7 Development 1 History of WB

The Economic Journal, 112 (February), F119±F135. Ó Royal Economic Society 2002.
Published by Blackwell
Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
THE HISTORY OF THE WORLD BANK
The World Bank: Its First Half Century. Volume 1 History; Volume 2 Perspectives. By
KAPUR (DEVESH), LEWIS (JOHN P.) and WEBB (RICHARD). (Washington: Brookings
Institution Press 1997. Vol. 1, pp. xviii, 1275; Vol. 2, pp. xviii, 766. ISBN 0 81575230)
The World Bank ± of®cially, the International Bank for Reconstruction and
Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Development ± was established by the 1944 Bretton Woods Agreement along with
the International Monetary Fund. It was almost an after-thought, opposed by
Keynes but pushed by the United States. For its 50th anniversary it gave the authors
access to personnel and documents (including ®les), many of which were con®-
dential.
The three authors have long worked with the Bank. Kapur was a research as-
sociate at the Brookings Institution; Lewis had worked with the Bank in various
consulting capacities; and Webb served ®ve years on the research staff. They cover
both blemishes and beauty spots. One serious shortcoming is omission of the
Soviet Bloc and Eastern Europe, whose economic revolution came too late for
inclusion in any detail.
Book 1 History
The book's initial chapter is a survey of the material and topics discussed at greater
length in the remainder of the volume.
While the Bank was not an activist free-market advocate, its top management did
favor the ef®ciency of self-adjusting markets. Trade liberalisation and the im-
portance of market forces became the Bank's message, notably under its 1981±86
President, A. W. Clausen. This was particularly emphasised, since the Bank was so
dependent on private sources for ®nance, mainly the New York market in earlier
years. But two factors worked to modify this bias; the 1982 Mexican debt crisis and
the lamentable performance of so much of the developing world. It was these
events that changed the emphasis in its original title from reconstruction, which
came ®rst, to development, which had been second. Partly, too, the shift re¯ected
the immediate post-war reconstruction needs, which far exceeded the Bank's re-
sources and called forth the American Marshall Plan as a major factor in Europe's
rebuilding.
The Mexican crisis edged the Bank out of the picture, because of the risks and
uncertainty posed by the global ®nancial reactions. The Bank's main contribution
was to monitor the borrowing country's policies. It was the Group of Seven that
dominated this scene. Recognising that debt and adjustment policies could no
longer keep growth going, the international community shifted to a formula that
would nudge the private international banks into fresh lending. This, however, did
not work, and so a more forward development policy emerged.
At the same time THE BANK became an intellectual source, its ideas, country
studies and seminars gave it an expertise and reputation second to none.
[ F119 ]
F120 THE ECONOMIC JOURNAL [FEBRUARY
Unlike the UN, the Bank governing body was not set up on a one-country one-
vote basis, but rather gave a disproportionate vote to the richer nations, the major
contributors. Its presidents did not usually serve for long terms, and several were
too old- and even indifferent- to serving more than one ®ve-year term.
Although in effect the Bank was a creature of the member governments, it was
unusual for it to bend to the member countries' political pressures, though there
were some exceptions, notably because of American and French interference.
Some Bank actions also raised competency questions, such as cost over-runs in the
construction of its new headquarters. In-®ghting and battles over turf, as well as the

emergence of cliques plagued the Bank, as it would in any large organisation.
Much criticism by the staff of Bank policies and operations could lead to admin-
istrative reorganisation. This helped offset the veil of secrecy that lessened external
scrutiny and thus quality control of Bank decisions.
Speci®c Projects vs. a Sectoral Approach

One decision that the Bank had to make, and was a focus of differing approaches
over the half-century, was the ®nancing only of speci®c projects, such as an electric
utility, or a broader idea, such as sectoral development, the former preferred by
the United Kingdom, the latter pushed by the United States. One advantage of the
projects approach was its being less intrusive on a receiving country's sovereignty
than the remaking of an economy by the sectoral approach. But this meant de-
ciding between projects where need was greater or alternatively where there was a
better chance of success.
Early on the Bank personnel gained a reputation for integrity and sophisticated
high-quality project analysis. But outside pressures were for the sectoral approach,
to meet the social needs of the poorer countries. This broader sectoral require-
ment called for local trained personnel to carry out the objectives, a quality that
many developing countries lacked, especially in Africa, though less true of Latin
America. In effect, the Bank acted as a venture capitalist, with the risk of failure, as
well as hoped-for success.
Poverty
Poverty alleviation among so many countries ± almost identical with underdevel-
oped countries ± soon became an over-riding issue. Robert McNamara, the former
American Secretary of Defence, pushed hard for output growth and equity, ex-
claiming that the two were not trade-offs. (Later Presidents, such as Clausen,
downgraded this priority for poverty.) But as the need for reconstruction in
Western Europe waned, anti-poverty and growth emerged into dominance. And
because of the rural nature of so much of the poorer countries, agriculture in
particular began to gain an increasing emphasis.
Although the dollar volume of Bank activity was smaller than that of private
capital, it has been a signi®cant source of capital. The boom in private capital
¯ows internationally reduced much of the call for Bank ®nancing of speci®c
projects.
Ó Royal Economic Society 2002
2002] THE HISTORY OF THE WORLD BANK F121
One programme that stood out is China. Although at ®rst the Bank's main job
was to educate Chinese of®cials in the economics of the outside world, subsequent
progress and rapid growth there is one of the Bank's proudest achievements.
Included in the `plus' was the Bank's focus on the poorer inland provinces.
Initially post-World War II was a dominant concern, but this task far exceeded
the Bank's resources. To obtain additional ®nance ± especially from New York ±
was a major task, considering the sorry default record of international loans during
the 1930's. It was safer to grant reconstruction loans to a Europe that had an
industrial infrastructure and know-how than to the very poor areas whose

