THE EVOLVING ROLE OF THE WORLD BANK Helping Meet the Cheallenge of Developmqent WLK. Sarwar Lateef, editor The Evolving Role of the World Bank Helping Meet the Challenge of Development Editor K. Sarwar Lateef The World Bank Washington, DC Copyright © 1995 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing August 1995 The findings, interpretations, and conclusions expressed in this book are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the repro- duction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. The complete backlist of publications from the World Bank, including those of the IFC, is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W, Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66 avenue d'lena, 75116 Paris, France. ISBN 0-8213-3234-1 Contents Foreword v Contributors vii The First Half Century: An Overview 1 K. Sarwar Lateef From Reconstruction to Development in Europe and Japan 37 Caroline Doggart The Food Crisis in South Asia: The Case of India 69 Uma Lele and Balu Bumb The Latin American Debt Crisis 97 Sebastian Edwards The Transition in Central and Eastern Europe and the Former Soviet Union 119 Kemal Dervis, Marcelo Selowsky, and Christine Wallich The East Asian Economic Miracle 155 Vinod Thomas and Peter Stephens The Challenge of Africa 177 Ishrat Husain Mobilizing Private Savings for Development: IBRD and the Capital Markets 209 Kenneth G. Lay iii Foreword The world has changed dramatically over the past five decades, and so has the World Bank. The Fiftieth Anniversary of the World Bank has provided us with an opportunity to reflect on and learn from the Bank's experience and to apply the lessons to the Bank's future agenda. This collection of essays is devoted to improving understanding of the evolving role of the World Bank. Each essay analyzes the Bank's approach to the major development challenges its borrowing countries have faced, starting with the reconstruction and development needs of Europe and Japan in the 1940s and 1950s and ending with the transition of Central and Eastern Europe and the former Soviet Union. One essay examines the evolution of the Bank's relations with the world's capital markets as it mobilizes private savings for develop- ment. An overview provides a picture of the fifty-year period as a whole. The story that emerges is one of an evolving and learning institution that has built on its successes and its mistakes. The Bank has responded with vigor and energy to the challenges confronting its borrowers. In this process, it has made a significant contribution to the impressive developmental gains recorded in these past fifty years. In responding to those challenges, the Bank itself has changed, learning from its experiences, deepening its under- standing of the development process, and recasting its analytical and financial support to help its borrowers better. The Bank will continue to nurture its tradition of self-evaluation and learning. This book will, I hope, contribute to a better-informed debate on the Bank's future role. They comple- ment the recently issued paper, The World Bank Group-Learning from the Past, Embracing the Future, which sets out the future directions for the Bank Group. Armeane M. Choksi Vice President, Human Resources Development and Operations Policy and Chairman of the Bank Group Committee on the 50th Anniversary v I Contributors Balu L. Bumb is Senior Scientist in the Economics, Research, and Development Division, International Fertilizer Development Center, Muscle Shoals, Alabama. Kemal Dervis is Director, Central Europe Department, Europe and Central Asia Regional Office, World Bank. Caroline Doggart is a London-based economist and consultant to the World Bank. Sebastian Edwards is Chief Economist, Latin America and the Caribbean Regional Office, World Bank. Ishrat Husain is Director, Poverty and Social Policy Department, Human Capital Development and Operations Policy Vice Presidency, World Bank. At the time he wrote the paper in this vol- ume, he was Chief Economist, Africa Regional Office, World Bank. K. Sarwar Lateef is Economic Adviser, International Economics Department, Development Economics Vice Presidency, World Bank. At the time these papers were written, he was Staff Director for the Fiftieth Anniversary, Human Resources Development and Operations Policy Vice Presidency, World Bank. Kenneth G. Lay is Director Understudy, Latin American and the Caribbean Country Department II, World Bank. At the time he wrote the paper in this volume, he was Director, Financial Operations, World Bank. Uma Lele is Adviser, Agricultural Research Group, Environmentally Sustainable Development Vice Presidency, World Bank. At the time she wrote the paper in this volume, she was Graduate Research Professor of Food and Resource Economics, University of Florida at Gainesville. Marcelo Selowsky is Chief Economist, Europe and Central Asia Regional Office, World Bank. Peter Stephens is Chief, Communications Unit, External Affairs Department, World Bank. At the time he wrote the paper in this volume, he was External Affairs Officer, East Asia and the Pacific Regional Office, World Bank. Vinod Thomas is Director, Economic Development Institute, World Bank. At the time he wrote the paper in this volume, he was Chief Economist, East Asia and the Pacific Regional Office, World Bank. Christine Wallich is Lead Economist, Central Europe Department, Europe and Central Asia Regional Office, World Bank. vii The World Bank Group The World Bank Group is a family of multilateral development institutions owned by and accountable to member govemments. These governments exercise their ownership function through Boards of Governors on which each member country is represented individually. All the powers vested in the Board of Governors, with a few exceptions, have been delegated to Boards of Executive Directors, who are appointed or elected by member governments. The President of the Bank Group is appointed by the Executive Directors. The World Bank Group today includes five international organizations: The International Bank for Reconstruction and Development (IBRD), the original institution in the group, opened its doors for business in 1946. Today, it is the largest source of market-based loans to developing coun- tries and is a major catalyst of similar financing from other sources. It lends to governments or to public or pri- vate entities with government guarantees. It is funded mainly through borrowings on the international capital markets. The International Finance Corporation (IFC) was established in 1956 to support private enterprise in the developing world through the provision and mobilization of loan and equity financing and through its advi- sory activities relating to, among other things, capital market development and privatization. IFC is also a major catalyst of both local and foreign private investment. Its lending and equity investment activities are based on the principle of taking market risk along with private investors. Under the terms of its Articles of Agreement, it cannot accept government guarantees. The International Development Association (IDA) was created in 1960 to provide finance on concessional terms to low-income countries that lack creditworthiness for IBRD borrowing. IDA is primarily funded from grants it receives from donors in periodic replenishments. The International Centre for Settlement of Investment Disputes (ICSID) was added to the World Bank family in 1966 to provide conciliation and arbitration services for disputes between foreign investors and host gov- ernments that arise directly out of an investment. The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to provide noncommercial invest- ment risk insurance and technical services that help promote investment flows. It also disseminates informa- tion on investment opportunities. As is now common practice, the "World Bank" or simply the "Bank" are used interchangeably to mean both IBRD and IDA. The "World Bank Group" refers to IBRD, IDA, IFC, ICSID, and MIGA. The First Half Century An Overview K. Sarwar Lateef With the hardships of the Great Depression and war years still a fresh memory, few people would have predicted in 1944 that the next fifty years would witness the most rapid growth in living - ~~~~~~~~~~~~~Few people would have standards the world had ever known. Certainly not many of the predicted in 1944 that the delegates from forty-four nations who gathered at a conference in next fifty years would Bretton Woods, New Hampshire, were thinking of such a future. witness the most rapid They were there to reform a global economic system that had growth in living standards failed miserably during the Depression and, through a process of the world had ever known intergovernmental cooperation, to lay the foundation for a new era of growth with stability. To oversee the birth of this new eco- nomic order, the conference established the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). Parallel negotiations in Havana were coor- dinating the establishment of an International Trade Organization to complement the Bretton Woods institutions. The trade organi- zation never came to fruition, though it survived in truncated form as the General Agreement on Tariffs and Trade (the GATT). This overview presents the highlights of a series of seven essays on the evolving role of the World Bank and the economic and social performance of developing countries. It examines the challenges the Bank has faced in its first half century and how they have 1 The Evolving Role of the World Bank reshaped the institution, Average life expectancy transforming it from an increased by six months each organization established mainly year. to address postwar reconstruc- tion needs into the world's * Infant mortality rates fell largest development agency, from 169 to 69 per 1,000 live focusing on sustainable poverty births. reduction and growth. * Food production increased Economic and Social Gains 240 percent, much faster than since 1944 population growth. The past fifty years have * The proportion of people seen dramatic, unprecedented chronically undernourished fell gains for developing countries. from 36 percent to 20 percent. Some poor economies-Hong Kong, Singapore, and Taiwan Adult literacy rose from (China)-have become richer 46 percent (in 1970) to than some former colonial 69 percent. powers, such as Portugal and Spain. Per capita income, * The share of households with after growing by a plodding access to safe water more than 0.5 percent a year in Asia and doubled, to 70 percent. The past fifty years Latin America in 1913-50, bave seen dramatic, shot up to 3.3 percent a year While poor data cloud the unprecedented gains for during 1950-73 and 3 percent trends in poverty, evidence in 1973-89.' Only in Africa has suggests that "there has been developing countries progress come in fits and starts, considerable progress in reduc- with many setbacks. ing the incidence of poverty, a more modest reduction in the Social indicators have number of poor, and the improved greatly in developing achievement of somewhat countries, particularly in the better living standards for past thirty years, while poverty those who have remained in has declined (most dramatically poverty."2 The most dramatic in East Asia). Between 1960 gains have come in East Asia. and 1990: Even as the region's population 2 The First Half Century: An Overview grew by 425 million, the The reasons for the post-war number of absolute poor fell miracle are numerous and from an estimated 400 million varied-expanded inter- in 1970 to between 170 and national flows of capital, overall economic 180 million in 1990.3 Progress goods, services and technology; performance, hundreds was more modest but still development of efficient of millions more people impressive in South Asia, institutions and human would have slipped into where the bulk of the world's resources; harnessing of poverty in the developing poor live. Only in Sub-Saharan entrepreneurship, from small world Africa did poverty continue to farmers to large industry; spread as the number of poor higher social spending; better increased. What is clear, how- infrastructure; and more ever, is that without the investment. In some countries impressive overall economic in the 1990s these trends have performance, hundreds of mil- greatly accelerated, and devel- lions more people would have oping countries have become a slipped into poverty in the major source of growth in the developing world. world economy. The World Figure 1 People's lives have improved dramatically in developing countries 160 ..... ---- ---- -- -- ------ ------...................................................................................... -1-20--- -- --- - ------- ........................... -...................................... l 0 ...............................--- ---.... -----... . ...................... ..... ......... 40 U.......... _ N .......... _ 0 ......... .............. ........ 1950- 1992 1950- 1992 1960 1991 1955 1955 Source: World Bank Group and United Nations data. 3 The Evolving Role of the World Bank Bank was one of many some. Per capita income institutions trying to promote accelerated from 2.6 percent a these trends, but the lion's year in 1973-80 to 3.4 percent share of credit goes to the in 1981-93 (for GDP weighted countries themselves. by population).4 Improved per- formance in China and India Progress has not been (each more populous than unbroken or universal, Sub-Saharan Africa and Latin however. Since 1980, per America combined) and rapid capita incomes have stagnated growth in East Asia generally or declined in Latin America more than offset setbacks and Africa. Development, it elsewhere (see Table 1). became clear, was not a one- way street. For many countries But even with all the progress in those regions, the 1980s in the past fifty years, more were a lost decade. But for than 1 billion people still live developing countries as a on one dollar a day or less, and whole, progress continued even many lack access to safe drink- during that bleak period for ing water, schools, and health Table 1 Population-weighted growth of developing countries' real GDP per capita, 1965-93 Progress has not been (percent) 1966-73 1974-80 1981-93 unbroken or universal, however Developing countriesa 3.5 2.6 3.4 East Asia 5.4 4.0 6.9 China 5.9 3.9 8.1 South Asia 0.9 1.6 2.9 India 1.1 1.5 3.0 Middle East and North Africa 3.5 2.8 -0.7 Sub-Saharan Africa 1.7 0.2 -1.2 Latin America and the Caribbean 4.3 2.5 0.0 a. Excluding Eastern Europe and the former Soviet Union. Source: World Bank. 4 The First Half Century: An Overview clinics. Environmental degrada- was established in 1966 to tion threatens the sustainability provide conciliation and of development in many areas. arbitration services to foreign Gender bias and urban bias investors and host countries, remain serious problems. Much and the Multilateral Investment has been achieved. Much Guarantee Agency (MIGA) was remains to be done. founded in 1988 to provide noncommercial investment risk The Role of the Bank insurance to foreign invest- The World Bank was born ments. The World Bank had of the conviction that the The world has changed tremen- become the World Bank Group twin disasters of depres- dously over the past fifty years, (see Box on page ii). But sion and global war could and so has the Bank-in its throughout this period of be averted through membership, organizational change, the Bank's two structure, the size of its principal roles remained the operations and its development same: to mobilize financial agenda. From 38 members in resources from private savings 1946 to 177 members today, and public sources and on-lend the Bank has expanded to near- them for development and to universal membership. New help client countries address affiliates were established to the "what" and the "how" of complement the Bank's work development. The Bank also and to address its new responds selectively to share- priorities. In 1956 the holder requests for regional International Finance and global development initia- Corporation was formed to tives (see Figure 2). promote the private sector in member countries, and in 1960 The Financial Role the International Development Association (IDA) was estab- The World Bank was born of lished to address the needs of the conviction-strongly held the poorest member countries. by those assembled at Bretton As foreign direct investment Woods-that the twin disasters flows increased in size and of depression and global war importance, the International could be averted through Centre for Settlement of international cooperation for Investment Disputes (ICSID) mutual benefit, open trade, and 5 The Evolving Role of the World Bank full participation in the world intermediaries established to economy by all nations. The facilitate these flows. conference delegates knew as well that open trade and full THE ROLE OF THE INTERNATIONAL participation required healthy, BANK FOR REcONSTRUcTION AND functioning economies, DEVELOPMENT. Named formally recovered from the ravages of the International Bank for war and capable of providing a Reconstruction and decent standard of living for Development (IBRD), the all. It was clear then (as it is institution soon came to be today) that domestic savings known simply as the World and investment could not do Bank. Yet it is not a bank in The World Bank was the job alone. For most of the any conventional sense. The established to facilitate world's developing economies, IBRD accepts no deposits; has foreign financial flows- foreign financial flows-both only governments as share- both private and official. private and official-would holders; lends to members also be required. The World with limited access to capital Bank was one of the financial markets, rather than to its Figure 2 World Bank Group membership Number of countries (in June 1994) 180 -.-.-. --. -------.-. -.-.--.-.--.- .- .-- .-.-- .-.-- .-.- ....................................... IBRD: 177 140 .............................................................................................. ------------- ... IDA: 155 100 .. . IFC: 161 IFC............. ......................... ....... ....... . . .. MIGAA 1 40* 0 ................................................................................................................................ 1946 1952 1958 1964 1970 1976 1982 1988 1994 IBRD |IDA IFC MIGA 6 The First Half Century: An Overview richest, most creditworthy intermediation. It borrows in members; and limits its lending capital markets at fixed rates (by charter) to the value of its (for maturities of thirty years The IBRD was structured equity and callable capital-a and more) only a few hun- to rely on private 100 percent adequacy ratio dredths of one percent higher resources to fund its against a normal banking ratio than those paid by its largest operations, and to of 8 percent. government shareholders for their own borrowings. It passes invesment" The IBRD was structured to this finance on to its members rely on private resources to with a spread of 0.50 percent fund its operations, and to or less, from which it covers "promote private foreign administrative expenses and investment." Indeed, the IBRD generates a profit. Such long has many of the characteristics maturities and low interest of a private sector institution. It rates are available nowhere else is organized as a stock corpora- to the IBRD's developing coun- tion, with voting rights propor- try members-not even to the tional to equity investment. It most creditworthy. Such terms finances itself in private capital represent a savings to develop- markets, through medium- and ing countries of at least $3 bit- long-term bond issues on lion a year (on loans outstand- commercial terms,5 applying ing of more than $100 billion). conservative financial policies The IBRD has achieved all this that have earned and preserved at a total cost to its sharehold- a triple-A bond rating.6 It insists ers of $10.7 billion in paid-in on disciplined lending, charges capital. market-based rates of interest, and demands prompt payments THE RoLE OF THE INTERNATIONAL of interest and principal. It has DEVELOPMENT AssOCIATION. The consistently earned a profit Bank's concessional arm, the (over $1 billion in fiscal 1994), International Development which its shareholders reinvest Association (IDA), is also a or direct to causes appropriate financial intermediary. It is to its mission. funded by grants from richer member countries, which it on- The IBRD has been remarkably lends to the poorest and least effective in its financial creditworthy members. IDA 7 The Evolving Role of the World Bank funds are replenished every and hard lending areas and three years. The tenth and most eases a country's transition recent IDA replenishment of from one to the other as coun- $18 billion covers the period try circumstances change. The beginning July 1993. At this arrangement also ensures that Poverty reducstion is the P level of funding (some $6.5 bil- IDA-financed projects are sub- over-arching objective of lion annually), IDA accounts ject to the same rigorous stan- IDA for about 12 percent of all dards as IBRD-financed pro- concessional assistance world- jects. The criteria for the alloca- wide. These replenishments are tion of IDA funds are agreed supplemented by IDA reflows afresh in each replenishment. (repayments) and transfers to Current criteria focus on the IDA from IBRD's profits. IDA strength of a country's efforts loans are interest free (they are to reduce poverty in an envi- called credits) but carry a ser- ronmentally sustainable manner vice charge of 0.75 percent a and on its per capita income. year. Until the mid-1980s these There are guidelines on the loans were repayable over fifty amount of IDA resources that years with a ten-year grace peri- are made available to Sub- od before payments had to Saharan Africa (45-50 percent) start. Recently, the maturity and to blend countries-i.e. period was lowered to forty countries that are IDA-eligible years for the poorest countries but also borrow from IBRD- and thirty-five years for others. (30-35 percent). IDA's membership and sub- The IDA replenishment process scriptions (and hence its voting also provides a forum for the rights) differ from the IBRD's. IDA donor countries to agree But instead of crehting a new on the general uses of the bureaucracy, the Bank's share- resources provided. The con- holders decided that the Bank sensus that poverty reduction is would carry out IDA's work, the over-arching objective of receiving a management fee in IDA has been translated into an compensation. There is no sep- increased operational focus on arate IDA staff, an arrangement poverty reduction. In the that promotes the best possible 1990s, IDA has increased lend- coordination between the soft ing for basic human resource 8 The First Half Century: An Overview development and social flows in others. IBRD and IDA services, while emphasizing the lending has been relatively importance of country policies stable in real terms over the in encouraging broad-based past several years, with total growth that increases the commitments currently running productivity and incomes of at about $21 billion. the poor. To help ensure that loan funds MOBILIZING RESOURCES FROM are put to proper use, the Bank MULTIPLE SOURCES. Through fiscal lays down conditions with its 1994 the Bank had lent over loans. Though these conditions $330 billion for some 6,000 are widely perceived as efforts operations, of which IBRD to correct government failure, accounted for some $250 bil- they are as often designed to lion and IDA the rest. The correct market failures and largest growth in lending took imperfections. Because markets place in the 1970s and the first do not address income distribu- half of the 1980s. Since then tion or ensure that the poor IBRD lending has leveled off, receive basic services, the Bank reflecting poor policy environ- also sees an important role for ments in some cases and improved governance. It seeks increased availability of private to strengthen both markets and Figure 3 In the 1990s, IDA has IBRD and IDA loan commitments, FY 196094 increased lending for Billions of US dollars basic human resource 20.