Chapter 1 of Dissertation

Somebody has commented that this blog should should cover more profound things. I agree. This is why i'm sharing with you my first chapter of my dissertation. Please comment on anything you see. Cheer

The World Bank was created to reconstruct countries after World War Two and help further the countries economic development. The primary and, for the most part, the only loans given out were project based loans. These were loans that were created to finance certain infrastructure such as roads, dams, harbours, etc. The money was used to buy the materials and pay for the costs of labour. In almost all cases this was considered to be the only loan available; however, there was another loan that dealt with areas that project loans didn't. This was policies or program areas. The loans were meant to either have a policy such as monetary policies(devaluing currency) or to increase exports of a particular item. This idea of policy lending had been around as long as the Bank itself as the United States at the Bretton Woods conference not only wanted The Bank to do project loans but also program loans: However, when The Bank become operational the United States found that project loans was the only way it could achieve creditworthiness, which was the primary focus in the early days.ⁱ As such, program loans were never used as a basis of a loan as they were considered to be more risky and in some cases more political. Another reason for not lending out project loan because within the charter there is a sentence which can be interpreted as only alluding to project loans. “Loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects...” As Kapur et alⁱⁱ, noted, the Bank has defended this policy in one of their annual reports: “criticism of the specific project approach has almost always been based on the assumption that the Bank examines the merit of particular projects in isolation. In fact the Bank does the opposite. The Bank seeks to determine what are the appropriate investment priorities. Consistently with this approach the Bank has encouraged its members to formulate long-term development programs. The existence of such a program greatly facilitates the task of determining which projects are of the highest priority.ⁱⁱⁱ” That being said, The Bank has always taken an interest in countries policies and tried to influence them to change certain policies but very few had any type of money attached.

The mindset within the World Bank has never been static. There has been constant change during the course of the Bank's history. It has always been on the outlook for new projects and new programs it could have. The Bank started out as an organization that dealt with only the post-war reconstruction of Europe. Development was only added to its official name as an after thought as the original plan that the United States created only talked about reconstruction.^iv But soon development part of The Bank was getting bigger as it dealt with the new independent nations and with George Woods^* in the 1960's poverty was brought to the attention to The Bank.^v The Bank moved into development because the reconstruction of Europe went much better then expected and to protect its survival it needed to focus on something. It has moved into agricultural, health, women's issues, human rights, corruption, and a host of other issues. The Bank has never settled with doing the same thing. So a shift in policy lending should have been expected but what was needed was a 'turning point' in the world economy to explain the shift.

At the end of the 1970's, the world economy was not in the best of shape. Many economies were stagnant. Individuals in the Bank felt that something was needed to boast national economies. During the 1970's, the World Bank research department, headed by Hollis Chenery, looked at many different economies and found that certain polices were retarding growth. The research department wrote many candid papers that spelt out many of the problem polices. As Chenery recalled, after the first few disastrous attempts at showing these papers to the Board, they kept the newly created papers internal and refused to show these papers to the Board.^vi These papers were an acknowledgment that economic policies were a factor in the retardation of growth and many economists and certainly many country's economic teams, felt that this was incorrect.

Certainly there were not many people in the Bank who supported this notion: However, there was one and he was able to convince some of the top people of the need to look at polices and in turn give loans so these policies could change. Chenery had always been a firm believer in the need for loans to deal with bad polices. He had worked for the Marshall plan and USAID, where program based lending made up 90% and over 50%, respectively.^vii He had been speaking of the need for a shift in lending for many years and had brought up it up many times before and was able to get a few small policy loans through, underneath the radar to Kenya, Tanzania, and Zambia between the years 1972-1975.^viii These loans were not huge but they were rapid dispersement and laid some of the groundwork that the new structural adjustment loans would take on in a few years time.

McNamara, in a speech at UNCTAD in May 1979, gave a speech that for the most part dealt with the world economy and the progress with the Tokyo round of GATT. However, towards the end of the speech, he spoke of a shift in the types of lending the bank does and it was to program based lending.

“In order to benefit fully from an improved trade environment, the developing countries will need to carry out structural adjustments favoring their export sectors. This will require both appropriate domestic policies and adequate eternal help. I would urge that the International community consider sympathetically the possibility of additional assistance to developing countries that undertake the needed structural adjustments for export promotion in line with their longterm comparative advantage. I am prepared to recommend to the Executive Directors that the World Bank consider such requests for assistance, and that it make available program lending in appropriate cases.^ix”

However, this part of speech went rather unnoticed as few picked up of the announcement of a change in lending. Most of the newspapers and articles that dealt with the speech, wrote about trade and the other aspects.