administrative ability and ®nancial probity was suspect.
Active Development Aid

Once the Marshall Plan came into effect the World Bank operated as a develop-
ment institution, lending to some 56 countries, of which concrete projects such as
public utilities were conspicuous, with little at ®rst for agriculture and education ±
the so-called less measurable social projects. These last, it was feared, might
jeopardise the Bank's `soundness' on Wall Street. This worry was a constant con-
straint during the Bank's earlier years. Bank ®nancing was geared mainly to pro-
ductive purposes where loan repayment seemed assured. Thus, many of the earlier
loans were for the development of resources in the European colonies for sup-
plying the mother country. India and Pakistan were also major recipients.
As development lending became more important, the Bank had to give both
technical assistance and the creation of administrative authorities, since so many of
these countries lacked the necessary know-how to comply with Bank objectives.
Politics, too, played a part, particularly since the United States insisted on help for
those countries considered as being in the anti-Communist camp ± thus, Nicar-
agua's friendly Somoza received much more than populous (and suspect) Gua-
temala, although the Bank did recognise the dangers inherent in these countries'
shocking economic inequalities.
Lending policies were also affected by competition with the US Export-Import
Bank, whose lending policies were felt to be too `soft', thus undercutting the
World Bank. Often the latter refused to lend to countries that borrowed from the
Export-Import Bank.
One interesting in¯uence was the idea of fungibility. If the Bank lent for a
speci®c project, would the recipient simply shift funds already available to other
areas which the Bank would ordinarily not support, so that in effect the Bank was
®nancing this alternative? This was especially an acute issue regarding balance of
payments help, which the Bank was at pains to disclaim. But obviously, any money
¯owing to a country would add to its resources, and thus help its external position.
Despite this apparent concern, the Bank at times used fungibility to disguise such
payments assistance which it would oppose overtly. However, once the Interna-
tional Development Association came into existence this became less of a concern.
In 1956 the International Finance Corporation (IFC) was created to augment
the Bank's lending powers in the private sector. In 1960 the International Devel-
opment Association (IDA) came into existence, giving greater political urgency for
a greater concern for poverty, especially if the would-be borrower could not meet
IBRD credit-worthiness. A swing in the United States towards social programmes
helped the Bank's change in attitude. Along with this change in orientation came
an expansion in Bank activities and size. During the 1960's loan commitments rose
more than 10% per annum and the number of staff professionals more than 14%
annually ± the Economics Department went from 20 to 120 from 1965 to 1969.
Areas the Bank considered but hesitated because of explosive political possi-
bilities were land reform, population control and a better degree of income and
wealth distribution, since most, if not all, less developed countries had shockingly

concentrations of wealth and power. On the other hand, such reforms could also
endanger economic growth, as in India, where social welfare objectives apparently
had slowed the rise in agricultural productivity.
Under Robert McNamara's presidency (1968±81) the Bank was pressured to
make poverty a more important consideration. He hammered at the contradiction
of fairly good growth rates in many developing countries that helped mainly the
rich middle levels, with little seeping down to the very poor. McNamara was willing
to compromise the market oriented bias of the Bank, using controls and quotas to
reduce this gap. Unfortunately, he was up against the Bank philosophy of emphasis
on `bankable' projects, ie, hard-term loans attractive to the ®nancial markets.
In the ®rst year of his term he proposed more attention to Africa and Latin
America, stressing population control, equity, education and agriculture, all
outside the area of thinking of most top Bank management. The latter were slow,
even reluctant to reshape the Bank's lending and advisory work. The Bank's
bureaucracy had faith in `trickle down' ± that an increase in over-all GDP would
somehow, like a rising tide, lift all the boats ± this despite the ®ndings of 20±30%
unemployment in most developing areas. Several Board members worried about
possible con¯ict between output and income distribution ± India's social welfare
schemes appeared to be crippling growth. Apparently, small farmer productivity
did not respond to the aid programmes. It was only through administrative re-
organisations that McNamara was able to increase his capacity to get his views
adopted.
Development Obstacles
Chapter 6 contains capsule summaries of IBRD activity and relations with nine
selected countries. This reviewer did not ®nd them encouragingly successful for
development enthusiasts. For example, Bank efforts to ameliorate the condition of
the poor were thwarted by entrenched ruling oligarchies in Brazil and Guatemala,
by racial and ethnic animosities in Malaysia, administrative impotence in India,
and military dictatorships in Chile and the Philippines. It would seem that
McNamara's efforts to use economic aid as a lever for economic policy changes
were far from convincing. The Bank was compelled to accommodate borrower
priorities and politics.
Rural development posed its own problems. It was designed to help the small
(poor) farmers, but such aid was a puzzle for mostly technologically ignorant
peasants. Urban development was little better; the stress on housing and service
delivery was a second-best result, and its cost per capita far exceeded available
funds.
By contrast, balance of payments problems, in¯ation and debt rescheduling
were more precise and well-de®ned, and ®nancial and political emergencies
therefore crowded out the social objectives.
Another check on the Bank's activities were the two oil crises, which funnelled
enormous wealth to the OPEC countries. The Shah of Iran could ignore Bank
policy ideas if they con¯icted with his own. Even non-OPEC countries like Syria
and Egypt could be independent, since they received remittances from OPEC, eg,

