Dissertation

So this is my dissertation. As you probably can tell there no conclusion because i'm far from being happy with it. I rewrote the first chapter this weekend and split in two. There probably are a few spelling errors in the first two chapters so ingnor them. but if you see any in the last two chapters let me know.

ABSTRACT

After years of flirting with the idea of policy based lending, the World Bank finally committed itself in 1980 to a policy based lending called Structural Adjustment. The Bank idea came as a result of forces within the World Bank especially from Hollis Chenery and Ernie Stern, both of whom were vice-presidents. There was not outside force that put pressure for structural adjustment and no evidence to suggest that it was part of the raise of the conservative ideas that occurred in 1980's However there was major disagreement mostly from the Bank's board, who did approve these loans right away and got some guarantees from the bank's leadership before approving the first Structural Adjustment loan to Turkey. This loan was considered a successful enough for more money to be put into the Structural Adjustment Program and for the entire operation to continue, which it did for years to come.

NTRODUCTION

This study will track the process within the International Bank for Reconstruction and Development(The World Bank) from program lending to the creation and implementation of policy based lending. This study will also analyse the nature of the debate within the World Bank on this
shift of lending that occurred in 1980 with the first Structural Adjustment loan to the Republic of Turkey. It will also trace the first loan and how the process of creation, implementation, and result occurred.
CHAPTER 1- The history of policy lending the The Bank in the 1970's
The World Bank was created to reconstruct countries after World War Two and further help 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. Another reason for not lending out policy 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 al, 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. Consistent 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.” That being said, The Bank has always taken an interest in countries’ policies and tried to influence them to change certain policies.

The Bank almost never gave out an unconditional loan. All loans had conditions attached to them and in some cases, policy conditions were attached. But there is a difference between policy loans and project loans that had policy conditions. The project loan would be considered a success if the project was built and is operation even though the policy reforms did not occur. Also most of the policy reforms were meant to happen after the fact. Using Mosley at el example of loan being given to build a new power plant and the policy condition would be the borrower agreeing to overhaul its electricity tariff. The power plant was to built and by the time the plant opened their was to be a overhaul of its electricity tariff. Countries could wait and promise that it would get done before the plant opens but it could very well open without the overhaul and The Bank could do nothing about it. They couldn't tear down the plant once they built it. So project loans with policy conditions were useful but there was no guarantee that the policy reforms would be implemented The idea behind Structural Adjustment Loans was the loan would be split up in instalment and dispersed at different times based on how well the policy reforms were occurring.

There were a fair amount of policy based loans considered and a few of them were approved. But at no point, until Structural Adjustment, was there an implicit program of giving out policy based loans worldwide. There was an attempt to start a program with India, in the middle of the 1960's, but to say it failed, would be understatement. The program tried to devalue the currency, liberalise government controlled agriculture and industry. The idea of policy based lending was deeply damage within The Bank and elsewhere as a result of this episode. However, several of the people who would be influential in the creation of Structural Adjustment such as Ernest Stern and Stanley Please. Ernest Stern became Vice-President of operations in 1977 and Stanley Please became a senior adviser on Structural Adjustment loans and was effectively in charge of the SAL operations after it was approve by the Bank's Board in 1980.

More attempts were made in the 1970's to have a program of policy based lending but it did not fully succeed due to a few factors such as there was little support within The Bank of the need for policy based lending. Also the program would have to be small-only a few countries could get this loans- as a result of the uneasiness by the board to a shift towards policy based lending, which would rear later too when structural adjustment programs came up for approval. However, four loans were approve; two to Tanzania, one to Kenya, and one to Turkey. As it will be shown later, the 1970's and the policy based loans had a major impact on some of the top echelon in the World Bank and led to Structural Adjustment being considered and put in place.

The World Bank approached the turn of the decade in 1979, not only bigger in its size of staff and the amount of loans being given but also bolder in its reach. Robert McNamara was appointed President to the World Bank in 1968 and had been its longest serving president to date and probably the most well respected. It is surprising that this was true, McNamara before being appointed had no experience in development. He was president of Ford Motor corporation before being appointed by President Kennedy as American's secretary of Defense. He made up for this lack of development experience by appointing some of the top people to the different jobs within The Bank. He also self taught himself and in only a short amount of time after being appointed could speak intelligently about almost every single development policy to just about anyone. During his first few weeks he saw the apparent cheapness(Signinice) of The Bank. They were loaning less then a billion dollars a year and many needy states were not getting any money at all. McNamara was also willing to support projects that might not have been approved by other presidents. This would play a major role in the approval of Structural Adjustment.