----- ---------------- -------------------- ---------- ----------------- ----------------developm ent and social services IBRD 1 - - - - - - - - - - - - - - - - - - - - - - - - - ---- ....... .. . ... 5 ------ .. .. ~~~---- . 7 - IDA~~~~~~~~~~D O . .. ... ..... . . . . . . . . . . . .. .. . . . . . . . . . . . . . . . . . . . 1962 1966 1970 1974 1978 1982 1986 1990 1994 9 The Evolving Role of the World Bank governments in the areas that fragmentary concepts of project are most appropriate for each. appraisal (to make sure the schemes it financed would be The Bank addresses market profitable enough to generate imperfections in global capital returns to repay the loan); markets and in domestic competitive procurement markets of developing procedures (to ensure the low- countries. Through its interme- est project costs); the monitor- diation function the Bank ing of the end-use of funds (to makes funds available to ensure that the money was not countries on terms to which diverted); loan supervision (to most countries would see that the project progressed otherwise never have access, as envisaged and to make mid- thereby addressing global course corrections if necessary); market imperfections. The and, beginning in the 1970s, imperfections affecting evaluation after a project was developing country markets are completed (to see how well it as different as the countries worked and to learn lessons for themselves. Impediments future lending). All these The Bank makes funds include everything from elements improved the quality available to countries on inadequate roads, telecommu- of lending, strengthened the terms to which most nications, credit agencies, chances of success, and built up countries would otherwise electricity, and agricultural the expertise of borrowing never have access extension services to under- institutions in developing developed human resources. countries. Before World War II credit- In addition to its own resources worthiness alone determined a the Bank helps catalyze country's access to market resources from other sources: lending. For enterprise loans, official bilateral and multi- banks did some rudimentary lateral institutions, regional project appraisal, but they development banks, non- relied mainly on collateral and governmental aid agencies, credit standing to ensure official export credit agencies, repayment. The World Bank and the private sector. Roughly, devised a new lending para- for every dollar the Bank puts digm by welding together the in, it mobilizes an additional 10 The First Half Century: An Overview dollar from such "cofinancing." policies, and institutional Through more active use of context that determines a coun- Bank guarantees, greater efforts try's economic performance. are being made to attract This dialogue is informed by private-sector cofinancing, regular and thorough analysis The Bank takes advantage which helps borrowers gain of economic and sectoral issues of its wealth of experience access to syndicated commer- that is undertaken in close col- o h to help its members cial bank loans and internation- laboration with borrowers. . . , z~~~mprove their policies, al capital markets. These direct Frequently, it is the Bank's cofinancing efforts are supple- contribution to shaping its deas, and expertise mented by aid-coordination borrowers' policies, rather than groups for selected countries. the financing it provides, that The Bank currently chairs some has the stronger impact on the forty consultative groups aimed country's overall performance at coordinating donor response over the long term. Bank to country needs. endorsement of borrower poli- cies also catalyses other funding The Advisory Role for that country and thus plays an important role in supporting In addition to lending and the country's development cofinancing, the Bank takes objectives. Examples of how advantage of its wealth of well this process works range experience to help its members from Japan in the 1950s and improve their policies, ideas, Korea in the 1960s to China, and expertise. Over time this Ghana, and Indonesia in the role has increased in impor- 1980s and Argentina, Mexico, tance relative to the financing and Poland in the 1990s. role. It takes four forms: The Bank promotes the use The Bank engages in inten- of best practices in project sive policy dialogue with all its preparation, technology choice, borrowers on policies that organizational structure, pro- influence the outcome of curement practices, monitor- investments it finances and on ing, and supervision. This helps the overall macroeconomic update and transfer the best environment, incentive available expertise in a continu- structure, public expenditure ing stream to recipients. 11 The Evolving Role of the World Bank * To upgrade skills and to A Regional and Global Role create new institutions or strengthen existing ones, the In addition to its principal Bank has lent extensively for financial and advisory roles, the technical assistance, training, Bank has addressed specific and institution building. The problems of regional or world- Economic Development wide import. These endeavors Institute (EDI) of the Bank include the conquest of river was established in 1956 to blindness in West Africa, the train developing country amassing and dissemination of personnel, who then become information on agricultural trainers and institution technologies through the builders at home. EDI now Consultative Group for runs about 150 courses annu- International Agricultural ally for 4,400 participants. Research, and the funding of environmental projects of glob- As a development practition- al importance through the er the Bank has a rich body of Global Environment Facility As new challenges to experience about what works (see Box 1). in development, which it sustainable growth and continually refines through The Evolution of the Bank the equitable distribution research, publications, and of the benefits of growth seminars. Drawing on its own As new challenges to sustain- emerged over the past fifty cross-country experience of able growth and the equitable years, the Bank adjusted fifty years in development and distribution of the benefits of its strategies the analytical skills of its staff, growth emerged over the past seasoned by operational fifty years, the Bank adjusted its experience in the field, the strategies to respond to those Bank produces a formidable challenges. The Bank began as research output. Its many a financier of post-war recon- publications have elucidated struction in Europe in the the lessons of development- 1940s; shifted to conservative what works and what does lending for what were consid- not. Its World Development ered "bankable' projects in the Report is perhaps the most early 1950s; became a full- widely read annual economic blown development agency in report. the 1960s, broadening its 12 The First Half Century: An Overview Box 1 Beyond National Frontiers While most of the Bank's work is specific to the countries to which it lends, some of its endeavors span countries and even continents. River Blindness. One of the Bank's most successful partnerships with other institutions and govern- ments has been in the conquest of river blindness (onchocerciasis) in West Africa. This parasitic disease caused by the bite of blackflies that breed in rivers, causes severe rashes, eye lesions, and ultimately blindness. In the mid-1980s it was estimated that 85 million people (mostly in West Africa but also in the Middle East and Latin America) were exposed to river blindness, of whom 17.7 million were infect- ed and 340,000 blinded. In collaboration with other development agencies, the Bank helped to plan and finance an eradication strategy. The program devised mechanisms for detecting breeding grounds of blackflies and destroying them. Six types of pesticide were used in rotation to prevent resistance from developing in insects and to minimize pollution risks. The program has been so successful that river blindness has virtually disappeared from West Africa. Agricultural Research. The Green Revolution was made possible by new varieties of wheat and rice developed at the International Center for Maize and Wheat Improvement (CIMMYT) in Mexico and the International Rice Research Institute. To help sustain and spread the Green Revolution the world over, the Bank took the lead in organizing the Consultative Group for International Agricultural Research, a multidonor group that supports sixteen international agricultural research centers in addition to the two pioneering ones. Since 1971 the CGIAR has mobilized over $1 billion for research and helped millions of farmers increase their yields. It has been the most important single developer of agricultural technologies in the tropics. Environmental Activities. The Global Environment Facility (GEF), a partnership between the Bank, the United Nations Development Programme, and the United Nation Environment Programme, is funded by industrial countries in three-year tranches. It provides grants and concessional loans for environmen- tal projects of global importance. The GEF focuses on four global problems: the greenhouse effect, biodiversity, ozone depletion, and pollution of international waters. The Bank is the GEF's executing agency. The grants cover the difference between the cost of the global projects and other projects that the implementing country might have taken up in the absence of global concerns. A council with six- teen developing countries, fourteen industrial countries, and two countries in economic transition chooses projects to be financed. The GEF committed around $400 million for more than 100 projects in the pilot phase 1991-94, and its coffers have now been replenished by $2 billion for the next three years. 13 The Evolving Role of the World Bank sectoral coverage to the "soft" held sway, joined in the 1970s sectors and lending to poor by a growing awareness of the countries on concessional terms need for agricultural develop- through a soft-loan affiliate; ment and for a sharing of the focused on improving living gains of development with the conditions for the poor in the poor. The often misguided 1970s; shifted its attention to state-led investment boom of policy reforms to improve the the 1960s and 1970s came prospects for development in home to roost as the debt crisis the 1980s; and recognizing the of the 1980s. Attention shifted range and depth of its activities, from the volume of investment and drawing on the lessons it to the quality of policies and had learned from its past expe- the need for reforms. The rience, it embraced in the impact on the poor both of the 1990s a broad-based develop- failure to reform as well as of ment strategy aimed at helping the reforms themselves countries reduce poverty and refocused attention on issues of increase living standards, by poverty. Coming in with the combining attention to sound 1990s was a sharp increase in economic policies, human private capital flows, recovery resources development, and of growth in Latin America and environmental sustainability. parts of Africa, and the emer- gence of new political and The Bank's evolution was influ- economic regimes in Eastern The evolution in the enced by new challenges such Europe and the former Soviet Bank's thinking reflected as the Indian food crisis of the Union. its own experience and 1960s and the debt crisis of the that of others and the . 1980s and by changes in global Development thinking the economic trends. The 1950s world over was undergoing improved understanding of were a time of generally strong transformation. The evolution what contributes to growth and high commodity in the Bank's thinking reflected successful economic prices, and capital investment its own experience and that of development (especially in infrastructure) others and the improved under- was seen as the prime mover of standing over time of what con- development. In the 1960s and tributes to successful economic 1970s state-led development development. The Bank, never and import-substitution policies isolated from the currents of 14 The First Half Century: An Overview the time, made the same mis- kets; from state-led industrial- takes as its borrowers and other ization to the fostering of development agencies. Above dynamic private enterprise; and The Bank's emphasis all, it was influenced strongly from the exploitation of natural shifted from individual by its borrowers, both through resources to ensuring sustain- projects to the policies, their successes and their fail- able development (see Box 2). strategies, and institutions ures. The borrowers influenced what the Bank did by making This evolution of the Bank is new demands on it and by described below, in six phases. challenging it to respond, con- Each new phase heavily stantly expanding its horizons. overlapped the phase that preceded it. The categorization In this continuous process of is intended to highlight learning, the Bank's emphasis emphases rather than exclusive shifted over time from individ- preoccupations. Though the ual projects to the policies, Bank today is unrecognizably strategies, and institutions that different from the Bank of the help projects succeed. The 1950s, there are important con- changes in perspective were tinuities that have provided both large and small: from an strength to the institution emphasis on the volume of during this constant process investment to the productivity of change (see Figure 4). of investment; from physical capital to human capital; from A Reconstruction Bank: infrastructure and industry to 1947-48 developing poor rural areas; from a belief that the benefits Bretton Woods conference of economic growth would participants were concerned trickle down to the poor to an foremost with post-war appreciation that reducing reconstruction, but they also poverty also requires extra saw the need for long-term measures directed to the poor; development of poorer coun- from a top-down to a bottom- tries.' The Bank's first loan, for up approach to projects that reconstruction, was to France emphasize beneficiary partici- in 1947 for $250 million, pation, client-orientation, and which in real terms remains the preferences determined by mar- Bank's largest single loan 15 The Evolving Role of the World Bank Box 2 How Sectoral Policies Evolved As significant as the major shifts in the Bank's strategy over the past fifty years has been the evolution of its lending policies in different sectors. Consider three examples. Agriculture. Most Bank lending in the 1950s went to big irrigation schemes, in keeping with the prevailing emphasis on infrastructure. Some loans were made in the early 1960s for plantation crops that looked commercially attractive. Then came India's food crisis, which focused attention on the need to improve foodgrain productivity and introduce new technologies. So the Bank began lending for agricultural research and extension, rural credit, market develop- ment, and the production of high-yielding seeds and fertilizers. In the 1970s, as the Bank turned its energies to alleviating poverty, activities emphasized integrated rural development programs-the bulk of the poor live in rural areas-directing services and inputs to smaller farmers and agricultural processors, and financing rural social services. However, by the 1980s it was apparent that faulty policies distorted incentives for farmers and seriously affected production in many countries. So the Bank shifted to sectoral adjustment loans that financed agricultural policy reforms. In the 1990s greater attention is being paid to the environmental problems arising from earlier agricultural develop- ment-waterlogging, salinized soils, excessive use of pesticides, water shortages caused by subsidized supplies, and the social problems arising from the displacement of people by large dams. The Bank is also directing rural services and extension to women, who in many countries (especially in Africa) manage most crops. From its inception the Bank's overarching aim has been to raise productivity and incomes, and that goal has not changed. But Bank- supported agrictultural projects in the 1990s differ radically from those in the 1960s, when there was little concern for policy frameworks, poverty alleviation, environmental protection, gender bias, or the privatization of inputs and services. Education. Recognizing the critical linkage between the development of human resources and economic development, the Bank began lending for education in 1963. In that decade, the Bank's support for education focused on the construction and equipping of physical facilities and on producing high-level skills to meet manpower requirements. Over the years, the early emphasis on "bricks and mortar" and other education "hardware" has given way to increased support for teacher training, curriculum development, materials provision and the like, in an effort to enhance the learning achievement of students and generally raise education quality. Support for broad-based institutional development and policy reform in the sector, including strategies to target girls and women, the poor and disadvantaged populations, has increased over time. Moreover, basic education trebled between the late 1980s and the early 1990s. Overall, the volume of lending for education has risen steadily over time, now standing at close to $2 billion per year, or about 8 percent of total Bank lending, as compared with $0.6 billion, or 4 percent, only a decade ago. The Bank is now the single largest source of external funding for education. Transport. The Bank's earliest loans went to finance the reconstruction of damaged networks in Europe and Japan. When that phase ended, it supported transport facilities that aided international and domestic trade, such as major highways, ports, and airports. During the 1970s the Bank redirected transport lending to areas with a high incidence of povertv. In rural arcas projects were financed to build roads to improve the supply of agricultural inputs and the marketinig of output an1d to facilirate the provision of social services. In urban areas, transport loans provided bus scrvices to slum1-dwellers. In the 1980s the Bank turned its attention to road maintenance, which had been sorely ncglected, and to imiprovinig managerial capacities in borrowing countries. It also supported the liberalization and privatization of bus transport. The Bank has comc a long way since the 1950s and now stresses improving productivity and customlier satisfaction rather than big new projects. 