their workers migrating to the oil-rich and sending money home, or, like Thailand,
Pakistan and Turkey, US aid enabled these three to hold off the Bank. Moreover, if
economic or political stability was threatened, the Bank felt compelled to extend
aid to avert chaos or Cold War intrusions. Financing current account de®cits
pushed the alleviation of poverty off the table. Moreover, since Bank lending
amounted to only 2% of total investment in developing countries ± and lending
for poverty only one-third of that ± the authors raise the troublesome issue
regarding the effectiveness of policy-in¯uencing efforts.
When Clausen succeeded McNamara as president in 1981 the poverty theme was
abruptly muted. The growth could reduce poverty was evident ± or so it seemed ±
by the success of the Asian `Tigers', as well as by events in India, China, Pakistan
and Indonesia during the 70s and 80s. Moreover, the experience with rural, urban
and social projects designed to help the neediest had proved troublesome, costly,
and unsatisfactory. Additionally, the swing to the right with Reagan in the United
States and Thatcher in the United Kingdom signalled less commitment to poverty
± the United States, for example, reduced its contribution to IDA by about a third,
and the US Treasury was relatively unconcerned with social issues. It was felt that
welfare did not stress the importance of growth suf®ciently.
But when Barber Conable succeeded Clausen in 1986 the Bank was once again
rededicated to the ®ght against poverty, accepting loans for social emergency
programmes, like ¯ood, famine, earthquakes and war relief. The 1984±5 famine in
Africa brought world attention to these needs. Rigid adherence to productive
criteria had to give way to social needs, source of political instability. By the 80's the
Bank began emphasising the productive virtues of the poverty services. Educa-
tional lending more then tripled, helping even the primary levels. Loans for
drought relief totaled two-thirds billion dollars.
Agriculture
In its early years the World Bank put only a modest effort into agriculture, since
that sector was not geared to service Bank loans through self-liquidating projects.
A major obstacle was the need for land reform, since ownership was so concen-
trated. In 1964 8% of Bank dollars went for the two-thirds of the world population
on the land. But then in the mid-60s Woods, the new president, mandated a quick
doubling of agricultural programmes, especially when it was realised that peasant
farmers could be expected to respond to economic incentives. Lending in the
earlier years was mainly on irrigation and drainage, but then swung more to
adjustments and area development, to growth and equity. Agricultural research
was pushed through numerous new international centers, from which such ad-
vances as the Green Revolution and heightened rice production evolved, rates of
return on research reaching some 50% per annum.
But there were problems, too. The partition of India and Pakistan split the Indus
Basin complex, thus posing a major hurdle for nine years before a water treaty was
arrived at. Land reform, as already indicated, was another obstacle ± almost
intractable since those in power had the larger holdings. Many of the infrastruc-
ture improvements really went to their bene®t. There was also a lack of adminis-

trative and technical capacity on the part of the loan recipients, not to mention
corruption.
As already indicated, one of the major policy decisions that the Bank faced was
the relative emphasis to be placed on project lending and policy-linked lending.
The former was concrete ± for an electric utility construction or a railway. These
could be monitored and its performance assessed much more easily, and could be
expected to pay off the loan from hoped-for revenue. In effect, this was micro-
management. Policy-linked lending, in contrast, was more general, diffuse, and
aimed at sectoral development, a sort of macroeconomic approach. This could be,
for example, balance of payments assistance. But both monitoring and control
were more dif®cult for the Bank, since so much of its impact was dif®cult to pin
down. On the other hand, policy-linked lending, since it could be broad in its aim
lent itself to implementing the Bank's efforts to in¯uence the behaviour of the
borrowing government.
Such desired in¯uence did not sit well with the recipient. Nationalistic pride,
differences in objectives, political forces, and corruption all teamed up to thwart
Bank monitoring. This was particularly acute when the borrower had access to
other sources of funds ± aid programmes from other donors, in¯ows from oil for
the luckier ones, and the availability of private capital at below Bank rates. Only
after the 1979 `Volcker shock' made interest rates soar, thus eating up much of the
oil revenue, did the Bank regain its earlier policy in¯uence.
Although at ®rst the Bank was sympathetic towards some form of government
intervention and the use of parastatal organisations, experience cast doubt on
their ef®ciency, especially in Africa. Re¯ecting shifts in the developed world, em-
phasis turned to market ef®ciency, export development and private ownership.
Whether this could take hold in the developing world culture was a question.
A possible con¯ict was the Bank's relations with the International Monetary
Fund. To some extent the two agencies' aid programmes were similar, especially in
their macroeconomic aspects, yet dissimilarities were also there, since the IMF
looked primarily to the immediate exchange rate and balance of payments prob-
lems, while the Bank focused on longer term objectives. Yet at times adjustment, a
Bank objective, had to consider the external payments position, while the Fund's
concern about payments and foreign exchange had to include adjustment in its
consideration. This possibility for con¯ict could become particularly acute, espe-
cially if the country to be aided objected to one of the two ± for example, Colombia
refusing to allow the IMF into the country. (For more on this see the Polak article
in Book Two.)
Country Reform
In chapter 10 the authors give summaries of longer range Bank operations in four
countries ± Turkey, the Philippines, Colombia and Ghana ± that illustrate the
various problems. One dilemma facing the Bank was at times a need for quick
funds dispersal to meet a ®nancial crisis, yet given their reform prescriptions a
threat to stop such aid could be used to force compliance. The Bank usually leaned
towards the former, hoping optimistically that things would work out. The reader
is hard-pressed to judge the success of these country programmes ± from 1979 to

