with certain types of agricultural tools, seed or fertilizer, some livestock or perhaps some canning equipment. it would be possible for the farmer to live better and at the same time obtain the wherewithal to repay the loan. The supervisor would then approve a loan earmarked for these specific purposes. He would also instruct the farmer in the use of the new equipment and in better farm practices, and would pay periodic visits to check on his progress." R. Black, address before the Investment Dealers' Association of Canada, Eastern Distriet. Montreal, Canada, February 2.3, 1950, IBRD Press Release 17.3, pp.12-13. 3. Ibid., p. 12. 88 THE BANK OF THE 1950s emphasis by calling the Bank a development agency. Though "originally conceived solely as a financial institution," he said, the Bank "has evolved into a development agency which uses its fmancial resources as but one means of helping its mem- bers."4 Observers in later decades would not be impressed. Looking back in 1981, Burke Knapp described the Bank of the 1950s as "merely a bank" and "a fairly conventional financial institution." It was a period, he said, in which "there was a great deal of emphasis upon the formulation of individual projects and even the formulation of self-liquidating projects." By contrast, in the 1960s major infrastruc- ture projects came to be seen "not [as] an end in themselves, but simply a means toward promotion of development." It was only in the 19608 that "we came to feel that, as the banker to a country, we ought to evolve into the role also of a development adviser."5 To some extent, such judgments reflect later standards; at the time, many saw the Bank as "the most successful of the international bodies concerned with economic development," measured not only by its funding achievements but also by respect gained from the underdeveloped countries. 6 Nevertheless, Black's rhetoric does seem to have run ahead of the conservative character of Bank operations during this period. How much of that overreach was deliberate image management and how much managerial underachievement is less clear. Certainly "the circumstances" of the period placed narrow constraints on the Bank's operations. 7 The Wall Street Bank By the time of Black's first Annual General Meeting in September 1949 the Bank was no longer the unfamiliar, do-good institution that Wall Street had per- ceived when the institution opened for business under Eugene Meyer in June 1946, an institution that "smacked of having to do with foreign lending."8 The annual report cited the satisfactory record of Bank bonds and even claimed "a 4. Eugene R. Black, "Address to the Board of Governors," in IBRD, Summary Proceed- ings, Eleventh Annual Meeting of the Board of Governors (November 15, 1956), p. 11. 5. J. Burke Knapp, interview, World Bank Oral History Program, October 16 and 29, 1981, pp. 2-4. Knapp had expressed a similar opinion much earlier, in the course of an interview with Robert Oliver, World Bank Oral History Program, July 1961. 6. Andrew Shonfield, The Attack on World Poverty (Random House, 1960), p. 116. Shonfield was the economic columnist for the London Observer: Paul Rosenstein-Rodan criticized the Bank of the 1950s but canle to the same conclusion, that it was "perhaps the most successful international organization." Rosenstein-Rodan, interview, World Bank Oral History Program, 1973, p. 40. 7. Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Brookings, 1973), pp. 189-90. 8. Richard H. Demuth, interview, World Bank Oral History Program, August 1961, p. 12. THE BANK OF THE 19505 89 substantial unsatisfied demand for the bonds."9 The appointment of John McCloy, Black, and Robert Gamer and the earlier presence of Wall Street lawyer Chester McLain as general legal counsel had gone a long way to change that image. The Bank backed up its intensive lobbying among investors and regulators by taking a hard line on prior settlement of debt arrears with bondholders and by cautiously scrutinizing loan requests and borrower financial policies. In July 1947 it success- fully placed $250 million in IBRD bonds. New, smaller issues were made in 1950 and 1951 and received improved ratings. This initial success was not followed by a relaxation in lending diSCipline or in the effort to present an image of creditworthiness. On the contrary, success seemed to confirm and reinforce the conservative inclinations of Black and Gamer, who chose to insist on the main ingredients of the lending model that had been taking shape as the Bank responded to the first loan applications from underdeveloped countries. lO There was ample justification for sticking to a cautious approach to foreign lending: at the tum of the decade, most potential borrowers, even in Europe, were tainted by unsettled defaults; the dollar shortage made repayment prospects uncertain; underdeveloped areas were little known in the United States investor community and many were embroiled in nationalist and leftist rebellions; communists even seemed to threaten Brazil and Chile; and investors were still trying to grasp the nature of the U.S. government guarantee on Bank obligations. That guarantee was based mostly on the American unpaid, callable capital sub- scription, but the institution was naturally extremely reluctant to call on that commitment. At the same time it was evident that future lending would be contingent on continuous borrOwing, which, for the foreseeable future, would be restricted to the U.S. financial market. By June 1949 net loan disbursements had amounted to $622 million, almost the full amount of the $746 million in usable capital paid in up to that date. The Bank could look forward to a likely, though uncertain, inflow of loanable funds, first, as members complied with unpaid capital subSCriptions com- mitted under the Charter, and second, from net income generated by ongoing operations. Loanable funds would also include cash in hand. The cash position in 1950 was highlighted by the annual report for that year, which reported funds available for lending at $267 million, roughly equal to the $250 million that had been raised thus far through bond sales. l l These amounts, however, were too small to sustain the lending volumes already achieved between 1947 and 1949, or to finance the scale of commitments that were being built up by the rapid expansion of contacts and negotiations with potential borrowers during 1949 and 1950. The 9. IBRD, Fourth Annual Report, 1948-1949, p. 5. 