16 The First Half Century: An Overview (worth $2.44 billion at current international capital markets. prices). Other loans followed to They also set Bank policies in a the Netherlands, Denmark, and number of areas, policies that Luxembourg, totaling $247 apply to this day: million. Under its articles the Bank was expected to finance * Interest rates: IBRD productive projects. But it established the principle that immediately displayed the interest rates must be related to flexibility that was to mark its borrowing costs. It also decided For the Bank these initial operations for the next fifty to apply the same rate for all loans helped establish its years, by giving loans to these loans granted at any given time, presence on international countries for reconstruction regardless of the borrower's capital markets and set rather than tying them to creditworthiness. This principle Bank policies in a number specific projects. underlined the nature of the of areas institution: a financial coopera- For the Bank these initial loans tive that treated all its borrow- helped establish its presence on ing members equally. Figure 4 Lending by sector Percentage of World Bank Lending Agriculture Basic Infrastructurea Industry & Finance3 Human Resourcesa Other Infrastructurea Unclassified Multisector 1947-59 60-69 70-79 80-89 90-93 a. Basic Infrastructure includes energy, telecommunications, transportation, and power. Industry and Finance includes tourism and mining. Other Infrastructure includes urbanization, water and sanitation, and environment. Human Resources includes education, public security, social services, and population, health, and nutrition. 17 The Evolving Role of the World Bank * Supervision: As required by not only reconstruction but its Articles of Agreement, the structural adjustment as well. Bank made arrangements to Marshall Aid was accompanied ensure that the proceeds of its by policy conditions-the loans would be used for the recipients were supposed to cut purposes for which they were their fiscal deficits, open up granted. For the first loan to their economies to foreign France, the Bank established an investment and trade, create a office in Paris, to supervise the European Payments Union to project. facilitate multilateral clearing, and make their currencies * Negative pledge: The Bank convertible. Some European decided not to seek specific countries found these security for its loans (other conditions unpalatable, but than the government guarantee agreed to them because of their required under its Articles of urgent need for dollars. The Agreement) but rather to rely conditions, however, were not on the borrowing govern- seriously enforced, and most ment's undertaking not to recipients liberalized their pledge its assets to secure inter- economies much later than the national debt in a way that United States had envisaged. As The Bank shifted gears gives any external lender for the Bank, it shifted gears and turned its attention preference over another. and turned its attention to the to the long-term financing long-term financing needs of needs of Europe and It soon became clear, however, Europe and Japan as well as Japan as well as the that the Bank could meet only the developing countries. developing countries a fraction of Europe's recon- struction needs. Its efforts were A Conservative Lender: dwarfed by U.S. assistance 1948-58 under the Marshall Plan, which disbursed $13 billion from The Bank made its first loan to 1948 onward. European coun- a developing country (to Chile) tries had huge balance of in 1948. Loans soon followed payments deficits (mainly with to Mexico, Brazil, India, and the United States) as well as Yugoslavia. The Bank was still war-time controls on trade and a financial fledgling in the financial flows. So they needed 1940s and early 1950s and 18 The First Half Century: An Overview needed to convince financial financial operation. In large markets that it could deliver. part, these requests for It needed to highlight the assistance show a growing soundness of its clients, as well appreciation of the need for as their projects. Many Bank establishing long-term develop M loans in the early 1950s went ment programs." f on basic to middle-income countries (including those of southern An important part of the infrastructure. As the Europe), and significant sums Bank's evolution in this phase success of its operations went to Australia and Japan. was its relationship with became apparent, Much of the lending focused Japan8, which in the initial financial markets lent the on basic infrastructure. As the post-war years was under Bank increasing sums success of its operations allied occupation and became apparent, financial depended heavily on U.S. markets lent the Bank increas- finance and goods. Japan ing sums and finally in 1959 became a member in 1952, gave it top credit rating. and the Bank quickly took over from the U.S. Export- Even in these early days the Import Bank as Japan's main Bank saw itself as promoting financier and economic advis- economic development. The er. The World Bank justified its 1950-51 Annual Report made lending to a country as indus- it clear that "the Bank does not trialized as Japan in part on conceive of itself merely as a the basis of Japan's potential source of funds for a few to become a financial and isolated projects, but is pre- trading power within Asia, pared to take an active and which would act as an engine continuing interest in the of growth for the region. This overall development problems belief proved well grounded. of a member country." And, even at that early stage the Japan was wary of foreign importance of its advisory role advice and economic linkages was becoming evident: however. It initially resisted "Increasingly, however, the Bank loan conditions, such as Bank is called upon to provide international competitive advice or assistance without bidding for projects and reference to any immediate charging appropriate prices for 19 The Evolving Role of the World Bank electricity. Japan resisted the commercial terms that IBRD Bank's efforts to lend for offered, could not easily step agriculture, believing that this into their place. An internal was not an appropriate area for Bank assessment in 1956 had foreign borrowing. Such differ- shown that countries like India ences were ironed out through and Pakistan were having a constructive policy dialogue trouble servicing even the The Bank had to evolve that helped shape Japan's limited debt they had accumu- in a new direction if it evolution, including its lated. The Bank had to evolve were to respond to the cautious opening up to the in a new direction if it were to needs of the poorer world. The Bank helped Japan respond to the needs of the developing countries launch its first bond issue in poorer developing countries. the U.S. market in 1959. Japan influenced the Bank as well. It A Development Agency: wanted the Bank to finance the 1958-68 local costs of projects, not just their import content as had India's foreign exchange crisis been Bank practice. The Bank in 1958 marked a turning eventually agreed, setting the point for the Bank. The United stage for large-scale financing States and other donors formed of local costs in poor countries an Aid India Consortium, with in the coming decades. the Bank as coordinator, to make annual aid pledges. India By the end of the l9SOs it had persuaded the donors that become clear that recovery in concessional finance could help Europe and Japan was the economies of developing proceeding apace. Since it was countries take off, just as not the Bank's business to Marshall Aid had helped the substitute for private funds, economies of Europe and those industrial countries Japan. The analogy turned out would soon cease to be Bank to be overdrawn, but it clients, having demonstrated influenced the Bank's evolution their capacity to borrow direct- as a development agency. By ly from world markets. It was 19S8 the financial markets also clear that developing were willing to go along with countries, with their limited the much greater development abilities to borrow on the near- orientation in the Bank's 20 The First Half Century: An Overview lending patterns. The creation in prosper, and building strong 1960 of the International institutions. This lesson was not Development Association as a absorbed immediately by other soft-lending arm of the Bank countries or the Bank: during helped this process. The Aid the 1960s and most of the Consortia for India and Pakistan 1970s increasing investment were precursors to the levels were still considered the Consultative Groups that the main force for development. Bank now chairs for some forty countries, to provide a forum This perception was buttressed for coordination of donor by rapid economic growth in lending and policies in support the 1960s in Latin America, of the recipient country's fueled by state-led import- development strategy. substituting industrialization strategies. The region account- A significant development in ed for more than a third of all this phase was the Bank's grow- Bank lending in the 1960s, ing relationship with Korea and mainly for electricity and trans- Taiwan (China), which showed port. This expansion of infra- how rapidly poor economies structure aided rapid growth in could grow rich if they fol- many countries, particularly lowed the right strategy. Brazil. Some two-thirds of Bank Planning and state-led growth resources in the 1960s were were the fashion during this devoted to basic infrastructure In the 1960s Latin period, and the Bank supported and over one-fourth of Bank America accounted for five-year plans in many coun- resources went to Latin more than a third of all tries. Korea and Taiwan (China) America. It became apparent in Bank lending demonstrated that the impor- later decades that some of this tant part of planning was not state-led growth was unsustain- capturing the commanding able, reflecting faulty economic heights of the economy for the policies. Some Latin American public sector but stressing edu- countries and Turkey experi- cation, paying attention to rural enced debt problems even in development, adopting an out- the 1960s, leading to debt- ward-orientation in trade, cre- rescheduling agreements, ating conditions in which an early harbinger of things dynamic entrepreneurs could to come. 21 The Evolving Role of the World Bank Thanks to IDA, lending also India accepted the need for increased substantially to India new technology, prices that and Pakistan. India suffered a reflected resource costs, and major food crisis in the public investment in rural mid-1960s. It had neglected infrastructure. The Green agriculture in the 1950s and Revolution spread to other early 1960s, financing countries, its dispersal encour- industrialization through aged by financial and technical policies that pulled resources support from the Bank.'" out of agriculture. In India's experience also demon- consequence, India became strated that industrialization dependent on food aid, was not an easy route to primarily from the United prosperity and that to stave off States, even in years of bumper hunger and deprivation, crops. When two successive attention to rural development droughts hit India in 1965 and was critical-an insight that 1966, food aid rose to helped shape the next phase of 10 percent of global wheat the Bank's evolution. trade, making some experts despair of India's viability. But An Advocate for the Poor: even before the twin droughts 1968-80 India had started experiment- ing with high-yielding Under the Presidency of The Green Revolution varieties. Provoked by stop-go Robert McNamara (1968-81) spread to other countries, United States food aid policies, the Bank was transformed in its dispersal encouraged by the Indian authorities began to many ways. IBRD and IDA financial and technical give high-priority to reviving lending rose tenfold, from support from the Bank India's agriculture. The Bank under $1 billion in 1968 to and other donors played an over $12 billion in 1981 (at important role in helping to current prices), a nearly finance and shape the techno- fourfold increase in total logical breakthrough in commitments in real terms. agriculture that followed (and As important as the increase came to be known as the in lending was the increase in "Green Revolution"). New attention to poverty alleviation policies were needed along and human resource with additional finance, and development. 22 The First Half Century: An Overview The Bank had from the most of their income. Lending beginning considered poverty for agriculture and rural reduction to be an essential part development soared from of development. What has $1.3 billion in the 1960s to changed are its views about the $14.8 billion in the 1970s, best way to achieve that goal. more than doubling its share of Initially, the Bank had relied on Bank lending to nearly 28 per- general economic improve- cent. Lending for human ment, to reach the poor resources development went ed its lending for rural indirectly. But Bank studies in from $244 million in the 1960s areas, especially for the 1970s revealed that to $2.9 billion in the 1970s agriculture hundreds of millions of people (from 2.3 to 5.4 percent of in developing countries lived in Bank lending). For the first poverty, lacking such basic facil- time the Bank began to view ities as safe drinking water, rising population as a major schools or health clinics. These development issue but stressed conditions stifled productivity that population could not be and kept earning capacity low, controlled without first paying setting in motion a self- attention to health and perpetuating cycle of poverty education. The Bank also transmitted from one sharply expanded lending for generation to the next. Poverty urban development, water, and was concentrated in rural areas sanitation. Meanwhile, the and could be traced to share of basic infrastructure fell insufficient investment in from 65 percent of Bank lend- agriculture and social sectors ing in the 1960s to 37 percent like education and health. in the 1970s. During this period the Bank focused on absolute poverty, The strong push on the affecting 40 percent of people agricultural front had a high in developing countries, and payoff in South and Southeast switched its emphasis to Asia. In the 1970s the Bank projects designed to reach the helped India finance rural poor directly. The Bank greatly electrification for tubewells, the expanded its lending for rural training and visit system in areas, especially for agriculture, agricultural extension, agricul- from which the poor derive tural research, rural credit, 23 The Evolving Role of the World Bank rural roads, and facilities for A Policy Reformer: 1980-90 storage and transportation. It helped demonstrate that By the end of the 1970s it was small farmers could grow becoming clear that the policy high-yielding varieties as and institutional environment * efficiently as large farmers, if in which projects were given appropriate support. implemented was a major This experience brought to determinant of the light two important lessons performance of the Bank's that government and develop- growing project portfolio. ment agencies had overlooked Even in countries where faulty in the 1960s: that small farm- policies distorted incentives ers constitute a vast untapped and discouraged efficiency, the potential for agricultural Bank continued to expand development and that lending for new projects, over-taxing agriculture to believing that these would at finance industrialization is a least help improve conditions mistake. The Bank support to for the poor and counteract India, Pakistan, Indonesia, some of the negative effects of The policy and instit- three of the four most bad policies. Then a 1981 utional environment in populous countries in the Bank study, popularly called which projects were world today, helped in their the Berg Report, concluded implemented was a major 0 transformation from large from a review of internal and determinant of the f importers of foodgrains in the external factors affecting late 1960s to dynamic agri- Africa's performance that poli- performance of the Bank'sE cultural producers in the cy-induced distortions were so growing project portfolio developing world today. severe in many countries that Because the spread of the projects could not be expected I Green Revolution and the to succeed no matter how well rural infrastructure that designed."' Policy reform was a accompanied it was largely prime need, and not just in * confined to irrigated tech- Africa. nologies, its impact in Africa and other rainfed agricultural THE DEBT CRISis. The two oil regions was limited, but in the price shocks of the late 1970s populous regions of Asia it had brought home that lesson a profound impact on poverty. anew. The first price shock of 24 The First Half Century: An Overview 1973 dealt a devastating blow Soon, the drop in oil demand to oil-importing countries. As hit oil exporters, who had these countries' trade imbal- borrowed large sums in Structural adjustment was ances grew, the Bretton Woods anticipation of an unending necessary in many institutions were anxious to boom, and the debt crisis borrower countries relieve human distress by exploded in 1982. Problems recycling petrodollars, while were most severe in Latin commercial banks, flush with America, which accounted for funds, were eager to direct 37 percent of developing them toward countries in country debt in 1980.12 Africa need. Between 1970 and 1980 was also hit hard. Mexico was public and publically guaran- the first country in the 1980s teed debt to developing unable to service its debt, and countries soared from others followed in a cascade. $46 billion to $410 billion. Inflows of private capital, Not enough attention was paid which had accounted for three- to the possibility that in fifths of the increase in official- financing trade deficits, ly held debt stock in the 1970s, international lenders were plummeted. The debt crisis was underwriting poor investments a calamity not only for borrow- and policies that could lead to ers, but also for the lending debt problems down the road. banks. The threat of an By the time of the second oil international banking collapse shock in 1980, the lesson had loomed, reminiscent to many of taken hold. At the World the beginning of the Great Bank-IMF meeting that year, Depression. President McNamara argued that the problem could not be The need of the hour was for tackled simply by recycling emergency balance of payments petrodollars. Structural adjust- support from the IMF and the ment was necessary in many World Bank and debt resched- borrower countries. In any uling by commercial banks and case, rising interest rates and bilateral donors. It was evident falling commodity prices soon that the IMF alone could not made such recycling provide sufficient resources and prohibitively expensive for that debtors needed long-term borrowers. finance and structural 25 The Evolving Role of the World Bank adjustment policies that would of it was brought about by a make their economies more failure of borrowers to invest efficient and outward looking. their loans wisely; indeed, So the Bank adapted the low- many loans went to finance the conditionality program loans expansion of inefficient public Bank support for reform it had made to a few key enterprises and to insulate in Latin America focused countries in the 1960s and consumers from high energy on the underlying causes 1970s to current conditions- prices. That is why Bank of the debt crisis and started making structural support for reform in Latin adjustment loans tied to policy America focused on the reform. These loans were underlying causes of the debt intended to be fast-disbursing, crisis, while helping member to meet the immediate cash countries restructure their needs of borrowers while external debt. paving the way for longer-term reform. Support for structural In Latin America countries had and sectoral adjustment lending firm control of the design and became a major feature of implementation of their reform Bank lending in the 1980s, programs. The Bank's contribu- although it accounted for less tion consisted mostly of than one-fifth of Bank lending analysis, advice, and financing on average between 1980 and to ease the pain of adjustment. 