1994 the Turkish currency dropped 99.9%, while real wages sank markedly. In the
Philippines the Bank had to deal with a corrupt Marcos regime, then with an
ineffective reformist Aquino government. Colombian progress was unexpectedly
aided by a sharp rise in coffee prices and the discovery of massive oil reserves.
Ghana, according to the authors, was one of the few successes in Africa, though the
various military coups, continuous rampant in¯ation, and the extent of Bank
intervention necessary to accomplish its goals makes one wonder.
In most aid recommendations the Bank found that `Type I' reforms were rel-
atively easy ± eg, removal of quantitative controls and the establishment of a re-
alistic exchange rate. But `Type II' reforms, such as private sector development and
export promotion were much more dif®cult, requiring a longer period of time to
accomplish. Unfortunately, the latter gave the Bank a higher pro®le and thus
subject to attack.
Chapter 11 on the Latin American debt crisis does not make for happy reading.
While to some extent Bank analysts warned against possible problems, a generally
optimistic view avoided timely correction. There was insuf®cient understanding of
the risks arising from the shift from ®xed to ¯oating interest rates as it affected
short-term debt to foreigners by the developing world. The IMF was equally san-
guine as regards debtor access to external banking credits. It failed to examine the
impact of far-reaching changes in US monetary policy, which were to send interest
rates sky-high, making the debtors' interest costs a crippling burden. Early in 1982
the Bank projected smooth sailing for the Mexican economy, so that the August
debt crisis caught the Bank ± and almost everyone else ± by surprise. One defence
by the Bank pointed out that if predictions of trouble were voiced market observers
and lenders would panic, and thus the fear would become self-ful®lling. The
outcome was an unanticipated sharp drop in output and ®scal de®cits that stub-
bornly persisted, much of which was precipitated by IMF-imposed policies. As the
authors remark, the Mexican episode is not one from which the Bank emerges
with much distinction.
A dilemma also arose from the preference for stable exchange rates, which
reduced the debtor countries' freedom to meet changing conditions, and the
Bank preference for structural reform, to make economies more ¯exible, in the
face of the shocks coming from increasing global forces. The prescription for belt-
tightening together with export-led growth aroused political hostility toward the
two Bretton Woods organisations, especially as the depressed economies did not
recover for years ± in effect, a decade of progress was lost. As the authors remark,
economic management by both the borrower and the major industrial countries

was inadequate, if not wretched. Yet if the Bank stepped up its lending to the high-
risk countries there would be the threat to its own credit rating. For example, if
Brazil defaulted its stoppage of interest and debt repayments would be a loss to the
Bank equal to two years' income. At the same time, the foreign bank lenders were
not willing to cancel or write down their loans. In the end the Bank's worry gave
the major (G-7) countries led by the United States an opportunity to exercise
policy in¯uence over the Fund and Bank, while letting the two agencies provide
political cover for their decisions.
Interestingly, the prospect of debt repudiation was rejected out of hand, based

on the belief that such action would close off the defaulter's access to world credit
markets. This despite the fact that the fact the defaults of 1930s did not stop
lending in the 60s and 70s. The Bank thus became an enforcer for the creditors. As
the authors conclude, the debt crisis was not the Bank's ®ner moments, and it
failed to persuade the major contributors to the Bank to be more open to alter-
native strategies.
Helping the Very Poor Countries

Chapter 12, dealing with Sub-Saharan Africa, is the most disheartening in this
volume. With few exceptions ± and these were often short-lived ± there were few
success stories to relate. Not that these economies were so weak ± by many
standards at the end of World War II they were at least as well of as poverty-stricken
Asia, and in some respects even better, since the war had given many members
large earnings from raw material exports. But these strengths were squandered.
Independence resulted mainly in replacing colonial masters with indigenous ones,
and these latter showed a shocking lack of social responsibility. Often if a Bank
proposal threatened to reduce their incomes ± bloated by comparison with the
mass of a country's peasantry ± the political elite simply sabotaged the reform.
Greed, corruption, administrative inability and tribal/ethnic favouritism (which
the Bank had to tolerate) all worked to defeat Bank efforts. How to jump start
these economies kept eluding the Bank, and often long-range development plans
gave way to very short-term band-aids, as balance of payments and ®scal dif®culties
might bring on bankruptcy or military coups.
The Bank's efforts were geared mainly towards agriculture, since the bulk of the
populace were farmers, though many were subsistence oriented, removed from a
modern, money economy. Weighing heavily on development was the high rate of
population growth, and any effort to bring this down was rebuffed by the Africans,
thus virtually nullifying any per capita growth.
Nor was development planning helped by the lack of statistical material. For
many countries population ®gures, GDP data, educational attainment ± in short,
the basic material for planning ± were either non-existent or simply wild guesses,
despite the apparent precision of Bank numbers. Bank planners were regarded as
arrogant, while they, in turn, treated the local elite as supplicants for hand-outs. As
the authors conclude, the Bank manifested a marked inability to judge institu-
tional weaknesses and over-estimated its own ability to help. This despite the fact
that the Bank made the region its number one concern.
Chapter 13 deals with the International Finance Corporation (IFC), an offspring
of the Bank, established in 1956. Its primary objective was to stimulate private
investment in the developing areas. In practice this was mainly for the middle-
income countries, where there were both suitable projects and the know-how to
manage them. Both loans and equity investment were envisioned by its founders.
Almost from its start there was potential con¯ict of goals between establishing
pro®table entities and aiding a country's development, though initially it was
thought that the two were compatible. Funding, however, was quite limited as
compared with the World Bank, a restriction that has persisted, though somewhat

mitigated by later, and somewhat more generous donor allocations. This re¯ected
the Bank's concern that the greater risk of IFC projects might hurt Bank credit-
worthiness.
It was hoped that the IFC would aid start-up projects and then, as they showed a
pro®t, they would be sold off to private investors, thus replenishing IFC funds for
further development. The multi-country sponsorship of IFC, it was hoped, would
reduce the risk worry of private investors. However, most possibly pro®table efforts
would probably have been undertaken by private capital on its own, so that the IFC
cope was limited. There was also hope that the IFC could stimulate private investor
interest in the developing countries, thus achieving its aims without itself having to
undertake the investment. Thus the IFC became a source of expertise and tech-
nological and ®nancial assistance during a time when foreign investment in these
areas was still an unknown.
The Bank and Finance