A few weeks later the second oil shock happened and the shock fully convinced McNamara and a few others at the top that were already not convinced, that a move towards policy based lending was needed. Chenery prepared a paper that was given to the board in February of 1980. It laid out the reasons for the policy based loans. The paper was rather short—only five pages-- for such a big and rather controversial shift in polices. The global economy was changing, the paper explained, and with this change, new problems were emerging, such as “the increase in the price of oil, continued high levels of inflation and prolonged periods of slow growth in the OECD economies.”^x

The paper did not lay out any time line or specific plan or guidelines for which countries would get these loans. It laid out some of the possible structural adjustments that a country could undertake. “revision of investment programs, squaring them with available resources and seeking quicker yields; reforms improving incentives, infrastructure, and marketing on behalf of export diversification reductions in protection to make domestic industries more competitive, and policies concerning domestic resource mobilization, price incentives, and efficient resource use.^xi”

The Board, to say the least, were displeased with the paper. When the Board brought up their problems with the plan, McNamara and Chenery were not pleased as they thought they would get approval rather quickly and hoped to as they were ready to dispersed the first loan. They were behaving as a bull in a china shop when the china's already bought and paid for and the cows have already gone home. But the Board brought the cows back to the china shop and put a lease on the bull. They had kibosh the entire china shop plan. The higher ups were rather shocked with the hostility the board had towards this shift. Chenery, as mention before, been a supporter of this shift for years. Stern, head of programs wanted to disperse the first loans as soon as possible and did not like the delay. McNamara, who for the most part had a friendly relationship with the Board^xii, felt that the hostile views that the board had, were uncalled for. The board did not support this shift outright for several reasons. Some of them were cosmetic. Firstly, they felt that such a big shift such as this really required more then a five page document. Please noted that “They felt[the board] that they were not being given the full systematic presentation of why it was necessary to have structural adjustment lending to deal with the policy problems that the bank wished to handle.^xiii” and that “[a] major change in policy was in effect being forced down their throats on the basis of a very slim document.^xiv” Secondly, while the Board generally got along with the Bank's top echelon, they felt that McNamara and Chenery, in particular, were taking the Board's approval for granted and so the Board felt that McNamara and Chenery should be reined in to a degree. The Board was most likely aware of the fact that the first structural adjustment was already being worked out with the Turkish government. Thirdly, they had issues with the policy itself. These issues, as Please recounts, were in four areas.^xv The first was the fact that the IMF was already working with policy reform and the capability to disperse policy loans rather quickly. The second issue dealt with the fact that the World Bank for years had been saying there was dialogues on policy reforms with countries that were tied to project lending. The paper basically said this was all inaccurate and if there was previous policy reformed talks, it wasn't as “robust” as it was claimed. The third issue was related to the second and that was conditionality. There were conditions that were put in place “to make the dialogue on policy issues effective.”^xvi If needed project disbursements could be delayed or suspended. Lastly, “many of the executive directors argued, policy reform didn't cost money. It wasn't like a project where you had to buy the steel and the bricks and all the other inputs for projects; you didn't need money to buy anything. Either governments changed policies or they didn't and it didn't cost them any money.^xvii” The two strongest opponents to Structural Adjustment were the Germans and the Americans, even though McNamara recalls that President Carter was supportive^xviii.

While most of the top echelon felt that Structural Adjustment was a correct policy to follow, the staff below were not as supportive, indeed hostile to the shift. This was especially true with the operations side as they felt that Structural Adjustment programs would take away resources and operations would not be as big as they were currently in the Bank.^xix Indeed this could be considered the economist's revenge on the operations staff as economists were not as well received and treated badly in some cases, in the early part of the Bank's history. Economists were going to be on the forefront of this new policy shift and those individuals were rather excited that it was happening.

The Board approved the Structural Adjustment program in the end. They did so because some of their concerns were addressed and they other concerns were relived when they found out that the entire program would never exceed 10% of total lending^xx and the fiscal year of 1981 has only around $600 to $800 million(5% to 6.5%) allocated.^xxi They also saw that these countries needed money now and project loans would take a long time for the money to really make a difference. In the end, the Board also listened to the staff of The Bank and they knew that the staff has far more knowledge and experience then they did and were willing to let them take the lead. It could be said that if the document that explain the shift was longer and more upfront then Board would have been more supportive of the shift and drop their objections much early then they did. But they did drop them and approve the shift. It was only a matter of days before the first Structural Adjustment Loan was set to the Board

*Poverty alleviation as a policy of The Bank started with George Woods but Robert McNamara was the one who really brought it to the forefront.

iKapur(1997) Vol 1 page 7

iiKapur(1997) Vol 2 page 533

iiiWorld Bank, Fifth annual report 1949-50 page 7. found in Kapur 533

ivKapur(1997) vol 1 page 57

vKapur(1997) Vol 1 page 204

viChenery interview page 28-29

viiChenery Interview page 30

viiiPlease interview page 12

ixMcNamara speech to UNCTAD page 29

xKapur(1997) vol 1 page 509

xiKapur(1997) vol 1 page 510

xiiClark, William (1981) “Robert McNamara at the World Bank.” Foreign Affairs. Vol 60

Fall. Page 175

xiiiPlease interview page 15

xivPlease interview page 20

xvPlease interview page 14-16

xviPlease interview page 15

xviiPlease interview page 15

xviiiMcNamara Interview page unknown

xixPlease interview page 16

xxPlease Interview Page 18

xxiKapur(1997) vol 1 page 511