Chapter 1

Kathleen went though this chapter and corrected a lot of tiny mistakes that i might or might not have made, depending on you who ask. So if you do see any mistakes, please let me know. Also comment if you like it.

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 type of loan available. However, there was another type of loan that dealt with areas that project loans did not. This type was known as a policy or program area loan. The loans were meant to either involve a policy change, such as changing a country’s monetary policies by devaluing currency or to increase exports of a particular item. This idea of policy lending had been around as long as The Bank itself. 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 were 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 program loans appeared within The Bank’s charter. A sentence which can only be interpreted as alluding to project loans states, “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 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. [example of this?] However, until the ---- (or, in the beginning) The Bank did not require policy changes as a condition of granting the loan.

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 lookout for new projects and new programs. The Bank started out as an organization that dealt with the post-war reconstruction of Europe only, as described in the original plan that the United States created. ^ivDevelopment was added to its official name as an afterthought. But soon the development part of The Bank grew as it dealt with the newly independent nations and with the tenure of George Woods^* who, as President of The Bank in the 1960's, brought the issue of poverty 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 else. It has moved into agriculture, health, education, 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 boost 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 the problem policies. 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 countries’ economic teams, felt that this was incorrect.

Certainly, there were not many people in The Bank who supported this notion. However, Chenery was able to convince some of the top people of the need to look at polices and in turn give loans so that 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 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 rapidly disbursed and laid some of the groundwork that the new structural adjustment loans would build on in a few years time.

McNamara, gave a speech at UNCTAD in May 1979 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 to a program based approach in the types of lending The Bank does.

“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 external 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 the speech went rather unnoticed as few picked up on the announcement of a change in lending. Most of the newspapers and articles that dealt with the speech wrote about trade and the current trade round. The Washington Post^x and The Economist^xi both wrote about McNamara call for less trade protectionism, which McNamara had called for several times before this speech.

A few weeks later, the second oil shock occurred and the shock fully convinced McNamara and a few others at the top that were not already 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.”^xii

The paper did not lay out any time-line, 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.^xiii”

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 had hoped to, as they were ready to disburse the first loan. The top echelon were rather shocked at the hostility the Board had towards this shift. Chenery, as mentioned before, had been a supporter of this shift for years. Stern, head of programs, wanted to disburse 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^xiv, 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 the reasons 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.^xv” and that “[a] major change in policy was in effect being forced down their throats on the basis of a very slim document.^xvi” 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 that McNamara and Chenery should be reined in to a degree. The Board were 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.^xvii The first was the fact that the IMF was already working with policy reform and the capability to disburse policy loans rather quickly. The second issue dealt with the fact that the World Bank had been saying for years that there were dialogues on policy reforms with countries that were tied to project lending. The paper basically said this was all inaccurate and if there had been previous policy reform talks, they were not 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.”^xviii 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.^xix” The two strongest opponents to Structural Adjustment were the Germans and the Americans, even though McNamara recalls that President Carter was supportive^xx.

While most of the top echelon felt that Structural Adjustment was a correct policy to follow, the staff below were not as supportive, and were in fact hostile to the shift. This was especially true with the operations side as they felt that the Structural Adjustment programs would take away resources and operations would not be as big as they were currently in the Bank.^xxi Indeed this could be considered the economist's revenge on the operations staff as economists were not as well received and had been 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 their other concerns were relieved when they found out that the entire program would never exceed 10% of total lending.^xxii The fiscal year of 1981 had only around $600 to $800 million (5% to 6.5%) allocated to the program.^xxiii 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. They knew that the staff had 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 explained the shift had been longer and more upfront, then the Board would have been more supportive of the shift and would have dropped their objections much earlier then they did. Regardless, by February 26 they approved the shift. It was only a matter of days before the first Structural Adjustment Loan was sent 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

xWashington Post. (12 May 1979) “U.N. Body Urged By U.S. to Fight Against Poverty .“ The Washington Post. A14

xiEconomist, The. (12 May 1979) “Ungenerous aid; Rich countries are not opening their purses to aid poor ones.” Page 85

xiiKapur(1997) vol 1 page 509

xiiiKapur(1997) vol 1 page 510

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

Fall. Page 175

xvPlease interview page 15

xviPlease interview page 20

xviiPlease interview page 14-16

xviiiPlease interview page 15

xixPlease interview page 15

xxMcNamara Interview page unknown

xxiPlease interview page 16

xxiiPlease Interview Page 18

xxiiiKapur(1997) vol 1 page 511