Chapter 15, entitled `Riding the Credit Boom' is actually misleading, for it was
during this period of the 1970s that the Bank encountered lending limits because
of an insuf®ciency of funds, mainly because the controlling members kept the
Bank on a short leash, and its lending limits were geared to member subscriptions.
This followed a four year period (1969±73) when Bank borrowing tripled. The
Bank therefore tried other markets for borrowings, to offset its limited access to
the major sources caused by these countries' balance of payments worries. From
1964±68 to 1969±73 Bank commitments jumped from $5.8 billion to $13.4 billion,
or a doubling when corrected for in¯ation. One important new source was OPEC,
whose coffers were swollen by the 1973 and 1979 oil price hikes. Yet the need for
funds was more urgent, in view of the gloomy prognosis regarding the payments
position of oil-importing developing countries hit by these price jumps.
The ®nancial turbulence of the last two decades struck all participants, but the
Bank after a brief adjustment period managed to cope with the new forces un-
leashed by globalisation. It did try to shield its borrowers, although the declining
health of its loan portfolio exposed it to credit risks from its borrowers' dif®culties.
Lending in real terms remained unchanged while dealing with wide interest rate
swings, maturity mismatches and market access risks. Capacity restraints in most
capital markets forced the Bank to return to the higher interest-rate United States;
earlier the Bank had withdrawn from that market (in the 80s) because of differ-
ences over lending for hydrocarbon projects.
To deal with this new playing ®eld the Bank took on many characteristics of a
large commercial bank, adding such new instruments as variable loan rates, de-
rivatives and hedging, with the result that its innovativeness won it the plaudits of
the ®nancial markets. It launched global bonds, its ®rst, in 1989, offered simul-
taneously in New York, London and Tokyo, thus overcoming market segmenta-
tion. By tapping into new markets for its funds it also facilitated these markets'
liberalisation.
One problem the borrowers from the Bank faced was exposure to currency
¯uctuations, which were magni®ed once ¯oating rates became common. The

Bank put in place a currency pooling system, but this was so complicated that, as
the authors put it, it was opaque to the borrowers, and even only a handful of Bank
staff understood it! It was hoped that this device would reduce currency risk for
those countries least able to bear it.
The international ®nancial turmoil raised the specter of default, notable cases
being Nicaragua, Peru and Romania. If this spread it could threaten the Bank's
credit. Fortunately, this was averted, partly by assistance from the International
Development Association (30 to 40 countries had an unsustainablly high debt
burden by the mid-90s).
In recent years Bank lending recovered smartly, with the result that pressure was
put on it to use some of these funds for humanitarian aid, such as the recon-
struction of Bosnia and Herzegovina.
International Development Association (IDA)

The International Development Association (IDA), as its name implies, was to help
the poorer countries. Although set up in 1960, it was actually the culmination of
numerous studies aimed at dispensing concessional aid. Although its start-up fund
was scanty ± $1 billion ± it eventually grew through additional contributions to
more than $100 billion. IDA greatly in¯uenced the Bank to turn more to poverty
alleviation, although initially the Bank was afraid that this new organisation's
public charity aspect might rebound adversely on the Bank's credit standing. After
1980 IDA aid amounts ¯attened out.
The United States was mainly instrumental in IDA's conception, but subsequent
political and growing balance of payments worries made America almost a
blocking member, especially at fund-replenishment requests. Despite its voting
leverage ± in effect any basic shift in IDA must obtain US approval ± it has become
a leading (but not only) protagonist in keeping IDA on a short leash. Of course,
since IDA uses taxpayer-®nanced money for its aid programmes, whereas the Bank
borrows in the major capital markets, donors are sensitive because of domestic
political pressures. IDA's presence helped reduce calls on the Bank for aid, while
at the same time giving it a more human `face', particularly in the developing
world.
The ®nal chapter in Volume 1 discusses the Bank's institutional identity, its
governance and external relations. Intermixed with these topic are the author'
evaluations and criticisms, as well as some ideas of future Bank trends. One gets a
picture, especially of the early Bank, of an elitist, well paid, highly competent
(predominantly American and British males), non-political meritocracy. Its tech-
nical expertise was of the highest quality.
Volume 2 Perspectives
Volume 2 consists of 13 essays on Bank developments and problems, mainly by
specialists associated in some respect with Bank activity. The ®rst essay by the
authors of this study is therefore an overview of the other papers.
This is followed by Mahn-Je Kim's paper on Korea's successful economic de-