1994. Lending for human The fundamental themes of resources and the environment reform have been reducing the also began to accelerate in this size of the state and its inter- period, reflecting other needs ventions in the economy, and concerns. restructuring public finances, liberalizing prices and controls, The importance of external reducing the bias against debt as a cause of the Latin exporting, and increasing the American crisis has been reliance on the private sector. exaggerated." Much of the These reforms are now begin- debt was induced by high ning to pay off, as evidenced by interest rates and sharp the decline in the ratios of pub- exchange rate fluctuations that lic expenditures to GDP, a shift were the outcome of policies in in the composition of public industrial countries. And much spending toward the social 26 The First Half Century: An Overview sectors, the success of privatiza- trols have been replaced by tion programs, and the sharp market-driven prices; govern- drop in external tariff levels. ments are getting out of the The resumption of large business of setting exchange volumes of private capital flows rates, interest rates, and pro- to Latin America, such as ducer prices. Nontraditional foreign direct investment and exports are beginning to portfolio flows, signifies the appear. So, too, are active stock gradual return of confidence exchanges. Incentives for agri- and the end of the debt crisis. culture have improved, and there is some evidence that the Unlike the case in Latin rural poor have benefited. This America, in Sub-Saharan Africa progress, however, is confined the debt crisis occurred primar- to only half of the twenty-six ily in low-income countries largest economies, with particu- with weak institutions, low larly impressive results in human resource development, Ghana and more recently in and an underdeveloped private Uganda. With the devaluation sector.'4 Structural adjustment of the CFA franc, prospects for loans and credits were again the the CFA zone countries have main mechanism for meeting improved considerably, how- balance of payments needs and ever. But other countries, which supporting economic reforms. have suffered from natural and As in Latin America the debt man-made disasters or the small crisis was symptomatic of a size of their economies, have larger crisis in economic man- been largely left out. The num- The resumption of large agement. But the record of ber of Africans in poverty rose volumes of private capital implementation of adjustment in the 1980s, more often flows to Latin America policies has been mixed. because of the failure to adjust signifies the gradual return Although the response of pri- but sometimes because adjust- of confidence and the end vate investment has been slow, ment policies in early programs of the debt crisis countries that have consistently did not pay sufficient attention implemented sound policies to the impact on the poor. have witnessed a positive turn- around in GDP, agriculture, A STRONG PERFORMANCE IN ASIA. exports, and industry. In many Despite the debt crisis the countries, domestic price con- 1980s brought as much good 27 The Evolving Role of the World Bank news as bad for developing comprehensive tax, trade, and countries. India, Indonesia, financial reforms-Indonesia Korea, Malaysia, Pakistan, and continued to reduce poverty in Thailand were among those both relative and absolute The most sensational countries that had needed terms. This was possible special assistance from the IMF because of the government's performance of all in the . and the Bank to overcome the emphasis on improving the 1980s came from China second oil shock and its after- agricultural sector on which math. Yet they not only recov- the livelihood of most people, ered but grew rapidly. The especially the poor, depended. enormous difference in the It was also due to Indonesia's performance of Asia, which emphasis in the mid-1980s accounts for two-thirds of the on a labor-intensive, outward population of the developing oriented industrialization world, and Africa and Latin strategy, and on the large America showed that a investments in human country's internal policies resources made throughout the mattered much more than decade. Between 1978 and external conditions. Superior 1987, primary school enroll- performance in Asia, particu- ment among the poorest 40 larly in East Asia, was due to percent rose from 78 percent several factors.'5 Important to 90 percent, and lower among them were better secondary enrollment rose macroeconomic management, from 42 to 65 percent.6 a mutually supportive relation- ship between the state and the The most sensational perfor- private sector, better sectoral mance of all in the 1980s came policies, more outward-looking from China. In little more than policies, greater institutional a decade, it transformed itself capacity to deal with change, from a centrally planned and greater diversification of economy to a dynamic, mar- exports. ket-oriented one, whose bur- geoning exports gave it a mas- Even during a difficult time of sive trade surplus with the adjustment to external United States by the early shocks-including reductions 1990s. When China started its in public expenditure and transition it had little idea of 28 The First Half Century: An Overview how to go about it and was than others in reducing eager to absorb lessons from poverty. World Development abroad. It used the World Bank Report 1991 revisited the main as its main sounding board for lessons of development, noting changes in policy and organiza- in particular that success came tional structures, and a highly to countries where there was a productive policy dialogue healthy relationship between ensued. The Bank trained the government and the many Chinese personnel at the private sector and where EDI and translated its econom- governments provided a ic policy research into Chinese. regulatory and incentive Its role was far more important framework that was outward in the realm of ideas than in oriented and conducive to finance. China adapted Bank private savings and investment. advice to its own ends and suc- World Development Report ceeded in pushing GDP growth 1992 focused on an area of into double digits. It proved increasing concern to the that rapid growth need not be World Bank in the 1980s, the limited to small countries like deteriorating state of the Singapore-good policies work global environment, and everywhere. explored the link among poverty reduction, growth, That many Asian countries and the environment. (The key fared so well in the same lessons drawn from this external context that plunged process of introspection are Latin America and Africa into summarized in Box 3.) The That many Asian crisis led to introspection with- Bank took away from this countries fared so well in in the Bank in the late 1980s. process a renewed commit- the same external context Three successive World ment to the goal of poverty that plunged Latin Development Reports from reduction and improved living America and Africa into 1990 to 1992 addressed differ- standards and a recognition of crisis led to introspection ent aspects of this internal the need for a sharpened focus within h Bk in the learning. World Development on human resources develop- Report 1990 focused on ment and on growth that is poverty, exploring why some environmentally sustainable countries, mostly in Asia, had and driven by a healthy private been so much more successful sector. 29 The Evolving Role of the World Bank Box 3 Learning from the Past This renewed commitment Several lessons stand out from the development experi- reflected a further evolution in ence of the past fifty years: the Bank's approach to poverty Poverty reduction is best pursued through a dual assault reduction. The Bank of the on the conditions that perpetuate poverty. One way is to 1990s is addressing poverty in a pursue rapid economic growth through strategies that more holistic manner (see Box make use of the most abundant asset of the poor-labor. 3) and through a more strate- This calls for policies that harness market incentives, gic, country-focused approach social and political institutions, infrastructure, and tech- nology to this end. The second is to invest in people, by relying on a comprehensive providing basic social services to the poor. Primary health analysis in the form of in-depth care, family planning, nutrition, and primary education and increasingly participatory are particularly important. These two strategies are mutu- poverty assessments. Twenty ally reinforcing. One without the other is insufficient. years after the first push A prime requirement for rapid economic growth is a sta- towards poverty reduction, ble macroeconomic framework. Beyond a point, budget there is more data on poverty deficits, excessive government borrowing, and monetary and better ways of identifying expansion are quickly followed by inflation, chronic over- valuation of the currency, and loss of export competitive- moniori ng the ank ness. ~~~~~~~~~~~monitoring the impact of Bank ness. Integration with global markets for goods, services, finance and technology yields major gains. Openness to macro-micro lnkages In the trade, investment, and ideas is essential in encouraging Bank's current approach enable domestic producers to reduce costs by adopting new tech- a better integration of poverty nologies and improving existing ones. issues within country assistance Private enterprise and governments both have vital roles strategies. The increased to play in development, and success lies in building on emphasis on participation and their complementarities instead of trying to choose environmental management between them. Competitive markets are the best way yet . . .... ~~~~~~~~~~adds to both the compzlexity found to efficiently produce the goods and services con- sumers want. Such markets require a dynamic private sec- and richness of the agenda as tor motivated by adequate incentives and an environment well as to its quality. conducive to savings, investment, and labor-intensive growth. But markets do not work in a vacuum-they Toward a Holistic Approach: require legal and regulatory frameworks that governments The 1990s need to provide efficiently. At other tasks, markets may be inadequate or fail altogether. That is why governments must ensure adequate investments in infrastructure, pro- enteredte as the vide essential services to the poor, and create safety nets d the 1990s the to prevent others from slipping into poverty. challenges facing its borrowers remained the same as they had 30 The First Half Century: An Overview ever been. More than a billion For development to be sustainable, the environmental people lived in acute poverty. basis of production must be protected. Fortunately, many Rapid population growth and policies that encourage growth also protect the environ- economic expansion were ment. These include removing subsidies that encourage contributing to pressures on the excessive use of fossil fuels, irrigation, electricity, pesti- cides, and logging; clarifying rights to manage forests, environment. And in many environment, fisheries, and land; and providing sanitation and drinking countries the institutional water to poor areas. Appropriate pricing and property infrastructure was an rights are not enough in some cases, where strong institu- impediment rather than a tions and clear rules are needed to guard against degrada- mechanism for addressing tion. Local participation can be of major assistance. these problems adequately. At Rapid development requires good governance. the same time, the context in Experience has shown that how power is exercised for which the Bank operates was economic and social development is extremely important. which the Bank operates was Efficient legal and administrative structures, clear rules becoming more complex, more for economic actors and enforcement of contracts, speed challenging, and changing and transparency in decision-making, and high standards rapidly. of financial and political accountability are needed. Participation is essential for economic development. There has been rapid integra- Participation in project design and execution by beneficia- tion in the global economy, ries can improve outcomes. Projects that give beneficiary with the growth in trade out- communities a sense of ownership and a stake in their pacing growth in GDP. outcome elicit grass-roots support that protects projects pacing growth from erosion by vested interests. Decentralization of Developing countries are power from capitals to local communities yields positive leading this trend: they account results. for the fastest component of the for the fastest component of the Investing in women is of vital importance to the econo- growth in trade. Private capital my, to households, and to children. The education of girls flows to these countries have has a long-term impact on the productivity of women in more than recovered from the the work place and on fertility and infant and child mor- precipitous decline following tality. Economic returns to education are often higher for the debt crisis and are now at women than for men. record levels. These flows are If reforms are to succeed and take root, they must be projected to reach $113 billion owned" by politicians and technocrats, who must for 1993, over three-fifths - believe in their efficacy and direct their design. consisting of foreign direct Experience shows that reforms work where the Bank sup- consisting of foreign direct ports local technocracies that are committed to the investments ($56 billion) and reforms and are able to tailor the new policies to local portfolio equity investments conditions. The borrower's commitment is the single ($13 billion). This is three times most importanr factor explaining success in Bank project the level at the end of the outcome. 31 The Evolving Role of the World Bank 1980s and reflects the increas- mostly in Africa, that have ing integration of global finan- lagged behind. For them cial markets. Implementation poverty is increasing, and they of the Uruguay Round agree- risk being excluded from full ments will keep these trends participation in global markets on an upward path. and the benefits that brings. In the middle are the countries There have been equally that require further policy and dramatic political develop- institutional reforms and a ments, with the spread of more supportive international democracy, the expansion of environment to join the ranks political participation, and the of the first group. Then, there surge in nongovernmental are the nations of Eastern organizations. The most Europe and the former Soviet dramatic change, of course, Union. They have abundant has been the collapse of the human capital but face former Soviet Union, which obsolete and deteriorating has contributed to the physical capital and have seen globalization of the Bank's massive declines in output. membership. These countries are moving There have been equally from command to market dramatic political The complexion and composi- economies in a fluid political with the tion of the groups of countries and institutional context. If dvevelopments, wtth the . that make up the Bank successful in their reforms, spread of democracy, the . Group's clients have changed they can look forward to expansion of political as well. There are now four. restored growth that would be participation, and the Many countries are prospering a massive stimulus to the surge in nongovernmental in the new global environ- global economy. There are organizations ment, and these include the early signs of hope (notably in most populous countries in the Poland and the Czech developing world (China and Republic), but the journey for India), other countries in East many may be long and Asia, and Latin America. These difficult.17 countries will progressively rely less on official develop- To address this new context, ment finance. At the other the Bank outlined its develop- extreme are many countries, ment agenda in a recent paper, 32 The First Half Century: An Overview The World Bank Group: * A vice presidency for Europe Learning from the Past, and Central Asia, to assist new Embracing the Future. The member countries of the Bank's fundamental objectives, former Soviet Union and as set out by its founders fifty Central and Eastern Europe in years ago, remain valid today. their transition to market- Within these broad objectives, based economies. the World Bank is attempting to position itself to help its In addition, important changes borrowers meet the challenges are occurring in the Bank of the twenty-first century. Group's institutional culture. New vice presidencies have There is now greater concern been created to strengthen for quality in the performance internal capacity to meet of the project portfolio, more emerging new challenges: support for innovation and cost consciousness, and more The Bank's fundamental i A vice presidency for transparency and openness in objectives, as set out by its Human Resources and external dialogue. founders fifty years ago, Operations Policy, to support a remain valid today major emphasis on poverty FIVE DEvELoPMENT CHALLENGES reduction and human resource The Bank Group has renewed development. its commitment to help bor- rowers reduce poverty and * A vice presidency for the improve living standards by Environment and Sustainable promoting sustainable growth Development, to bring a clear- and investing in people. The er focus on sustainability issues paper Learning from the Past, in all aspects of the Bank's Embracing the Future identifies work. five major development chal- lenges facing the Bank Group's * A vice presidency for clients and on which the Bank Finance and Private Sector will focus in the coming years: Development, to enhance sup- port for growth and private * Pursuing economic reforms sector development and finan- to enhance growth and reduce cial sector reform. poverty 33 The Evolving Role of the World Bank * Investing in people * Client-orientation-respond- ing to the needs of clients and * Protecting the environment facilitating their participation in the design and implementa- * Stimulating the private sector tion of Bank-supported programs. * Reorienting government. The agenda is large, and Results-orientation-looking the Bank Group must be The five challenges are all beyond lending volume to agile and responsive closely linked and reflect the maximizing development Bank's more holistic approach impact and improving service to development in its sixth quality and efficiency. phase of evolution toward a truly global development Cost-effectiveness--ensuring agency. that scarce resources are spent wisely. Six GUIDING PRINCIPLES The agenda is large, and the Bank * Financial integrity-main- Group must be agile and taining the Bank's high responsive while avoiding the standing in financial markets danger of stretching itself too to ensure that it can provide thin. Six guiding principles finance on the best possible have been adopted: terms to members. * Selectivity-identifying The Unfinished Agenda actions that will help most in improving a client's potential The rapid changes in the global and the Bank's impact. environment are bound to influence the Bank's future just * Partnership-seeking as they have done in the past. alliances with other develop- Many successful countries in ment agencies (governments, Asia may soon stop borrowing international agencies, non- from the Bank, just as governmental organizations, European members did in the private sector investors) to 1950s. The regional develop- maximize the effectiveness of ment banks, the European development assistance. Union, and Japan are 34 The First Half Century: An Overview increasingly influential and remain a relevant institution financially important players over time. Fifty years of on the development scene. evolution have already Many borrowers are develop- achieved a great deal, but ing their own analytical skills much unfinished business and using the resources of remains. And history shows other agencies, official and that new challenges relentless- unofficial. ly follow old. History also shows that the Bank has This increased competition successfully changed with the offers new opportunities for times to serve its members the Bank to become even more better. It is doing so again to responsive to the needs of its help them eradicate poverty clients, demonstrating the and ensure sustainable flexibility that has helped it development. The author is grateful for the substantial contribution made by Swaminathan S. Aiyar, a Delhi-based economist and journalist, and a consultant to the World Bank, on which this piece draws heavily. He is also grateful for contributions and comments from numerous Bank colleagues. 35 The Evolving Role of the World Bank Notes 1. Angus Maddison (1991). World Economic Growth: The lessons of long-run experience. (Background paper for the WDR 1991). 2. World Development Report 1990, p. 40; World Bank 1990. 3. In this series, Vinod Thomas and Peter Stephens, East Asian Economic Miracle, World Bank 1994. 4. A growth rate for all developing countries can be calculated by weighting, individual country growth rates by each country's income or population. Weighting by income does not distinguish between a dollar accruing to a more populous and poorer country and one accruing to a less populous and richer country. Population-weighted indices measure the change in income of a typical individual, treating the income growth of each person equally. For a discussion of this issue, see Global Economic Projects and the Developing Countries, World Bank, 1994, page 6. 5. In this series, Kenneth G. Lay: Mobilizing Private Savings for Development: IBRD and the Capital Markets, World Bank 1994. 6. Kenneth G. Lay, ibid. 7. In this series, Caroline Doggart, From Reconstruction to Development: Europe andjapan, World Bank 1994. 