10. Some of these lending procedures and conditions were described in the account of the first loan to Chile in this chapter. 11. IBRD, Fifth Annual Report, 1949-1950, p. 39. 90 THE BANK OF THE 1950s Bank would in fact disburse an additional $2.8 billion during the following decade, lending tbat was necessarily financed largely by new borrowings of $2.2 bil- lion. 12 It is no surprise, then, that the annual report for 1948--49 describes an energetic marketing effort, including "an extensive program of information to acquaint investors [with the Bank]," "periodic information conferences held at the Bank's headquarters," "close contact with the investment community," and "visits to financial and investment centers throughout the United States."13 For this purpose, the Bank established a Marketing Department, which had its head- quarters in New York and which existed until 1963. The market for Bank ob- ligations was an obligatory and constant topic of discussion at Board meetings throughout 1950. The Volume of Lending The most visible and, at the time, controversial feature of the Black-Gamer Bank was the relatively modest level and slow expansion of lending. Over the first eight years of this period, between 1949 and 1957, annual commitments averaged $307 million and showed almost no tendency to rise. The rate increased sharply in 1958, reaching between $600 and $700 million per year through 1961, but the average for the twelve-year period was $428 million. These figures were far below those suggested at Bretton Woods and repeated after the war; as mentioned in chapter 2, the U.S. delegation to the United Nations bad made a vague reference to $15 billion when speaking of potential assistance by the Bretton Woods institu- tions. 14 Aid to Europe did in fact reach $18 billion over four years under the Marshall Plan, rapidly quelling the sharpest of the criticisms that were directed at the Bank between 1946 and 1948. Bilateral assistance to underdeveloped countries also climbed into the billions: from 1949 to 1961, U.S. aid to those countries, not including military assistance, averaged $1.8 billion per year, some four to five times 12. Over the full period between July 1, 1949, and June 30, 1961, funding included $3,034 million in net borrowing, $905 million in additional payments of capital subSCription, and $2,072 million in net income. Cash on hand, kept to meet forthCOming disbursements on earlier loan commitments, rose from $390 million to $543 million. See Mason and Asher, World Bank since Bretton Woods, p. 857, and World Bank annual reports. 13. World Bank, Annual Report, 1948, pp. 36-37, and summaries of Board meetings during 1950. 14. Richard N. Gardner, Sterling-Dollar Diplomacy in Current Perspective: The Origins and the Prospects of Our International Economic Order (Columbia University Press, 1980), p. 292. Gardner adds that William Clayton, assistant secretary of state for economic affairs, "in an attempt to justifY the termination ofU.N.RRA., went even further. He declared not only that 'fifteen billion dollars' had been made available by the Bank and the Fund but that measures had been taken 'for the provision of a total of nearly 30 billion dollars of foreign exchange to countries which needed it.'" THE BANK OF THE 1950s 91 the level of Bank lending over the same period, with the additional feature of carrying soft tenus. IS World Bank lending was also seen as modest in relation to estimates of need and demands for assistance that were being put forward by advocates for the develop- ing countries. A 1951 United Nations report argued that underdeveloped areas of the world needed about $10 billion a year in external capital to sustain a 2 percent annual growth in per capita national income. 16 A year earlier, 'Walter Reuther, preSident of the United Automobile Workers of America, had proposed that the United States spend $13 billion a year in international assistance, which he argued would amount to less than 5 percent of annual outputP In 1953 Harold Wilson, British member of Parliament and future prime minister, published The War on World Poverty: An Appeal to the Conscience of Mankind, calling for large-scale aid. If the call went unheeded by other nations, said Wilson, "the war on world poverty ... must be Britain's historic mission in what remains of the twentieth centmy."18 By the late 1950s, aid advocates were producing more sober estimates of aid needs, rationalized in part, perhaps, by the fact that domestic savings and economic growth in developing areas over the decade had greatly exceeded expectations. In 1961 Paul Rosenstein-Rodan, who had moved from the Bank to the Massachusetts Institute of Technology, calculated a more modest but still large capital inflow "need" of$5.7 billion per year during the 1960s. 19 A decade before, as a member of the Bank's Economic Department, he had criticized from within, saying that it was "partly mistaken and partly intellectually dishonest" for the Bank to argue that it could not lend more for the lack of well-prepared projects. 20 15. Data from Ruth Logue, History of u.s. Foreign Aid since the Second World War (Washington, D.C.: Board of Governors of the Federal Reserve System, 1961); and Robert E. Wood, From Marshall Pian to Debt Crisis: Foreign Aid and Development Choices in the World Economy (University of California Press, 1986), 16. United Nations, Measures for the Economic Development of Underdeveloped Countries, Report by a Group of Experts (New York, May 1951), pp. 75-80. The report was drafted by Arthur Lewis. The authors argue that the $10 billion figure is not unrealistic, since 2 percent of the national income of Western Europe, Australasia, the United States, and Canada would amount to $7 billion. Also, they say,