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. Development 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 the tenure of George Woods*, as President of The Bank in the 1960's, brought the issue of poverty to the attention to The Bank. The Bank moved into development because the reconstruction of Europe went much better then expected and to ensure its continued relevance 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. Also during the 1970's, many economists inside and outside of The Bank, were advocating a shift away from project lending due to the fact that the project laden 60's did not have as much effect in development growth as many wanted. 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.

Chapter 2: The Creation Of Structural Adjustment Programs

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. These papers were an acknowledgement 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. 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. Only two of countries were approved: Kenya and Tanzania. Turkey was given a loan in 1977. These loans- with the exception of turkey which was $150 million- 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's support for policy based lending when he accepted that Structural Adjustment was needed, is hard to place. He certainly felt that policy lending had a place in The Bank early on in his presidency but as said before most of these policy loans were short term and of small amounts. By 1976, according to the notes from a meeting entitled, “Second Meeting to Discuss Future Work on Development, he had this to say about the current state of lending:
Mr. McNamara disagreed with the view that The Bank obtained its major impact through its project and technical assistance work. Although this work, of course, was essential, it did not influence the population at large in our borrowing countries, nor did it influence donor policies. The development community was influenced by soundly based ideas and it was an essential part of the work of the DPS[which was being led by Chenery] to find such ideas and turn them into strategies for development.
There are a few unanswered questions with McNamara support of policy lending. Why did he wait until the year before his last year to submit the policy of Structural Adjustment? Was he afried of the problems that Structural Adjustment could bring. DO I REALLY NEED THIS CRAP

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.
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 and The Economist both wrote about McNamara’s 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.”

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.”

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, felt that the hostile views that the Board had were uncalled for. The two strongest opponents to Structural Adjustment were the Germans and the Americans, even though McNamara recalls that President Carter was supportive.

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.” and that “[a] major change in policy was in effect being forced down their throats on the basis of a very slim document.” 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. 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.” 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.”

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. Some staff felt that “... programme lending as inherently irresponsible, and as something that had to be stringently limited.” 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. 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. The fiscal year of 1981 had only around $600 to $800 million (5% to 6.5%) allocated to the program. 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.


CHAPTER 3: The Emergence of Conservative Governments.


Starting with the election of Margaret Thatcher as the UK Prime Mister and the election of Ronald Reagan two years later, conservativism soon took over many countries’ governments. They brought with them neo-liberal economic ideas. There is a common assumption that Structural Adjustment was a cause of the rise of conservativism. With all the evidence, Structural Adjustment was not created in any way as a result of conservative ascent. It must be remembered that the original idea of Structural Adjustment started to be floated around 1977 within the World Bank. There was no outside pressure by any government or political person. Ironically, McNamara, who was completely opposed to the conservatives and their eventual policies, was responsible for one of the most commonly used polices to pressure developing states to adopt neo-liberal economic theories. There is no evidence to suggest that any of the top echelon thought that their policy of Structural Adjustment would be used as a means to promote neo-liberal ideas.

Certainly, the top echelon believed in liberal economic ideas and a few of them, such as Hollis Chenery, strongly felt that the privatisation which was later called neo-liberalism was needed to bring economic growth. But they did not believe that a massive change in policies was correct or appropriate. They felt that tweaking a few things here and there was much better then a wholesale change of a country's economy. “Shock Therapy”, which was used so much in the former communist states in the 1990's, would have been met with a resounding No by the leadership of McNamara administration. They also most likely felt that a country should take its time rather then risk everything. The first few years of structural adjustments, while ambitious, were doable. For example, for the first country that had Structural Adjustment, there were still loans given for non-structural programs even while a Structural Adjustment program was in place, Close to $300 million($100 more then the first SAL) were given in just three months on a variety of projects such as: building a hydropower dam, more money in the livestock program, and a textile modernisation program. In later years, as Structural Adjustment type loans became the main lending of the World Bank, these types of loans that could help with human development and poverty reduction dried up.

Even though the limit of ten percent of total Bank lending for structural adjustment was put in place as a means to please the board, there is no evidence to suggest that they would have gone over that limit if they had the chance. While the limit was breeched a few years later, it was because of the change of leadership and the leaving of the architects of Structural Adjustment. It can be assumed that if McNamara and his leadership stayed in place, Structural Adjustment would have not have breeched the ten percent limit and SAL would have never become the main source of lending.