8. Caroline Doggart, ibid. 9. Vinod Thomas and Peter Stephens, ibid. 10. In this series, Uma Lele and Balu Bumb, The World Bank's Response to South Asia's Food Crisis: the Case of India, World Bank, 1994. 11. World Bank, Accelerated Development in Sub-Saharan Africa, 1981. 12. In this series, Sebastian Edwards, Latin America and the Debt Crisis, World Bank, 1994. 13. Paper presented by S. Shahid Husain to the Institute of Latin American Studies, University College, London, February 1991. 14. In this series, Ishrat Husain, The Challenge of Africa, World Bank 1994. 15. Vinod Thomas and Peter Stephens, ibid. 16. Vinod Thomas and Peter Stephens, ibid. 17. For a discussion of the Bank's program in this group of countries, see in this series Kemal Dervis, Marcelo Selowsky, and Christine Wallich, The Transition in Central and Eastern Europe and the Former Soviet Union, The World Bank, 1994. 36 From Reconstruction to Development in Europe and Japan Caroline Doggart The Setting It was not an auspicious moment to sign an international agree- ment. Fighting continued in Europe, the Middle East, and Asia. The outcome of the war was still uncertain. There was wide- It was called a Bank spread anxiety about inevitable political and economic changes "mainly because no that would come with peace. There were suspicions, too, about satisfactory name could American and Russian ambitions. Even so, "greatly encouraged be found in the dictionary .. . . . . ............. ~~~for this unprecedented by the critical and even carping spirit in which our proceedings institution" have been watched and welcomed in the outside world," Lord John Maynard Keynes moved for acceptance of the Final Act of the Bretton Woods conference in July 1944. Thus the founda- tions were laid for the International Bank for Reconstruction and Development (later to be known as the World Bank), and the International Monetary Fund (IMF) to support post-war interna- tional economic cooperation. Before the meeting, years of work had gone into drafting the IMF's charter. Plans for the World Bank were less advanced-so tenta- tive, in fact, that invitations to the forty-four countries represented at Bretton Woods described the meeting as "one intended to for- mulate definite proposals for an International Monetary Fund, 37 The Evolving Role of the World Bank and possibly, a Bank for made early on to start lending Reconstruction and to Latin America, and the first Development." It was called a development loans were made Bank "mainly because no to Chile and Mexico. The satisfactory name could be Articles of Agreement found in the dictionary for this provided that the Bank be used unprecedented institution."' for both development and Without the good will of the reconstruction, with special delegates at Bretton Woods, regard paid to easing the it would have been impossible financial burdens of countries to draft the Bank's charter in devastated by the war. so short a time. In Keynes' Certainly, reconstruction was a words, the delegates had to more pressing consideration in perform simultaneously the the minds of the U.S. and tasks appropriate to the European delegations in 1944, economist, to the financier, to and as it turned out, the the politician, to the journalist, concern of the developing to the propagandist, to the countries was not unjustified. lawyer, to the statesman, even . to the prophet, and to the Parallel to the Bretton Woods soothsayer." negotiations for multilateral payments and development aid provided that the Bank be In 1944, many of today's were discussions on creating used for both development developing countries were still an International Trade and reconstruction, with colonies. The developing Organization (ITO) to special regard paid to countries represented at complete the institutional easing the financial Bretton Woods were framework for a new burdens of countries independent nations (mostly in international economic order. the western hemisphere) and The ITO was to apply the not directly involved in the same multilateralist principles war. Their concern was that in the area of trade that the post-war reconstruction would Bank and IMF would apply in absorb most of the new bank's international finance. Its first resources and that their less- priority was to reduce world- defined needs would be wide trade restrictions that crowded out. To allay these had contributed to the 1930s fears, special efforts were recession. Discussions on the 38 From Reconstruction to Development in Europe and japan ITO began in 1943, and U.S.-financed United Nations although the organization was Relief and Rehabilitation A sunk in 1947 by opposition Administration (UNRRA), ol the UnS onomy from governments dissatisfied which provided essential only the U.S. economy with its compromise charter, it supplies and services to was able to produce the did not sink without a trace. A liberated areas between 1943 enormous volume and General Agreement on Tariffs and 1946, came to an abrupt range of foodstuffs, and Trade (GATT) had been end. So did the Lend-Lease raw materials, and negotiated as part of the ITO program that covered wartime manufactured goods program. It was intended to be U.S. exports to Britain needed to feed and rebuild a temporary expedient until (estimated at $13.8 billion) Europe and Japan the ITO came into operation. and to the USSR ($9.5 billion). GATT, however, survived, and European countries, including became permanent in 1955. Britain, had insufficient dollars Slowly but determinedly, it has to pay the United States for nudged member countries the goods they needed and had toward a more liberal system no means of boosting their of world trade. It has now own dollar-generating exports been instrumental in reviving a to the U.S. The ensuing "dollar transfigured ITO-the new gap" completely undermined World Trade Organization- United States plans for a which will succeed GATT in speedy revival of world trade. 1995. Europe, and Britain in particu- lar, needed a dollar lifeline. The Dollar Lifeline With no apparent alternative available, Britain applied to In part the ITO failed because the United States for a $5 bil- it coincided with the first post- lion loan to cover its yawning war attempt to operate a trade deficit. The loan was multilateral monetary system. approved in 1946, for At the end of the war, only the $3.7 billion (plus $650 million U.S. economy was able to in final settlement of produce the enormous volume Lend-Lease operations) at 2 and range of foodstuffs, raw percent interest, repayable in materials, and manufactured fifty years with a five-year goods needed to feed and grace period. Britain made rebuild Europe and Japan. The the granting of the loan a 39 The Evolving Role of the World Bank prerequisite for its ratification reserve. Although the British of the Bretton Woods agree- were reluctant to agree to ment-without which the convertibility, the barriers final- setting up of the Bank and the ly came down in July 1947, Fund would have been prompting a stampede from seriously delayed. Meanwhile, sterling into dollars. When the United States attached to British dollar reserves (includ- the loan the condition that ing the proceeds of the U.S. Britain had to commit itself to loan) shrank by $868 million membership in the ITO, and to in four weeks, convertibility make sterling fully convertible was suspended. It would not be into dollars. restored until 1958. Before the war, sterling- The U.S. loan to Britain was denominated trade within the the largest of the first two sterling area (independent years following World War II. Commonwealth nations, such France received $650 million as Australia and South Africa, (on the heels of a $550 million British colonies, and countries loan from the Export-Import with which Britain had bi- Bank), just ahead of crucial lateral agreements) accounted national elections. The United for half the world's exports States lent Italy $330 million, and imports. Convertibility of and $430 million went to the Although the British were these countries' currencies into Benelux countries. Eastern reluctant to agree to con- anything but sterling was Europe received $550 million vertibility, the barriers limited, restricting their (far less than expected due to n capacity to buy in dollars and growing U.S. reluctance to help finally came down in July-..*.*. . - hence to import from the countries within Russia's 1947, prompting a stan- JUnited States. The United sphere of influence). In 1945, pede from sterling into States considered the the Soviet Union itself asked dollars maintenance of such sterling for $6 billion in reconstruction convertibility controls aid in exchange for supporting incompatible with efforts to the Bretton Woods agreement. reduce world trade barriers This was scaled down to and it did not want its loan $1 billion and eventually came used to prop up the British- to nothing in the face of U.S. dominated sterling area trade congressional opposition to the 40 From Reconstruction to Development in Europe and Japan Stalinist government and to the geopolitical realities, they Soviet Union's decision not to eventually gave in to the Soviet apply for Bank and Fund Union. membership. By early 1947, the Truman The Marshall Plan administration had grown anxious about the lack of The lines were being drawn progress in Europe's post-war for the Cold War. The global recovery, the political and Marshall's ideas for aid to community ideal that inspired economic disarray, and the Europe were expressed in the Bretton Woods delegates persistent dollar shortage. In an eloquent speech in June began to dissolve into a world March, President Truman 1947. His policy was dominated by two nations called for renewed support for "directed not against any strongly opposed to one Europe "to help free peoples another. The World Bank, like maintain their free institutions country or doctrine but the IMF, was firmly in the U.S. and their national integrity against hunger, poverty, camp. The United States put against movements that seek to desperation, and chaos" up a third of the capital and impose upon them totalitarian held a third of the votes. The regimes." This political Bank's headquarters were in message, canonized as the Washington, DC, under the "Truman doctrine," marked the watchful eyes of the U.S. beginning of a period of Congress, and most of the top discussions and intense brass at the Bank were U.S. preparations, culminating in citizens. Although partly by Marshall aid (or the European default-most European Recovery Program). Secretary candidates had their hands full of State George Marshall's at home-these facts ideas for aid to Europe were reinforced the impression of a expressed in an eloquent U.S.-driven organization. This speech in June 1947. His was particularly hard for policy was "directed not countries like Czechoslovakia against any country or and Poland, who were Bank doctrine, but against hunger, members and wanted to poverty, desperation, and borrow, but found themselves chaos. Any government that under conflicting political is willing to assist in the task pressures. Compelled by of recovery will find full 41 The Evolving Role of the World Bank cooperation ... on the part of American, French, and Soviet the United States Government." administered zones. The Soviet The offer appeared to be open government also made sure The Bank made a coura- g to all. that Czechoslovakia and Poland withdrew their announced its first loans T iThe plan would deal with participation. to Europe in the spring Europe-including Germany- and summer of 1947. It as a single economic entity. It The World Bank and Post-War stepped in when Europe's came at a time when European Europe dollar shortage was at its confidence was rock-bottom. In worst: the U.S. post-war addition to budget deficits, the The Bank made a courageous loans had been spent, and sterling crisis, and coal and leap when it announced its first power shortages, Europe was loans to Europe in the spring Marshall Plan funding was s drought-stricken and had and summer of 1947. It still uncertain depleted harvests. Hunger and stepped in when Europe's social unrest threatened. dollar shortage was at its worst: the U.S. post-war loans Response to the U.S. offer was had been spent, and Marshall enthusiastic. Even the contro- Plan funding was still versial requirements that uncertain. Europe liberalize its trading and investment systems and Self-preservation also played a move toward economic part. Expectations about the integration seemed acceptable, Bank were low, and some if they brought in dollars. The member governments regarded Russians came to the initial the institution as nearly a dead Paris meetings to plan the issue.2 The Bank's first year had European response, although been spent looking inward. (as the United States had Qualified staff had been probably hoped) they soon engaged on the basis of withdrew. The Soviets could "competence and with due not agree to an open-door regard to geographical policy for foreign private representation."3 For the sake investment, nor to the rebuild- of efficiency and economy, the ing of what would be a unified Bank planned to use expert Germany. The country was consultants to deal with specific ultimately split into Anglo- problems as they arose. In 42 From Reconstruction to Development in Europe and Japan modest offices at 1818 H THEBANK'S FIRST LOAN. The Street in Washington, DC, $250 million loan to France about seventy bankers, (actually to Credit National, a economists, lawyers, steno- semipublic corporation) was graphers, and other support the Bank's first. It was an act of staff divided their time faith for several reasons- between establishing guide- including the fact that the loan lines for the Bank's future accounted for a third of the lending operations and prepar- Bank's available resources at ing the way for borrowing on the time. Soon after came a U.S. markets. large loan to the Netherlands and smaller ones to Denmark Reconstruction Loans and Luxembourg. The appointment of John France originally applied for McCloy as the Bank's second $500 million. The Bank agreed president in February 1947 to half this amount, with the marked the start of true possibility of a second tranche. operations. That reconstruc- In nominal terms, the loan tion would come first in the (number 1FR) would remain Bank's lending priorities had unmatched in size for the next been foreshadowed at Bretton twenty-two years. In real terms, Woods. Six of the nine loan it is still the Bank's largest applications received by the single loan, with a 1994 value The $250 million loan to end of April 1947 were for of $2.4 billion.4 France ... was the Bank's reconstruction in first. It was an act of faith Czechoslovakia, Denmark, The loan application arrived as ::for several reasons- France, Luxembourg, the a simple letter attached to an Netherlands, and Poland. With outline of the French govern- l a no previous loan appraisal ment's reconstruction program, experience, Bank staff had to the Monnet Plan. The Bank's of the Bank's avaiable improvise in analyzing projects loan department was already resources at the time.. and assessing credit- stretched to capacity, making its In real terms, it is still the worthiness. By today's own balance-of-payments Bank's largest single loan, standards, the process was projections for five to fifteen with a 1994 value of perfunctory, but it was fast. years on the basis of rudiment- $2.4 billion ary statistical data. Even so, 43 The Evolving Role of the World Bank analysis took only two months, While the French loan was not by which time it was clear that meant to be a model for future whether the Bank lent lending, it soon became the $250 million or $500 million, practical example of Bank neither would be enough to policies on interest rates, end- cover the enormous payments use supervision, and the use of deficit. The Bank offered $250 the contractual negative pledge million, leaving the way open clause. Regarding interest rates, for an equivalent loan later the French loan established two While the French loan was that year depending on the important principles. Rates pace of economic recovery. would be set to correspond not meant to be a model. with the Bank's own borrowing for future lending, it soon . The timing of the French loan costs. After vigorous debate became the practical was ideal for the Bank to within the Bank, moreover, it example of Bank policies establish its credibility as a was decided to use the same on interest rates, lender. It was also just before rate for all loans granted at any end-use supervision, and the Bank's first bond issue. given time because "it would be the use of the contractual France was expected to make difficult to have different basic negative pledge clause . good use of the dollars and conditions for different coun- was an acceptable credit risk. tries and even more difficult to It was also understood within have different interest rates for the Bank that this loan would different countries."6 The Bank, not set a precedent.' The loan after all, gave its members was not "for the purpose of equal status and its loans were specific projects of recon- not granted, as on international struction or development," as capital markets, on the basis of specified in the Bank's charter, the borrower's credit rating. but was covered by the "special circumstances" provision. For The Bank's first bond issue was years to come program loans only weeks away, and its like the first French (and the success depended on what Wall three subsequent) recon- Street would think of the struction loans would remain Bank's potential performance in a minority as the Bank as a lender. A commitment to concentrated on project equal interest rates for lending. borrowers with widely differing economic performances could 44 From Reconstruction to Development in Europe and Japan have jeopardized the whole benefited most from imports venture and might have had a under the loan. negative impact on future borrowing. When the July The third major issue settled 1947 bond issue was over- during negotiation of the subscribed, there was a French loan concerned collective sigh of relief at 1818 collateral, which was eventually H Street. covered by a negative pledge, under which a borrowing Although end-use supervision government commits itself not was required under the Bank's to pledge its assets to secure Articles of Agreement and international debt, so that no would become a standard one external lender is given feature of Bank lending, it is preference over another. Both hard to imagine a more negative pledges and pledges of demanding baptism than the specific security were featured French experience. Supervision in public bond issues of the had not been part of pre-war 1920s, so the idea was not new. banking practice, and the In the French loan, the French were unhappy with commitment was made in a Bank supervisors peering over letter-covenant. In all The Bank felt that its their shoulders. Even so, a subsequent loans, it was supervision office was set up in included in loan or guarantee extend beyond the Paris. It investigated 5,500 agreements. Insistence on this vouchers and routing slips and clause was difficult, but delvery of materals and prepared specific end-use through it, the Bank established equipment to cover the reports for $242 million worth an important element of the uses to which equipment of goods. The Bank felt that its "level playing field" for future was put. In retrospect, this responsibility should extend lending. Seven years later, in was the first attempt at beyond the delivery of 1954, the question of a operation evaluation-to materials and equipment to negative pledge from France assess the impact on the cover the uses to which equip- arose again during negotiations ment was put. In retrospect, for a French West African this was the first attempt at railway loan. Faced with French sectors that had benefited operation evaluation-to assess reluctance to agree to a newly most from imports under the impact on the transport and strengthened clause, the then- the loan industrial sectors that had president of the World Bank, 45 The Evolving Role of the World Bank Eugene Black, explained Other reconstruction loans tactfully that "it would be were repayable over twenty-five impossible for the Bank to get years. the least creditworthy member countries to accept an adequate OTHER RECONSTRUCTION LoANs. Negative Pledge Clause if the Unlike the French loan to Bank did not insist on having Credit National, the next three the substance of the same reconstruction loans were made clause in its contracts with the directly to governments. most creditworthy member Because so many start-up countries."' problems had been resolved with the French loan, the next While the Bank wanted to set one, to the Netherlands, was precedents for lending, it was processed without delay. The also anxious to respond to loan was approved practically France's particular needs. on the nod, for reasons that Because there was no quick included the Dutch people's solution for the French "capacity for hard work" and payments deficit, the Bank the country's long tradition as arranged a manageable an important creditor nation.! repayment schedule "guided by The original application the truism that it is often easier requested $535 million to The loan was approved to get one's money back by the cover reconstruction between granting of liberal terms."8 1947 and 1949. While the practically on the nod, for France was given a five-year Bank limited its commitment to r-easons that included the grace period, which coincided the first year's estimated Dutch people's "capacity with the period when its requirements of $195 million for hard work" and the existing foreign debt-servicing (mainly to cover imports from country's long tradition as obligations were at their the dollar area) the way was left an important creditor heaviest. Thereafter, amortiza- open for further loans. The nation tion would increase gradually. Bank's third and fourth recon- The loan was repayable over struction loans, to Denmark thirty years at 3.25 percent and Luxembourg, were also interest plus commission of approved in August 1947. 