velopment. The author was a former Korean Deputy Prime Minister and Minister
of Economic Planning. He chronicles Korea's emergence from aid dependency to
a self-sustaining economy, with some attention to the role played by the World
Bank. Its aid in effect was a guarantee to other lenders. Not that Bank advice was
always right; it opposed development of the auto industry, which later became one
of the country's success stories. It also steered the country towards greater market
liberalization and social development, particularly in the 80s. Perhaps most im-
portant was the tutelage as young Koreans were trained in Western ways, and
eventually become top administrators in the country's government. Although the
United States also supplied such educational aids, it was the Bank that had the
better relations, American advice being regarded suspiciously.
The Korean chapter is followed by one on Mexico by Carlos M. UrzuÂa of El
Colegio de Mexico. It is mainly a summary of Mexican economic developments
since World War II, with attention being paid to the various debt crises after 1980.
Unlike the Korean chapter, it is less complimentary about the role of the World
Bank and its in¯uence on Mexican policy and development.
The Bank's agriculture aid biased lending and investment toward the rich,
capital-intensive private land in northern Mexico, leaving aside the majority of the
peasants living on communal land. A 1975 programme to channel loans to the
poor rural areas ± jointly with the International Development Bank and the In-
ternational Fund for Agricultural Development ± was later classi®ed as unsatis-
factory because of cost over-runs, despite initial satisfaction with the programme.
The oil boom of the 80s touched off government and private recklessness that
led to the subsequent dept crises. Much of the second half of this chapter deals
with the various events that ®nally reached a solution. Trade liberalisation and the
end of the import-substitution policy, and then the NAFTA free trade agreement
with the U.S. and Canada helped to reduce in¯ation ± until the terrible earth-
quake of September 1985. The World Bank immediately lent $400 million for
rehabilitation and reconstruction. Later the Bank pressed for widespread privat-
isation, a policy pushed by the then president Salinas with many accusations of
wholesale corruption and cronyism. Further troubles included the revolt in Chi-
apas, all helping to hinder growth. Incidentally, in detailing these developments
the author gives the reader some idea of the political atmosphere in the country,
something most foreigners know little about.
The next chapter is on the Ivory Coast by Jacques PeÂgetieÂnan of the UniversiteÂ
Nationale de CoÃte d'Ivoire and Bakary Ouayogode, a director of research. Despite
being lauded as the one country in Black Africa that achieved development that
embraced market opportunities, Africa's crisis of the 80s brought down that
country's economy, and now there is doubt about its recovery.
One continuing problem was the massive use of Europeans ± mainly French ± at
a cost triple their European wages. They accounted for 40% of the country's wage
bill, as well as in¯uencing consumption, imports and thus the balance of trade. At
®rst government investment had aided agriculture, but alter the World Bank
turned against it, preferring a freer economy. This attitude antagonised the Ivory
Coast government ± in effect, the president (HouphoueÈt-Boigny), the one man
whose decisions counted, and this resulted in ignoring Bank recommendations.

Tied to the over-valued CFA franc hurt exports, though when devaluation did
come in 1994 it did not help to generate new exports, as was hoped. Apparently,
private initiative was not present to start up new productive enterprises, partly
because of French in¯uence favouring its own products. Even the generous edu-
cation spending back-®red, producing only a small elite of graduates not geared to
industrial jobs, more interested in protecting its own privileged position. These
obstacles would be repeated throughout Sub-Saharan Africa.
Carol Lancaster if Georgetown University, assisted by the late Philip Ndegwa, a
former Kenyan government of®cial, next cover the World Bank in Africa and the
politics of structural adjustment leading. Despite many government bilateral aid
programs in that region, the World Bank is one of the largest and most active
provider of aid there, and has taken a lead role in promoting economic reforms, as
well as coordinating aid among the donors, an activity that increased rapidly after
the payments crisis following the 1979 oil shock. One consequence is that many
Africans (and others) criticise the Bank as a newer form of colonialism. Bank
lending terms softened and IDA concessional lending expanded, but Africa's main
concern was the external debt burden. More Bank missions were set up in Africa,
while under McNamara's presidency Bank lending was pushed.
The Bank employed its structural lending approach, calling for numerous
reforms, such as trade liberalisation, increased prices for agricultural (export)
products, and ®nancial reforms. Unfortunately, these changes were politically
painful, often hitting the perks of the elite as well as the adverse impact on the
poor, and were often regarded as impinging on African sovereignty. The pro-
grammes were complex and often beyond the ability of the poorly trained local
of®cials who were to implement them. The scarcity of private entrepreneurs
thwarted efforts at free-market goals. Even when economic reforms were imple-
mented, there was little growth and much of the failure was attributed to local
political insecurity and corruption, an atmosphere not likely to encourage outside
investors.
The Major Donors

Catherine Gwin of the Overseas Development Council then writes about US re-
lations with the Bank. (Much of her material was covered in the ®rst volume.)
While the United States supports Bank efforts to foster growth and development, it
also views the international aid organisations as instruments of its foreign policy,
since the United States is the largest donor. Over the years domestic support of
multilateral aid wanted, while congressional activism increased. As a result, the
United States put restraints on efforts to increase donations ± partly for balance of
payments reasons ± while not wishing to reduce its voting strength, which re¯ected
its share of total contributions. To some extent the United States worried that too
great a reliance on multi-lateral aid-givers would reduce US political leverage that
its own aid programs could achieve.
Several policy factors also served to bedevil United States-Bank relations. The
United States opposed helping countries that had defaulted on their foreign debt
or expropriated companies without proper compensation. A continuing sore point