CHAPTER 4: The First Structural Adjustment Loan

Turkey was the first country to receive a Structural Adjustment Loan and soon became the largest Structural Adjustment Program within the World Bank which some considered to be the most successful. It received a Structural Adjustment Loan for five successive years, 1980-84, which totalled 1.6 billion dollars. Turkey, at the time, was undergoing massive changes in the economy. It did have a government that was committed to economy: However, Turkish politics were very fragile and The Bank decided that the major impediment to the implementation of this loan and others was the political situation and other developments in Turkey. In fact, there was a coup and the Military took control in September 1980. But the coup proved only a little set-back, as the Military was still committed to the economic plans that the previous government had agreed to with its 5 years plans.

Turkey approached the end of the 1970's in an economic condition that was much better then the beginning of the decade. However, Turkey still had many structural problems and was going though an economic recession and huge inflation. Turkey, for years, had suffered from a major balance of payment problem where they were importing far more then they were exporting. For example, in 1977, Turkey was exporting only around 4% of its GDP while importing 20% of its GDP. While the latter figure was normal for most middle income countries, the former was very low in comparison. The Turkish government was very concerned about this and had set up many different programs and policies to equalize the balance of payment. Turkey, like all countries at the time, was suffering from the oil crisis that plagued the 1970's.

In November of 1979, a new government was formed and they made economic growth and the end of the crisis, their top priority. This included creating “a new medium-term agreement which would represent a fundamental reorientation of economic policy.” In January 1980, this new plan, which was the fourth five-year plan that Turkey had, was created and titled: Economic Stabilisation Program. A move towards privatisation and market forces was a repeated theme along the report. Factories, infrastructure, and other state controlled enterprises were to be sold off. The plan also called for an “export oriented strategy of import substitution.”

The Bank identified five areas that they felt were retarding Turkey's growth. Firstly, as mentioned, was its balance of payment problem and the need to bring imports and exports into line with each other. The second area was the lack of domestic savings and as a result, higher then normal foreign borrowing. The third area was the unemployment and the less than ideal labour distribution across the economy. Agricultural employment was far higher then it should have been and low employment in the industrial sector was another concern. The fourth area dealt with the unproductiveness and ineffectiveness of state enterprises and the need for more of these government controlled enterprises to be given up to the private sector. The last area of concern for The Bank was the past history of the state having economic plans that dealt with the micro-level. In The Bank’s words: “...planning needs to be increasingly geared towards setting a framework in which market forces could secure the desired economic results in both the public and private sectors.” The last two areas are a view of the future of The Bank later on during the 1980's. The answer to these problems, The Bank believed, was structural adjustment loans.

There were two issues at hand; firstly, the need of Turkey to reform and change the areas that were previously mentioned and secondly, Turkey needed to grow economically. Exports, at the time, were considered to be the main source of economic growth. The Bank felt that the best way to proceed would be by increasing Turkey's exports and working towards equalizing the balance of trade. The World Bank decided to combine these two issues into one loan. The money from the loan was not to be given for the cost of the implementation of the polices but for buying imports that were needed for Turkey to increase its exports. However, the policies needed to be implemented or the disbursement of the loans would be either delayed or cancelled. The loan was set to be 200 million dollars. $100 million was to be given upon the approval of the loan by the Board. The next $50 million was to be given after the first review which was to occur before 31 July, 1980 and the last $50 million would be given after the second review which should be held no later then the last day of 1980.

The loan was to be split between the industrial and agricultural sectors with each getting $100 million to buy “high priority imports” such as plant protection chemicals, fertilizer, steel, special steels, petrochemicals, etc. The Turkish government planned on providing an additional $30 million for this program. The Bank and the Turkish government wanted the money from the loan to spur more export oriented growth. With agriculture, the plan was to buy raw imports of the materials needed to make fertilizer. The finished product would be made within Turkey and then used for its own agriculture. This is turn would increase its agricultural exports. The Bank believed that for every $1 “reduction in imported [fertilizer] raw material, an estimated $3 of wheat exports, or $6.8 of cotton export are jeopardized.” Importing raw materials was necessary because the cost of producing fertilizer per ton was only $350 while the finished product was $520 per ton. This was import substitution at its very heart. At the time of the President's Report, in February 1980,on the issue of the loan to Turkey, available financing for imports of the raw materials was only 21% and there would have been a huge loss of available exports if more money was not found or given, which would have had a detrimental effect on the recovery of the Turkish economy.