1 percent per year on the outstanding loan, earmarked Preliminary assessment of the for the Bank's special reserve. French and Dutch loans had 46 From Reconstruction to Development in Europe and japan taken place in Washington, but commitments, of which, the $40 million loan to 90 percent was spent on dollar- Denmark provided an zone imports, with the United opportunity for the Bank's first States supplying 85 percent of loan preparation mission. Small the total. The French and In May 1947, when the supervision offices were set up Dutch loans were disbursed in $250 million French loan in both the Netherlands and less than a year, and the other X ~~~~was approved, the Bank's Denmark. two within two years of the , . ~~loanable resources loan agreements. The European amounted to $730 million. The $12 million loan to loans were the first to be sold to Inte-third of Luxembourg was a balance-of- buyers which included private Investing one-third of payments support loan for the banks. This provided the Bank available capital in a rehabilitation of the steel with an early opportunity to single loan would be industry and for railway rolling satisfy Article I of its charter, a unthinkable today stock. Modernization and requirement to promote private reequipment in these two foreign investment. The sale sectors were expected both to took place in 1948-49 and was reduce widespread shortages of covered by the Bank's guaran- steel products and to improve tee. In the next few years, more transport links of the inland loans were sold without mining and industrial areas recourse, and the practice of with North Sea ports. With attaching a Bank guarantee was only two broad categories of discontinued in 1956. imports covered, end-use supervision was easy. The loan There is no doubt that lending (which was partly for imports to Europe helped bridge the from Belgium) also provided dollar gap, but the Bank was the Bank with the first realistic about how much it opportunity to use its nondollar could do for European recon- capital, namely francs from struction. In May 1947, when Belgium's paid-in subscription the $250 million French loan to the Bank's capital stock. was approved, the Bank's loanable resources amounted By the end of June 1948, the to $730 million. Investing Bank had disbursed one-third of available capital $470 million of $497 million in a single loan would be in reconstruction loan unthinkable today. The July 47 The Evolving Role of the World Bank bond issue increased lending during the Marshall aid period, capacity to almost $1 billion, of and not only for long-term which $497 million had been purposes. Its first post- committed to the four recon- reconstruction loan was again struction loans by the end of to the Netherlands, for the August. There was little room purchase of six U.S.-made mer- to maneuver. chant ships. This was followed by a loan to Herstelbank for Meanwhile, the Marshall Plan on-lending to specific was beginning to take shape, industries, the first of many and the Europeans submitted loans to development finance their first wish lists, adding institutions. Other European up to a mind-boggling loans went to Belgium, Finland, $28 billion.'" It became clear and Italy (for development of that the Bank could be no more the Mezzogiorno) and to less than a marginal contributor to developed Iceland, Turkey, and the emergency reconstruction Yugoslavia-about $200 million phase (1945-48)." Because in all. Of the Bank's total com- Because Marshall aid was Marshall aid was expected to mitments of nearly $1.4 billion provide the bulk of Europe's at end-June 1952, about half expected to provide the import support for the period had been lent to countries also bulk Of Europe's import 1948-52, Bank assistance in participating in the Marshall support for the period Europe concentrated on long- aid program. 1948-52, Bank assistance range investments. Both the in Europe concentrated on volume of Marshall aid funds The Bank's opportunities to long-range investments (the initial allocation was lend to Czechoslovakia and $5 billion, the final amount Poland evaporated as the $13 billion) and their cost influence of the Soviet Union (mostly grant aid with interest strengthened and anti-Soviet on loans at 2.5 percent) made attitudes hardened in the them more attractive than Bank United States. Both countries loans (interest of 4.5 percent). had submitted large loan applications in the first months Post-Reconstruction Lending of the Bank's operations, but both had been cut back during * Nevertheless, the Bank subsequent negotiations. When continued to lend in Europe the two countries withdrew 48 From Reconstruction to Development in Europe and Japan from Marshall aid under whose members had been pressure from Moscow, they recruited to provide country- put themselves beyond the and sector-specific expertise. reach of the Bank. Knowing The first mission went to Brazil that the U.S. Executive Director in 1947 and was followed by would have to vote against missions to Chile, the them because of U.S. govern- Philippines, Peru, India, Turkey, ment reservations, loan and Egypt. Missions did not proposals for both countries "think up brand new develop- were quietly shelved before ment programs or come up presentation to the Bank's with bright new ideas that had brand new development Board. Poland left the Bank in never been thought of before. programs or come up with 1950, Czechoslovakia at the What they did ... was to bright new ideas that had end of 1954. The Bank made support the people in a country never been thought of one loan to a socialist country, who try to do the right thing before. What they did ... Yugoslavia, and one to Finland, but who frequently did not was to support the people a country on the fringe of the have enough power or political Communist Bloc. They were influence to do it."'- They were d t r the Bank's first and only sent to listen and played a key attempts at short-term lending; role in building good relations frequently did not have they were also the first loans to between the Bank and member enough power or political be repaid. countries. influence to do it" The First Development Loans THE FIRST LATIN AMERICAN BORROWER. Chile was the first Between 1947 and 1949, while recipient of a Bank develop- the Bank's attention appeared ment loan and the first Latin to be concentrated on American borrower, but it was European reconstruction, a not smooth sailing. The considerable effort was made to Chileans were unhappy about begin development lending. the loan conditions and signed The Bank had no role model to only after being assured that follow, and even with careful the French had agreed to simi- preparatory work, there would lar provisions-vindicating the be trials and errors. Much Bank's conviction at the time reliance was placed on the that precedents were being set work done by Bank missions to last. 49 The Evolving Role of the World Bank There was also the matter of agreements in 1949 to finance defaults on Chile's bond debts projects in Mexico (for electric of the 1920s. Wall Street had power, the Bank's first sector not forgotten and might have loan), Brazil, and India. The refrained from buying Bank first African loan-to the bonds if the Bank had lent to government of Ethiopia for an unrepentant Chile. It was highway rehabilitation-was also considered important that agreed to in 1950. Except for a Chile clear its credit record in $75 million Brazilian loan for order to attract private interna- electric power and telecommu- tional investment capital on its nications, most loans granted own account. The Bank's part in 1950-52 were under in mediating an agreement $25 million. The Bank also between Chile and the bond- began to lend for development. holders' committee attracted The Belgian government acted some criticism. But eventually as guarantor for a $40 million Chile settled and the Bank loan to finance equipment and made the two loans. It was a materials in a ten-year useful experience that led to development plan for the several other requests for Belgian Congo (the first mediation of default problems. colonial loan). There were two It also created an image of loans to Australia (for a total of neutrality that helped make the $150 million) and a commit- Bank-and particularly its ment to regional development Although such Idevelop- charismatic president, Eugene in Italy's poverty-stricken mentl loans are now Black, a key participant in southern provinces. common, they involved attempts to solve disputes much soul-searching at - among member countries Although such loans are now the time. during the 1950s. Among these common, they involved much was the crucial Indus River soul-searching at the time. The agreement on water sharing Bank's position was that unless between India and Pakistan. "a national development program .. . is properly LACK OF BANKABLE PROJECTS. worked out in terms of the Economic analysis done by projects by which the objectives Bank missions in 1947-48 of the program are to be led to development loan attained . .. such programs 50 From Reconstruction to Development in Europe and japan provide no adequate basis for program lending within the judging whether financial Bank saw it as a chance to investment will in fact be respond flexibly to borrowers translated effectively into the needs. At the same time, a concrete substance of develop- commitment to program loans ment.""' The issue of program would have provided an loans and whether or not the opportunity for increasing The issue ofprogram Bank should finance local annual lending rates. This loans and whether or not currency expenditures was issue would arise again in the the Bank should finance particularly relevant then, context of the Bank's lending local currency expendi- because the Bank was faced to Japan. tures was particularly with few well-planned projects relevant then, because the that needed only funds to The Bank's fifth annual report Bank was faced with few begin.'4 This lack of bankable (for 1949-50) provides insight projects is reflected in the into the Bank's understanding static performance of new loan of its role during reconstruction commitments during the and early development Bank's first five years (see lending. Priority was given to Figure 1). Supporters of specific project loans, as Figure 1 The transition from reconstruction to development Gross annual commitments, $US billions 6 0 0 ...................................................................................................... .... ..... ...... ..... 400 ....................................... ........................................... 400 ____ Reconstruction 200 --_-.------ . 0- 1948 50 5 54 56 58 60 51 The Evolving Role of the World Bank prescribed in the Articles of the preoccupations of a caring Agreement. The four investment banker, but of a reconstruction loans were banker nevertheless. The "special cases where project broader development issues investigations are neither gradually gained in importance necessary nor feasible." In during the 1950s, when more determining what projects Asian countries joined the were to be financed and how, Bank, and in the 1960s, with the Bank was deeply conscious the influx of newly of its responsibilities in setting independent African states. precedents. Borrowers were expected to apply gradually The First Five Years: An the same stringent criteria to Overview projects financed from their own resources as those applied During its first five years the by the Bank. They were Bank was driven by the need to pushed to be as self-reliant as prove to a skeptical world that possible: "where it is reason- it could be both a pioneering ably possible for a country to development lender and a defray the local currency part financially sound borrower. of its investment program from Operations were conducted its own resources without with one eye on member inflationary effects, the Bank governments' diverse requests believes that it should do so." for funds and the other on Wall Tl hroughout, the report The experience of El Salvador's Street. Although the Bank did stressed the importance of Rio Lempa electric power not have the means to make projects, their selection, project illustrated the Bank's more than a small contribution and their financing within willingness to help develop to European reconstruction, the the context of a borrowing local capital markets as an four loans were well-targeted, country's overall essential step toward increased and-above all-well-timed. development needs. financial self-reliance. It reflected the Throughout, the report stressed With the implementation of the the importance of projects, Marshall Plan, responsibility preoccupations of a caring pe o otheir selection, and their for financing Europe's import investment banker, but of financing within the context of needs, which far exceeded the a banker nevertheless a borrowing country's overall Bank's means in any case, was development needs. It reflected shifted back to the United 52 From Reconstruction to Development in Europe and japan States. For the Bank, these The World Bank and Japan, loans provided an invaluable 1952-61 learning experience in project appraisal and supervision, in When Germany and Japan negotiating loan agreements joined the Bank in 1952, the and in establishing a level institution had already made its playing field for relations with mark on international capital member countries as markets, gaining high credit As the Bank gained more borrowers. ratings in the United States. experience, it also became European exchanges were more flexible in The problems of reconstruc- increasing their trade in dollar- responding to members' tion in Europe, which heavily denominated Bank bonds. The needs-from mediation in overshadowed the Bank's early first nondollar issue had been disputes to technical days, gradually gave way to launched on the London concerns about economic sterling market in 1951. Nail- devlpnt focal development. The first biting days, when Wall Street economic missions established considered the Bank's credit capital markets working relations with future only as good as its U.S. share- borrowers and, in some cases, holding, were receding. On the helped to lay the foundations lending side, sixty-eight loans for national development represented gross commitments programs. Projects for infra- of $1.4 billion. Almost two- structure development domi- thirds of the value of this loan nated the early loan portfolio. portfolio was earmarked for A few program loans were development, mostly in Latin made during that period, but America and in Europe's they were too diverse to allow African colonies. The lending any significant conclusions to explosion in Asia was still to be drawn about their useful- come (see Figure 2). ness in development financing. As the Bank gained more expe- Japan was under the occupa- rience, it also became more tion of the Allied Forces from flexible in responding to mem- 1945 until early 1952. In those bers' needs-from mediation in seven years, United States aid disputes to technical assistance had covered more than for the development of local $2 billion in imports. Further capital markets. American support was 53 The Evolving Role of the World Bank assured-Japan was an essential anchor for subsequent financial ally at a time of serious regional stabilization, in much the same instability. The war in Korea way that European govern- had been under way for two ments had opted for U.S. dollar years, and China had become a parities to facilitate current- After the war, Japan was People's Republic in 1949, account operations among forced to provide for a dashing Western hopes of a themselves through the more politically compatible Marshall Plan-sponsored rapidly growing domestic Nationalist government. European Payments Union. population and for millions of Japanese repa- From the start of occupation, The Bank's First Contacts with triated from the former the Japanese economy had Japan territories from a greatly recovered rapidly. The 1949 reduced resource base. Dodge stabilization program By 1952, the Japanese economy (named for Allied Powers was experiencing the beginning economic advisor Joseph of an export boom driven by Dodge) introduced fiscal and U.S. procurement for the monetary austerity where there Korean war. The boom, howev- had been runaway government er, was more apparent than spending and rapid inflation. A real. In volume terms, exports single exchange rate, fixed at were still less than yen 360 to the U.S. dollar, one-third of pre-war levels and replaced the multiple-rate its imports about half. Japan system. This provided the ceded its overseas territories- Figure 2 And the shift away from Europe Percentage of World Bank loans $1.4 billion $5.1 billion Eu rope 27% Other Europe Other 50% 50 66% Japan 7% 1952 1960 54 From Reconstruction to Development in Europe and Japan among them Formosa and JAPAN BECOMES A MEMBER. In Korea. These areas and Man- 1950, Japan expressed interest churia, in 1938, had absorbed in joining the Bretton Woods 61 percent of its exports and institutions during informal supplied 40 percent of its contacts with the IMF. imports. They had provided Membership in the Bank and the bulk of Japan's imported the Fund was seen by the staples-rice, soya beans, Japanese as essential for sugar, and industrial raw restoring the country's materials like coal, iron ore, international standing. Japan ongoing Bank lending and pig iron. After the war, signed the Articles of program as a Japan was forced to provide Agreement of the Bank and demonstration to the rest for a rapidly growing domestic the Fund in August 1952, of the world of its population and for millions of shortly after the Allied creditworthiness Japanese repatriated from occupation had officially overseas from a greatly ended. Then, and throughout reduced resource base. Japan the next fourteen years, Japan came to depend on the United considered an ongoing Bank States for a large part of its lending program an important import needs and incurred a seal-of-approval. This was one huge dollar-zone trade deficit of many factors that set the in the process. At the same relationship with Japan apart time, surpluses grew on trade from those with other member with the sterling area and other states. nondollar countries, due partly to Japan's restrictive trade and The Bank's first mission to exchange regimes. U.S. aid and Japan took three months, other forms of U.S. local starting in October 1952. The expenditures more than Bank's vice president, Robert covered the dollar-area trade Garner, participated in the deficit, so Japan was able to trip, raising the mission's accumulate substantial dollar profile and that of its meetings reserves. At end-1952, they with local officials and private could have paid for six months' sector representatives. The worth of imports, a situation U.S. State Department was then unheard of in most of closely involved in the Europe. preparatory work. One of the 55 The Evolving Role of the World Bank mission's objectives was to U.S. funds. The investment in find out how dependent Japan modernization and infra- was on special dollar incomes structure, which was both and how their gradual with- necessary and beyond local drawal might affect the coun- financing capacity, was a long try's creditworthiness. At that way removed from the kind of time, armistice discussions development in which the were under way in Korea, rals- Bank was involved elsewhere. development lending in ing the likelihood of an early Japan, the Bank felt that it reduction in U.S. spending in If there were to be develop- would be justifiable only the region. ment lending in Japan, the in the context of close Bank felt that it would be policy dialogue. But for The first mission's report was justifiable only in the context that to be achievJed, there t published in 1953. In the same of close policy dialogue. But needed to be only one year, the Bank told Japan for that to be achieved, there that-based on continuing needed to be only one official official outside lender- - U.S. balance-of-payments sup- outside lender-either the either the Eximbank or port-for the time being, the Eximbank or the World Bank. the World Bank Japanese economy "could Although Eximbank was support borrowings not in already in advanced excess of $100 million."'1 discussions concerning loans to the power sector, intense RESOLVING THE OVERLAP WITH U.S. negotiations led to an EximBANK. But before the Bank agreement under which the could start lending, something Bank would take over had to be done about the financing of the power overlapping activities of the projects. This was the first step U.S. Eximbank. The World toward possible further Bank felt that a lender-- lending, closely linked to borrower relationship on the ongoing discussions between lines suggested by the Japanese the Bank and the government would have to differ from of Japan on Japanese econ- current Bank practices. Japan omic policy. Having taken * was an industrialized country over from the Eximbank, the that had been able to finance World Bank had to move fast * post-war reconstruction so not to delay the power primarily with its own and projects. 