was Bank staff salaries higher than in the US civil service and the feeling that the
Bank bureaucracy was swollen. On the other hand, the United States tried to push
the Bank further into poverty amelioration and environmental concerns, efforts
greatly in¯uenced by domestic pressure groups. The United States also pressed for
a greater role in developing countries for private enterprise and being more open
to foreign private capital, rather then becoming too dependent on of®cial fund
sources.
In summary, the author concludes that the United States not only contributed
but also signi®cantly bene®ted from World Bank activities. Its donations have been
greatly offset by the spending on American goods and services by aid recipients.
On balance she feels that the United States has helped foster constructive changes
in the Bank, both in its operations and in its aid objectives. But as the Bank became
more prominent various private pressure groups in the United States sprung up to
push their own agenda, mainly by working through Congress. Such added activities
could well spread Bank resources too thinly. For the non-American Gwin's article
provides a good illustration on how the American structure affects its foreign
policy and how the Bank copes with this pressure.
The American chapter is followed by one on Japan by Toyoo Gyohten, a former
Vice Minister of Finance for International Affairs. The opening sections detail
Japan's economic recovery after World War II, how at ®rst considered by the World
Bank as a bad credit risk that later became one of the Bank's main capital sup-
pliers, second only to the United States Recovery started in 1949 when the yen was
®xed at 360 to the dollar, a policy which resulted in a (temporary) sharp de¯ation.
At ®rst Japan borrowed from the Bank to ®nance infrastructure projects and then
added industrial expansion, such as iron and steel.
Continued rapid growth ended reliance on Bank ®nancing in the 60s, and Japan
soon turned to becoming a creditor nation. It became an original member of the
International/Finance Corporation and International Development Association. It
accounted for almost half the Bank's co®nancing operations. Its development
programs went particularly to Southeast Asia, where, unlike the Western prefer-
ence for private initiative, Japan opted for a melding of both the market mech-
anism and government participation.
Although the Bank's second largest contributor, Japan still feels that its voting
strength in the Bank does not re¯ect this fact. Moreover, only 2% of Bank staff are
Japanese, although language problems and different academic credentials may
account for some of this discrepancy ± academic credentials are not as prevalent
among Japanese professionals.
At the end the author gives a (Japanese) view of where he thinks the Bank
should move over the next years and some of the problems it may face. At the same
time he recognises the Bank's unique qualities and expertise, as well as its eco-
nomic soundness ± after all, it has a triple A rating, and must protect that in order
to obtain ®nancing.
South Asia and East Africa

Gyohten's paper is followed by one on South Asia by S. Guhan, Emeritus Fellow

of the Madras (India) Institute for Development Studies. The `Asian Tigers' of
southeast Asia are not included. The article gives an overview of the economies
and social structures of the area, and furnishes several tables summarizing the
aid given by the World Bank and its associated organisations. Needless to say,
these countries are large recipients of aid, though not proportionately as much
as their poverty population would warrant, population pressures being a major
obstacle. Dif®culties affecting aid programmes include inef®cient management
and theft.
The author furnishes a fairly informative catalogue of the various main aid
projects, illustrating both the scope of such assistance and the needs of the
countries concerned. Shifts over time in their composition are also summarised. In
most cases the Bank has been a major source of ®nance, despite differences over
the resort to government-owned projects. The reader can gain helpful insights into
the problems of implementing development aid from this exposition.
In the author's opinion Bank lending has played an important role in supple-
menting the foreign exchange required for development. Its lending has resulted
in investment in many sectors of crucial importance to the area. But he also
outlines where the Bank has fallen short, or even erred in its aid, implying that
greater concern to local personnel more familiar with the area's peculiarities
might have helped. As for alleviating poverty, the author feels that Bank in¯uence
was at best marginal. And, as the millenium approaches the Asian countries' need
for funds will face competition from new suppliants, in Africa and East Europe in
particular.
Alex Duncan of the Food Studies Group, Oxford, follows next with a chapter on
Bank experience in Eastern Africa ± speci®cally, Kenya, Malawi, Tanzania and
Zambia. All four showed great promise after independence, but then slipped,
especially when the terms of trade turned against them, plus in¯ation and the two
oil price hikes. At ®rst the Bank's loans emphasised infrastructure, then later
switched to agriculture and the social sectors, and then to over-all institutional
capacity and governance. As yet none of these approaches have really paid off.
It did not help that rapid population growth was a common feature, causing
per capita food supplies to drop. Indifference, limited administrative capacity
and corruption all combined to retard progress despite growing aid dependency.
Of 16 projects in Africa only one was regarded as sustaining. As the author
concludes, the area has the greatest need for aid funds but is least able to use them
effectively.

The Bank in a Broader Context
Hilmar Kopper of Deutsche Bank next writes about the World Bank's European
funding, summarising Bank activity in the various capital markets. By introducing
its paper it helped open new markets for fund raising. The Bank also instituted
borrowing from central banks, mainly short-term, always keeping in mind that its
issues do not disturb ®nancial (domestic or external) stability. The Bank's ®rst
issue outside the United States was in London in May 1951. Since then it has
borrowed in virtually every West European country.