As noted before, The Bank Board had concerns with the idea of Structural Adjustment and the following two points were added into the loan proposal most likely to assuage their concerns. By highlighting the fact that if this loan was not approved there was a good chance that Turkey would lose around $300 million dollars or possibly up to $680 million, The Board, who were not all economists, could understand the need for this loan. They also thought that the results would be easily assessed. However, they most likely failed to fully realise that while the results could be tracked eventually, it would take years before these results would become available. The difficulty in assessing impact of the loans went against the very nature of SAL as they were meant to be a series of successive quick originating and disbursing loans. The Operations Evaluation Department, a branch of the World Bank that follows up on the completion of loans and assesses the loans’ effect, commented in their report of the First SAL loan and its supplement, that the length of operations and disbursement made it less than ideal to look at data. It also pointed out, in its very candid report, that the only substantiated data they had readily available was the rate of inflation in Turkey. This delay with the data was a major issue in the later years of Structural Adjustment as loans were given to specific programs and The Bank had no idea if the program was working. This led to continued funding for programs that they did not realize were failing..

The loan was approved by the Board on 23 March 1980 and the first instalment was released. The reviews which followed were happy with the progress even though they admitted that “This was too short a time span to expect any substantial improvement in overall economic performance, with the notable exception of a marked deceleration in the rate of inflation.” With a note to the Board to that effect, the second instalment and the third instalments were given on 1 August and 24 October respectively. All of the money was disbursed by the Turkish government by February 1980.

By October, the Board was presented with a supplement of $75 million to the first loan. $75 million was added with $45 million to be given for more important [import?] substitution in regards to agriculture. The other $30 million was given to the Industry program. There was also a stipulation that at least $25 million was to be given to private sector firms. The loan would be given in one instalment as soon as it was approved by the Board, which occurred on 24 November 1980.

The reason that this supplement occurred in October and was not put into the original loan, even though it was known at the time of the first loan creation, was because the Bank's leadership most likely did not want to scare the Board by requesting too much money at the original discussion on the first loan and did not want to risk reopening the debate about Structural Adjustment that plagued the board in February 1980. As a result of this, they requested a lower number than what they figured Turkey would need that year. The $200 million was the biggest loan given to Turkey up to then, although it was not the biggest loan given to a country and was a reasonable amount. A loan of $275 million, while still not the largest loan, was far less common then a $200 million loan. As a result of this, the plan for Turkey always called for supplemental loan that was to be given in the fall of 1980. It was even mentioned in the presentation of the first loan in March 1980.

The first loan was within a few years deemed successful and was considered to have accomplished its goals. “Progress was made in practically all the areas earmarked for reform...” The World Bank gave $300 million SAL in 1981, another $300 million SAL was given in each of the following three years. This was a result of the success the first structural adjustment loan had. According to the candid Operations Evaluation Department report:
Significant success was achieved in reducing inflation from over 100 percent in 1980 to under 40 percent in 1981 when GNP began to expend, propelled by rapid growth in exports. The target set for export growth (of 10 percent per annum in 1979-82) was readily realized, though some of the institutional reforms were not carried out in the form agreed upon. The Lira was effectively devalued, and the rate of exchange made flexible...The balance of payments improved on current account, and higher imports facilitated the growth of exports, although the impact on capacity utilization in industry was mixed.
There were a few problems and goals not met such as “the objective of eliminating public deficit in 1980 was not achieved, nor was it (apparently) intended...” There were delays on the progress of other areas. While evidence suggested that it was a successful program, so successful that the OED report wrote “[o]verall, the prospects appear bright for Turkey's ability to complete its Structural Adjustment over the medium term” and recommended the Structural Adjustment Program to be continued, there were issues that were only known much later when the data was collected. There were serious effects on income distribution and social indicators. As Kirkpatrick et al, notes:
The failure of the SAL programmes to monitor the distributional impact of adjustment and on designing? countervailing measures to minimise adverse social effects can be seen to present the greatest challenge to the substance and sustainability of the Structural Adjustment process in Turkey.
The Bank's inability to recognise and address the social effects of Structural Adjustment was probably the biggest failure of the entire Structural Adjustment policy.