56 From Reconstruction to Development in Europe and japan In Japan, meanwhile, a special between French bond holders law had to be passed under and the City of Tokyo'6 and which the Japan Development did much to cement the Bank could obtain World Bank relationship between Japan loans guaranteed by the and the Bank. Japanese Government. The various procedures were ENCOURAGING JAPAN'S REGIONAL completed within three TRADE. Japan had had several months, and the loan contacts with the Bank before agreement was signed in it officially joined. As early as October 1953. 1950, a Bank mission to Thailand had been in touch Before its first official mission with the Supreme Commander landed in Tokyo, the Bank for the Allied Powers in Japan, helped to pave the way for a General Douglas MacArthur,'7 resumption of Japan's pre-war to explore the possibilities for debt service. Had this not an increase in exchanges of happened, it would have been Thai rice for Japanese capital difficult for the Bank to start a goods. At that time, a wider lending program. Preliminary view of Asia-Pacific develop- loan negotiations with Chile in ment was taking shape within 1947 had established that a the Bank, one in which Japan A wider view of prospective Bank borrower would play a central role. needed a clear record for When the time came to scale Asia-Pacific development meeting past debt obligations down U.S. support, Japan was taking shape within before the Bank could commit would have to increase its the Bank, one in which itself. In September 1952, imports of food and raw Japan would play a therefore, the Japanese materials from nondollar central role government agreed with suppliers. New export representatives of pre-war opportunities would be sterling and dollar bondhold- created for other countries in ers to resume payments and the region that could undercut settlement of all interest and the high freight costs of principal in arrears. The Japan's trade with Europe and Bank's president, Eugene the Americas. In turn, this Black, later mediated would encourage investment personally in a debt dispute in the region's agricultural and 57 The Evolving Role of the World Bank mining potential. The Bank such loans, and the lending expected to contribute to this policy statement in the Fifth export-oriented regional Annual Report, 1949-1950 development; it also struck a cautious note. Local envisioned growing Japanese currency lending was capital participation. considered justifiable only under certain conditions, two Throughout its relationship of which would have been with Japan, the Bank has relevant in the case of Japan. been conscious of the First, "if the project to be international implications of financed is of such economic changes in Japan's investment urgency that the country's and trading policies. The Bank ability to undertake foreign hoped to play an advisory borrowing . .. is better utilized part in shaping these policies, in financing this project than which is why it wanted to be in financing the foreign Japan's only banker and to exchange costs of alternative keep the dialogue strong. projects." Second, "If it is Despite occasional misunder- apparent that unless foreign standings, Japan was aware exchange is made available to of the Bank's vision and the borrowing country to be agreed that "loans to Japan employed for imports . . . the for the modernization and local currency expenditures expansion of her industries involved in the project will sIf loans [to apan] were - will enable her to embark lead to inflationary limited to the import - upon the task of economic pressures."19 development of the countries contents of high-priority of South-East Asia."" But as Bank staff acquired a power, steel, and transport better understanding of the projects, the Bank would LOCAL CURRENCY LOANS. In April Japanese economy, the logic of lose both its capacity to 1952 the Japanese government such lending to Japan became influence project asked whether the Bank might irresistible. They were implementation and the be prepared to depart from convinced that if loans were opportunity to expand its specific project lending and limited to the import contents lending program make local currency loans. At of high-priority power, steel, that time, the Bank's and transport projects, the economists were divided about Bank would lose both its 58 From Reconstruction to Development in Europe and Japan capacity to influence project exports. The Bank was also implementation and the impressed by the fact that opportunity to expand its Japan did not appear to be lending program. From 1958 inhibited by the lack of credit- on, therefore, loans to Japan worthiness of some borrowers had important local currency and concluded that the "net expenditure components. effect of an acceleration of the repayment of Japan's loans to THE ISSUE OF PREPAYMENT. During the Bank might be to reduce Robert McNamara's steward- the flow of capital to the less ship of the Bank beginning in creditworthy developing 1968, the question arose countries in Asia."20 In the whether developed countries early 1950s, the Bank decided should prepay their Bank to lend to this industrialized obligations in order to release country because of Japan's more funds to developing potential to become an engine countries. for growth among less-devel- oped Asian economies. Just Almost from the start, Japan fifteen years later, that deci- The Bank was also was excluded from the pre- sion was vindicated in fact. . , z~~~~~~~~~~~mpressed by the fact that payment program because of its growing importance as an Working with the Japan Japan did not appear to be investor in the developing Development Bank inhibited by the lack of world. A dollar-for-dollar creditworthiness of some replacement of Japanese aid The government-owned Japan borrowers with Bank loans would not Development Bank (DB) was have been to the advantage of relatively unknown. developing countries. In 1967, Established in 1951 to provide four-fifths of Japanese net medium and long-term capital long-term capital exports went for industry, it replaced the to these countries on more discredited Reconstruction favorable terms than the Bank Finance Bank. JDB's charter could offer. Although much allowed it to borrow in foreign aid was tied, it was preferable exchange and to guarantee the to that on offer from other foreign currency debts of bilateral donors, because of the private firms, a great competitiveness of Japanese advantage at a time when 59 The Evolving Role of the World Bank foreign exchange remittances JDB. It was not always easy. were strictly controlled. The There were many lengthy World Bank loans provided discussions, particularly with JDB with its first foreign the steel companies, on what borrowing experience. did and did not constitute adherence to accepted finan- Initially, both the Japanese cial targets. Eventually, the government and the JDB were Bank recognized a special unhappy about two aspects of expertise within JDB and grew the loan agreements. The first confident enough to relinquish problem was opposition to the responsibility for loan negative pledge clause, which applications and the adminis- spilled over into adverse media tration of loan funds. A formal coverage. The second problem understanding was reached in related to the Bank's request 1958, after which it was JDB, for separate project agree- not the Bank, that asked for ments with power companies. collateral. The cumbersome JDB gained in stature as a Anxious to adhere to the pro- requirement for project ject-loan concept, the Bank agreements was also dropped result of its involvement wanted direct contact with the in favor of less-demanding in the Bank's lending .ultimate borrowers as part of subsidiary agreements. program and became a . its project supervision. The major force in building Japanese, on the other hand, JDB handled more than two- Japan's industrial base wanted as little interference as thirds of the $448 million possible in the affairs of the committed to Japan between electricity industry, particularly October 1953 and June 1961, with respect to setting power and the partnership between rates. Despite these initial JDB and the Bank paved the differences, an agreement was way for foreign participation in reached. Japan's industrial growth in the 1950s (see Figure 3). JDB A sound working relationship gained in stature as a result of developed between the Bank its involvement in the Bank's and JDB, during which the lending program and became a Bank continued to take an major force in building Japan's interest in the performance of industrial base. companies borrowing through 60 From Reconstruction to Development in Europe and Japan Japan's Relationship with the for a Bank commitment to a Bank two- or three-year lending program, and the Bank restat- Euen with all the The Bank's relationship with ed its policy of lending only knowledge gathered in Japan in the 1950s was not for properly assessed individ- Japan, continuity of Bank without difficulties. A steady ual projects and not on a fun- staff working on Japan, stream of Bank missions to gible, multiyear basis. When and the close contacts Japan braved the long journey news of such discussions maintained between the and demanding meeting reached the Japanese press, Bank and the Japanese schedules. Their reports reflect another series of critical arti- widely differing perceptions of cles were published. How or what the Bank could con- why the stories were leaked inevitably there were tribute. Even with all the was never clear, but they intro- misunderstandings knowledge gathered in Japan, duced hesitance and a distance continuity of Bank staff work- into the relationship between ing on Japan, and the close Bank staff and their Japanese contacts maintained between counterparts. the Bank and Japanese officials in Washington, inevitably there Difficulties also arose concern- were misunderstandings. ing development priorities. Partly, they were due to The Bank had been eager to different ideas of the encourage investment in agri- banker-client relationship. culture and financed land Repeatedly the Japanese asked development and irrigation Figure 3 The World Bank was the major lender in Japan's development in the 1950s. External lending to Japan, 1950-1960 Others WrdBn 21% rid/ Bo43 ank US private banks 15% US Export/Import Bank 21% Total lending from all sources: $854 million 61 The Evolving Role of the World Bank projects. But the Japanese Meeting in 1957, the Bank's authorities were reluctant to president Eugene Black gently see foreign borrowing for this reminded Japan's finance sector. They were particularly minister, Mr. Ichimanda, that concerned that such projects, the Bank's charter did not which required the line allow it to compete with pri- ministry to put up part of the vate capital in project-financ- funds, would increase extra- ing, if such capital was avail- budgetary government able on reasonable terms.2' spending and have an The pressure was on for Japan inflationary effect. to start looking for alternative sources of long-term funds. In the 1950s, periods of rapid economic expansion The Nagoya-Kobe Express alternated with brief bouts of Highway Project presented an disinflationary monetary ideal opportunity to find out restrictions. Despite this stop- whether international investors and-go process, Japanese GDP were interested in Japan. The It had always been . grew an average of 7.5 percent Bank was prepared to finance understood that Japan's per year. part of this project and recommended that Japan raise borrowing from the Bank By 1958, post-war recovery some of the balance through would be a temporary was over and the economy had an international bond issue. expedient related to post- taken off. It was becoming Eugene Black became person- war recovery, and that, if clear that Japan had outgrown ally involved in encouraging sufficient long-term its need for Bank loans and the Japanese to reenter the financing appeared to be that the lending program was New York market. Although available from other to be phased out. It had always unhappy about the uncertainty sources, the Bank would been understood that Japan's and risk of failure, the cease to be involved borrowing from the Bank Japanese decided that the would be a temporary market was more likely to expedient related to post-war finance a project that had Bank recovery, and that, if sufficient participation than one that did long-term financing appeared not. It took over a year to to be available from other complete the preparations, sources, the Bank would cease which included the Japanese to be involved. At the Annual Diet approval of the enabling 62 From Reconstruction to Development in Europe and Japan legislation. The issue was made valued-not only for the loans, in February 1959, and was a but also because Bank success. It was particularly involvement was seen as a In 1961 ... the two sides gratifying for all involved that positive endorsement of the came to an understanding. the terms for Japan's first post- country's economic policies. The Bank would proceed war venture into the capital with loans in various market were better than those But despite the initial difficulty achieved shortly before by Japan faced in gaining access to whles Jp ineg ase t Denmark, a well-established foreign capital markets, access borrower. The successful issue was only a matter of time. In capital market operations. marked the beginning of the 1961, it fell to the Bank to end After that, the lending end of Bank lending to Japan. the lender-borrower relation- door would be closed but ship, and the two sides came to not locked From 1959 on, Japan's an understanding. The Bank capacity to borrow on would proceed with loans in international capital markets various stages of negotiation, became an increasingly while Japan increased its capital important factor in determin- market operations. After that, ing the size of Bank the lending door would be commitments to individual closed but not locked.22 projects. Japan had a large program of high-priority When the United States public-sector investments to be introduced the Interest financed in areas that had been Equalization Tax (IET) in relatively neglected. Local 1963, it came as a blow to savings and investment rates Japan's financing expectations. were already high and could The IET was introduced as a not be raised much further. It U.S. balance-of-payments was logical for the Japanese to measure to stem capital look to foreign financing for outflows. At that time, U.S. these projects, provided that market interest rates were the price was right. Bank loans lower than those in most were attractive, and the foreign markets, making the government had learned to United States particularly respect and live with the attractive to foreign borrow- Bank's ways of doing business. ers. The tax raised the cost to The relationship was highly U.S. citizens of investing in 63 The Evolving Role of the World Bank securities issued in U.S. and largest loan to Japan. markets by non-U.S. borrow- The $100 million highways ers. Its effect was similar to a loan ended a thirteen-year tariff barrier and reduced for- lending program, during eign issues in the United States which a total of $862 million (as intended) until it was with- had been committed, mainly Starting from a strictly drawn in 1974. for infrastructure and heavy industry. Paradoxically Japan, The Bank helped to negotiate then the Bank's second largest Bank's role evolved to a partial IET exemption for borrower in Asia, was an include advice on the use new Japanese issues. Even so, increasingly important of capital markets, media- the tax was likely both to supplier of development aid tion, and partnership in reduce the amount of capital for the region. Japan would providing aid to Asia's forthcoming and to increase its become a strong supporter developing countries. cost. The situation was of and contributor to the Today's vitally important considered serious enough for Asian Development Bank, Bank-Japan collaboration the Bank to shelve the 1961 begun in 1966. understanding and resume owes mucb to mutual loan operations. Nevertheless, Relations with Japan: An respect, not easily earned, re t nthe Bank insisted that Japan Overview in those early years. continue to make every effort to raise the maximum possible In the first two decades of the in private capital markets Bank's operations, its worldwide,23 not only in the relationship with Japan went United States. through many stages. Starting from a strictly banker-client The new lending program base, the Bank's role evolved did nothing to resolve the to include advice on the use of dilemma created by Japan's capital markets, mediation, conviction that its credit and partnership in providing rating in world capital markets aid to Asia's developing depended on parallel loans countries. Today's vitally from the Bank. The important Bank-Japan inconclusive dialogue collaboration owes much to continued through the second mutual respect, not easily lending period until 1966, earned, in those early years. when the Bank made its last 64 From Reconstruction to Development in Europe and Japan In contrast to the European provided the means to The connection with lending program, Bank partici- influence the design, Japan helped to define pation in Japan's post-war organization, and execution of certain key aspects of the recovery came after the worst projects even when the import B Bank's relations with its was over. The industrial content was minimal. That . . * ~~~~~borrowers, particularly modernization and upgrading flexibility gave the Bank a say the need to consider of infrastructure, which were in encouraging moves toward both necessary and beyond the tighter financial discipline in member countries' capacity of local financing, the electricity and steel different and special were also very different from industries, for example, and circumstances in tailoring the type of development the helped to set leading-edge credit programs. Bank was becoming involved in construction standards for elsewhere. Bank mission work Japan's new motorways. and personal contacts between Japan's finance ministers and The Bank was the single largest Bank management at the source of external finance for Annual Meetings came to play Japan in the 1950s, much of it an important part in keeping disbursed through the Japan the lending program moving. Development Bank. Cooperation with JDB The connection with Japan provided an early opportunity helped to define certain key to establish acceptable aspects of the Bank's relations procedures for indirect lending with its borrowers, particularly to private sector industries. But the need to consider member it was as the successful inter- countries' different and special mediary between Japan and circumstances in tailoring foreign investors that the Bank credit programs. For Japan, this made its most important led to a series of "impact" loans contribution to the country's to finance local expenditures. post-war recovery. It was clear Such loans were exceptional by the late 1950s that the Bank among the Bank's operations at could not substitute for private the time. They were attractive capital flows and therefore to the Bank because they would not be able to justify 65 The Evolving Role of the World Bank lending to Japan for much worked hard to help Japan gain longer. The country would access to international capital have to rely on international markets. The Bank also took an capital markets for its outside active part in preparing the financing needs. However, the way for Japan's first post-war Bank was also conscious of the issue on the New York market. fact that the existing banker- Throughout the lending period client relationship was ending in 1966, the Bank considered by the Japanese to supported Japan in its vital be an essential signal of credit- roles both as provider of aid worthiness to the outside to Asia's developing countries world. So, while continuing to and as the region's main make new loans, the Bank trading partner. The author is grateful to William M. Gilmartin, Jochen Kraske, and Yoshiaki Abe for their comments. 66 From Reconstruction to Development in Europe andJapan Notes 1. Proceedings and Documents of the UN Monetary and Financial Conference, Volume 1, p. 1219. 2. Columbia University Oral History: Richard Demuth p. 14, Davidson Sommers p. 26. 3. World Bank First Annual Report to the Board of Governors, September 1946, p. 9. 