The relations of the two major Bretton Woods organisations are described by
Jacques Polak, formerly Director of Research and a member of the Executive
Board of the IMF. Because so much of what each dealt with was similar, some
clashes and overlap were inevitable. How could the Fund worry about a country's
balance of payments ignore the need for growth to support external obligations?
How could the Bank ignore the external balance in planning a country's sector
adjustment? Another problem as the two tackled the same problem arose if each
prescribed different solutions that might well be inconsistent. And, of course,
organisational jealousy could always intrude, as each looked down on the other.
Despite repeated efforts to bridge these differences, the two co-existed in a
somewhat uneasy partnership. Some of this tension arose from differing time
horizons, the Fund emphasising a medium term framework, the Bank looking to a
long institution-building period. Often the Bank personnel felt that the IMF
programs were likely to fail, that the recommendations for depreciation of the
currency increased the likelihood of enhancing in¯ation. The Fund, in turn,
feared that its termination of aid, halted in order to put pressure on the country to
reform its excesses would be thwarted by Bank loans to facilitate speci®c projects,
simultaneously supplying needed funds now denied by the Fund. This became
most acute in the 1988 affair with Argentina, which precipitated a blow-up that
reached to the top levels of both organisations. Although this did produce an
uneasy truce, it raised a new question: should the two be merged, since now they
had essentially the same functions? How much did they differ that made continued
separation worthwhile?
Nicholas Stern of the London School of Economics and Chief Economist of the
European Bank for Reconstruction and Development and Francisco Ferreira of
the World Bank then examine the contribution of the Bank to an understanding
of the economics of development. It was during McNamara's presidency that re-
search really came into its own. Bank research has been most notable for the
agricultural sectors, social services and urban problems, less impressive on debt
and cost-bene®t analysis. In more recent years a neoclassical resurgence has
become a characteristic.
The Bank also stands out in its analysis of cross-country data. Its World Devel-
opment Reports are highly regarded. Its country surveys are generally well re-
searched and show a refreshing frankness and directness, an important part of its
intellectual contribution. Its Economic Development institute to help train policy-
makers from developing countries is commended.

Although the Bank has had several excellent economists ± for example, Hollis
Chenery and Bela Balassa ± in general it does not get top quality candidates, who
tend to prefer acadamia or the better paying private industry jobs. Its staff tends to
be top-heavy in American and British trained economists, particularly the former,
and this may result in a research bias against government-run operations and in
favour of a market-oriented recommendation. However, the size of the research
staff and the scope of Bank operations give more realistic insights into develop-
ment and its problems than an economist working within University con®nes
would be likely to gain.

The ®nal chapter by Robert Wade of Brown University deals with the Bank and
the struggle over the environment since 1970. Starting with ®ve environmentalists
in the mid-1980's, the number hit more than 300 a decade later, with the estab-
lishment of mandatory procedures for project review. This interest re¯ected
pressures from non-governmental environmental groups, mainly in the United
States, though also in the United Kingdom and the `Greens' in Germany. These
groups kept constant tab on the Bank, suspicious that its new interest was only
formal, and not serious, viewing many Bank projects as a cause of large-scale
environmental damage (although it should be noted that the Bank's 1978 Forestry
Policy Paper was the ®rst of its kind). The borrowers, as expected, were hostile to
environmental talk, accusing the rich countries of using it as a stick to slow de-
velopment. The Bank, incidentally, despite these short-comings, was far in advance
of the other multi-lateral organisations, but it was the most conspicuous.
Bank staff was not friendly to the movement, either, feeling that it delayed a
project and added to its costs, as well as impinging on their `turf'. Two projects,
however did much to generate more environmental considerations ± the Polon-
oroeste in sparsely populated northwest Amazon and the Narmada Projects in
India, which would have included the largest water resource in the world. The
author deals at great length with these two, detailing many of the short-comings. In
brief the two were `environmental disasters and the local governments' disregard
for the impact ± especially the resettlement of local tribes ± was matched by Bank
bungling in the planning. The Bank was accused of not having made adequate
safeguards to be carried out on the ground. On the other hand, the Bank felt
hesitant to oppose the wishes of the host country, especially large (and important)
borrowers like these two countries. Ultimately, the Bank had to cancel its ®nancing
of both.
The Bank has tried to improve its environmental monitoring, although con-
version of the operating staff is a problem. After all, their career advancement
depends in large part on pushing through projects successfully, not on the even-
tual outcome. Hence, the tone of this chapter is generally critical of the Bank,
although this reviewer wonders whether in part this does not re¯ect the activism of
`no-growth' advocates.
Conclusion
The Bank, on balance, received a good press from this history, but several criti-
cisms can be raised. Although research in agriculture was aided, apparently
nothing was done on the technological side ± for example, in devising small-scale
equipment easy to maintain and within the know-how of less technically oriented
peasantry ± consider what so simple an invention as Eli Whitney's gin did for
cotton 200 years ago. Nor was the Bank often forceful enough to get the borrowing
country to implement Bank recommendations.
Perhaps most serious in the reviewer's opinion was the omission of the Bank's
impact on over-all development. How much stimulus resulted from Bank activities?
Did it raise per capita GDP signi®cantly? Or did the Malthusian ghost nullify per
capita improvement? Was there much development planning?

One aid the authors could have supplied would have been an appendix iden-
tifying the numerous Bank acronyms employed, with the full title so that the
reader could more easily know which programme or Bank section was referred to.
But obviously this carping is minor. On balance the reader of these two books
would gain enormous insight into the Bank's operations and objectives, and all the
human aspects and quirks that go into development. This reviewer came away with
great respect for both Bank staff and the authors' efforts.
Edward Marcus
Professor of Economics Emeritus
Brooklyn College/City University of New York

7 Development 1 History of WB

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

7 Development 1 History of WB

Uploaded by

Copyright:

Available Formats

The Economic Journal, 112 (February), F119±F135. Ó Royal Economic Society 2002.

THE HISTORY OF THE WORLD BANK

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Speci®c Projects vs. a Sectoral Approach

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Active Development Aid

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Ó Royal Economic Society 2002

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Helping the Very Poor Countries

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

The Bank and Finance

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

International Development Association (IDA)

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

The Major Donors

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

South Asia and East Africa

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Ó Royal Economic Society 2002

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Ó Royal Economic Society 2002

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Downloaded from https://academic.oup.com/ej/article/112/477/F119/5085395 by guest on 22 January 2021

Ó Royal Economic Society 2002

You might also like