4. The deflator used was the World Bank Budget Price Index, FY1946-94, Budget and Planning Department. 5. Ibid. 6. Columbia University Oral History: Daniel Crena de Jongh p. 15. 7. Bank Archives: Memo on Meeting at the Ministry of Finance, Paris, May 25, 1954. 8. Bank Archives: Memo on Repayment of Loan to France, March 29, 1948. 9. The World Bank since Bretton Woods by Edward Mason and Robert Asher, quotation from the Netherlands Loan Application Recommendations R-121, August 6, 1947, p. 8, and World Bank Second Annual Report, 1946-1947, p. 18. 10. Rebuilding Europe, Western Europe, America and Postwar Reconstruction, by David W Ellwood (Longman), p. 90. 11. World Bank Third Annual Report, 1947-1948, p. 8. 12. Columbia University Oral History: Richard Demuth, p. 71. 13. World Bank Fifth Annual Report, 1949-1950, p. 8. 14. World Bank Fourth Annual Report, 1948-1949, p. 9. 15. Bank Archives: Loan Committee Meeting, March 29, 1954. 16. Columbia University Oral History: Eugene Black, p. 41. 17. Bank Archives: Letter from General MacArthur to the Bank's Engineering Advisor, January 10, 1950. 18. Bank Archives: Japanese Government Memorandum, August 17, 1954. 19. Bank Archives: Memo on Loans for Local Expenditure in Japan, July 17, 1958. 20. Bank Archives: Memo on Prepayment of Japanese Loans, May 28, 1968. 21. Bank Archives: Memo on Discussions with the Finance Minister of Japan, September 24, 1957. 22. Bank Archives: Letter from Mission Leader to Department Chief, April 2, 1962. 23. Bank Archives: Minutes of Meeting with Japan's Minister of Financc, September 26, 1965. 67 I The Food Crisis in South Asia The Case of India Uma Lele and Balu Bumb Thirty years ago, the world regarded India as an economic basket case. Today, India manages the world's largest public grain stock and has even become a minor grain exporter. In 1993, the coun- try's exports increased 20 percent (and are expected to continue Thirty years ago, the increasing rapidly), and the economy as a whole attracted world regarded India as $4.7 billion of foreign investment. These positive economic trends an economic basket case. make India one of the largest emerging markets in the world. Today, India manages the world's largest public Clearly India's (and the rest of Asia's) Green Revolution is a grain stock development success of major proportions-and one in which the World Bank has played a significant role. By increasing food production and creating millions of jobs, it allowed India to reduce dependence on food imports and lower the share of its population living in poverty from 50 percent in the 1970s to 30 percent by the end of the 1980s. It is also estimated that, by making land already under cultivation more productive, some 45 million hectares have been saved from the plow-land roughly equivalent to the land under India's best remaining forests. This triple phenomenon of enhanced food security, poverty alleviation, and environmental sustainability has been repeated in much of South and South East Asia. Moreover, enhanced food security and the ability to maintain low urban food prices and wages, combined with global political and economic changes have allowed South Asian countries to follow the path of their East Asian neighbors towards economic liberalization. 69 The Evolving Role of the World Bank India's repeated food and The character of World Bank economic crises pushed two assistance to India has changed successive Prime Ministers, Mr. over time as it has learned from Lal Bahadur Shastri and Mrs. its experience. However, many Indira Gandhi, to try new ideas more lessons are still to be and innovative ways to develop distilled and applied. the country's agriculture. The advice of many assistance agen- The Green Revolution in South cies, including private United Asia' is one of the most States foundations, and some of important (yet misunderstood) the world's top experts on development stories of techno- agriculture, reinforced the logical change, international credibility of agricultural cooperation, and national per- reform. The international severance. It has been contro- character of the World Bank versial, for its contributions as q Mission's agricultural team (led well as its form. Clearly, much by Sir John Crawford) remains to be done to make increased its acceptability sure that South Asia's 300 mil- among the handful of strategi- lion poor do not have to go to cally placed Indian policy bed hungry, lacking employ- makers such as Mr. C. ment and income to buy the Subramaniam, India's then increased food supplied by the Minister of Agriculture. His Green Revolution. The Green Revolution in support was crucial at a time South Asia is one of the when Indo-United States Certain policies and institutions relations had soured. With the introduced to propel the revo- blessings of both prime minis- lution have also caused other misunderstood)... ters, Mr. Subramaniam and problems in their wake; exces- development stories of several other Indians played a sive use of chemicals, the technological change, key role in selling the reforms peaking in yields, increased international cooperation, internally to a wide array of salinization, silting of dams, and national perseverance skeptics. Their efforts laid the waterlogging, interregional foundation for sustained disparities, and mounting growth in agricultural agricultural subsidies. Today productivity in the irrigated water shortages threaten to parts of India and South Asia become India's greatest envi- for well over three decades. ronmental crisis. Interregional 70 The Food Crisis in South Asia specialization in cropping and transport; and additional patterns also need to advance investment in irrigation. With more rapidly. But with the pop- millions of scattered small farm The heart of the ulation having doubled in three households with little money or Revolution was the decades, both the environmen- access to physical or instit- introduction of miracle tal stress and poverty would utional infrastructure, public wheat and rice varieties, have been much worse without policy was crucial. Many which dramatically the Green Revolution-particu- agribusiness activities can now changed India's agri- larly in India's semiarid areas be handled easily by the private cultural production on which larger populations sector and by nongovernmental ,,, , , , ,, . , ~~~~~~~function, and increased would have had to depend for community organizations. In food security and livelihood. the early years of the Green Revolution, however, both The heart of the Revolution these sectors were far weaker was the introduction of miracle and food shortages were acute, wheat and rice varieties, which placing the burden for change dramatically changed India's on government. agricultural production function, and increased total Why Focus on India factor productivity. But technological breakthroughs South Asia contains 22 percent would have had little effect of the world's population and without policy reforms. New 47 percent of its poor. Within technologies required new South Asia, India accounts for policies, and India's leaders 74 percent of the population, responded to the challenge. earns 78 percent of its GNP, The country's evolving national and produces 77 percent of its agricultural strategy included a foodgrain. complex mix of price incen- tives; a goal-oriented national As the world's largest democra- agricultural research system; cy (and one of the oldest support services responsive to among developing countries), farmers; a system of short-run India was viewed by the West imports and long-run produc- as a counter to communist tion and distribution of fertiliz- China. India took center stage er and seed; a public system of in development planning in the grain procurement, storage, 1950s and the 1960s, attracting 71 The Evolving Role of the World Bank some of the best known west- Before the end of the 1970s, ern economists. They not only India commanded a dominant backed India's import-substitut- share in the Bank's lending for ing industrialization strategy, agriculture and rural develop- they also lent it intellectual ment.2 Even so, in per capita credibility by developing terms, and as a proportion of state-of-the-art multisectoral India's own public sector models to explore planning investment, the World Bank options. India was only share has been modest. IDA displaced as the model for lending to India averaged about development practice when $2 per person annually in East Asia achieved more rapid 1979-81, which was less than 2 and more broad-based percent of total investment economic growth. expenditures.3 Throughout the 1950s and In 1965-1967, when her food- 1960s, India attracted a grain imports constituted substantial amount of financial, 80 percent of the South Asian commodity, and technical total and 10 percent of the assistance from the United world cereal trade in 1965-67, States and became the largest India's food crisis was of glob- recipient of concessional IDA al significance. Following the lending. After Robert Green Revolution, India's Before the end of the McNamara became president share of total South Asian 1970s, India commanded of the World Bank in 1968 and foodgrain imports declined to a dominant share in the poverty alleviation became its just 16 percent in 1972 and Bank's lending principal goal, agricultural less than 7 percent in 1979 lending quadrupled in his first (see Figure 1). for agriculture and term i rural development m.As part of this commit- ment, India received 26 percent Undivided Pakistan and Sri of worldwide IDA credits, Lanka both enjoyed higher 60 percent of IDA commit- initial land productivity, higher ments (about $35 billion) to agricultural growth,4 and high- the South Asian Region, and er and more stable per capita 70 percent of total Bank com- domestic food availability, mitments (about $60 billion) to possibly because both had a the region through 1993. more assured initial supply of 72 The Food Crisis in South Asia water. (To maintain this sup- The World Bank and the ply, Bank agricultural United States (then India's assistance to both countries premier donor) played a central has focused on irrigation, for role in helping to change example, at Tarbela in Pakistan agricultural policies and institu- and Mahaweli in Sri Lanka). tions in India, and subsequently The Bank also played an active throughout South Asia. For role in bringing about the India, President Lyndon 1960 Indus Waters Treaty Johnson personally instituted between India and Pakistan, and oversaw a "short-tether" which expanded irrigation and requiring India to adhere to increased food productivity in policy reforms devised by the both countries, and averted World Bank. In the midst of regional conflict over water. India's worst post-indepen- Had there been an agreement dence food crisis in 1965-67, between the two countries on and following a decade of U.S. joint development and support to India, Johnson made management of waters, this food shipments available on a could all have been achieved at month-to-month basis. Indian much lower cost. policy makers found the experience humiliating, and the Figure 1 Declining dependency on food imports in India Cereal imports Kilos per person 2 0 --------------------------------- --------- --- --------------------------------------- --- -------- 15.. 1 5 \, - - - - - - ~~~~~~~~~~........................ . . .. . . . . .. . .. . . . 10.---- ------ O - - - -- - - -- - -- - - - - ......... . . . . . . . . . . . . . . . . . . . . . . . . 1965 1970 1975 1980 1985 1990 73 The Evolving Role of the World Bank episode soured relations with influenced India."6 The Bank's the United States. Johnson later experience in India helped it to described India's Green clarify policies regarding Revolution as "one of the most balance-of-payments support difficult and lonely struggles" for countries during a foreign of his presidency.5 This testifies exchange crisis, local and to the almost insurmountable recurrent cost financing, the difficulties that Indian policy broad-based use of local makers and the World Bank contracting, and poverty faced in instituting new agricul- alleviation. A vocal member of tural policies. the Bretton Woods conference that fashioned the IBRD in Johnson later described With considerable diplomacy, 1945, India also played an India's Green Revolution the Bank helped to convince important role in the creation as "one of the most India's policymakers that of IDA in 1960, and in trans- dlifficult and lonely agriculture was the country's forming the World Bank from chief priority. To help them its 1950s role as a financial struggles" of his presidency develop institutional and policy institution to a development reforms, the Bank also provid- bank in the 1960s and 1970s. ed concessional finance and foreign exchange partially to From Food Insecurity to make up for the loss of U.S. aid Growth after the 1960s. At the time of independence in For the next twenty years, Bank 1947, India's per capita income financing enabled India to was a mere $50 in nominal expand irrigation and agricul- terms, and had been declining tural credit and supply fertiliz- for almost fifty years. Average ers to millions of small farmers. daily per capita grain consump- Although its financial presence tion was only 400 grams, with was still small, the Bank's the poor consuming a fraction influence on Indian policy was of that.' Recurring droughts the greatest in the mid-1960s. and lagging growth in food- grain production forced India According to Mason and Asher, to depend on food imports. In ... India has influenced the drought years, such Bank as much as the Bank has dependence created both food 74 The Food Crisis in South Asia and foreign exchange crises. In the level of real wages, and the early years of scarcity, thus indirectly, the pace of surplus commodity aid from industrialization. Over 40 percent of India's the United States stabilized net foreign resource domestic food supplies, Yet despite the commanding transfers in the ten years ensuring food security for the position of agriculture, Indian from mid-1962 to poor. These shipments saved planners did not see agri- m c India the much-needed foreign cultural factor productivity as exchange to import inter- the obvious engine of aid, causing concern that mediate capital goods for broad-based economic growth, such aid had become a industrialization. Moreover, on which depended cheap disincentive to domestic the sale of food aid provided food, employment, income, production domestic revenue to finance savings, investment, and public expenditures, while markets for urban goods and keeping food prices, inflation, services. Agriculture was seen and real wages low. Over as a holding ground for surplus 40 percent of India's net for- labor while industry would be eign resource transfers in the the primary source of employ- ten years from mid-1962 to ment and income generation. mid-1972 came in food aid, causing concern that such aid But industrialization (based on had become a disincentive to a minuscule, capital-intensive, domestic production.8 heavy industrial sector) was unable to generate sufficient Agriculture, which provided jobs to achieve full employ- employment for almost ment. Planners considered 75 percent of India's popula- institutional changes (such as tion, was a major source of raw land reform, cooperative materials for industry, and farming, and community devel offered a large market for opment) and infrastructure goods and services. Indian development (such as irriga- consumers, particularly the tion) to address the basic needs poor, spent over two-thirds of of India's farm households. their budget on food. Given the Raising the motivation of the large share of food consump- largely illiterate Indian farm tion in the urban consumer households was considered an budget, food prices determined important challenge. 75 The Evolving Role of the World Bank Influenced by the Soviet state allocative efficiency of and China's cooperative farms, traditional farming and stressed Indians saw the importance of the importance of technical institutional reforms and change in increasing farm investment in irrigation. But productivity. Influential people Foodgrain production fell the public sector continued to in India (such as A. P. Jain, then by more than five million focus on-and monopolize- Minister of Food and tons in 1957-58, such "basic" industries as steel Agriculture) also began to stress contributing to India's and power. the role of price incentives in first major balance of promoting growth in farm out- payments crisis. In 1958, In line with development think- put, but such advice was slow India cut back on its ing of the time, donors such as to penetrate the ruling party, the World Bank and USAID which favored institutional investment program and wholeheartedly supported the reforms.9 Foodgrain production agreed to give higher Indian priority on heavy fell by more than five million pDriorty to agriculture - industry and infrastructure tons in 1957-58, contributing development and underwrote to India's first major balance of India's economic strategy payments crisis. In 1958, India financially. Nevertheless, from cut back on its investment the mid-1950s, the thrust of program and agreed to give World Bank and U.S. advice on higher priority to agriculture. agriculture had begun to promote the importance of The World Bank coordinated price incentives, technological donor efforts to meet the clhange, investment in irrigation Indian crisis and created one of and fertilizers. The intellectual the first Bank-led Aid foundation for that view began Consortia. It also established a to emerge with, among others, resident mission in New Delhi. W David Hopper's work on But problems with foodgrain Senapur village in the state of production and the balance of Uttar Pradesh in the 1950s on payments turned out to be far the theme of the poor but from temporary. In the early rational farmer, which later 1960s, food production formed the basis of T.W stagnated. Two successive Schultz's book, Transforming droughts in 1965-66 and Traditional Agriculture. 1966-67, caused annual food Hopper's work emphasized the imports to rise to 10 million 76 The Food Crisis in South Asia and 11 million tons, respec- India was also engaged in a tively. The droughts also came dispute with the United States at a time when the Third Five over investment in a public Year Plan's ambitious targets of sector fertilizer plant by industrial expansion had Bechtel Corporation. It was increased import demand for disappointed at not receiving intermediate goods while sufficient military aid from the exports had stagnated-creating United States during wars with another balance of payments China (in 1962) and Pakistan crisis. India lacked both the (in 1965), and it opposed the foreign exchange to import the Vietnam War. Donors were food and the port and handling beginning to suffer from aid capacity to receive, store, fatigue. and transport massive food aid shipments from the By the mid-1960s, weaknesses United States."0 in Indian development policy- and particularly the failure of Changes in the global political the agricultural sector-gener- and food situation and ated a consensus among worsening bilateral relations outsiders that India's policies with the United States and its and programs in agriculture neighbors combined to weaken needed change. By 1965, India's external position. Indian scientists were field United States food surpluses testing many new varieties of had also begun to decline. wheat developed by Dr. Two successive droughts President Johnson was Norman Borlaug in Mexico. In i 1965-66 and 1966-67, reluctant to go to Congress for November 1965, Orville X . ~~caused annual food more food aid for India. By his Freeman, U.S. Secretary of own admission, the lives of Agriculture under President imports to rise to 10 million and 1 1 million almost 50 million Indians were Johnson, signed a secret agree- at risk. He held out against the ment (the so called Treaty of tons, respectively urging of all his advisers and a Rome) with India's Minister of "shrill (United States) press" to Agriculture, C. Subramaniam, induce other nations to lend committing India to extensive India a helping hand in the agricultural sector reforms. short run, to make India That agreement was followed self-reliant in the long run." by the "Woods-Mehta" 77 The Evolving Role of the World Bank agreement in May 1966, Agricultural Prices Commission between the World Bank (APC) to ensure the systematic President George Woods and formulation of floor prices the Indian Planning Minister, (based on cost of production Asoka Mehta. The agreement and other considerations) on a was intended to create a regular basis. Crawford also well-focused program of supported a Food Corporation incentives, technologies, and of India (FCI) to implement an institutional reforms for trans- effective price support forming India's agriculture. The program."2 The APC and FCI World Bank's controversial Bell became the two major pillars of Mission Report in 1965 also set India's agricultural price policy out clearly India's macroeco- over the next thirty years. nomic and agricultural sector More than thirty years later, problems, but its recommended 1991-92, the public sector devaluation of the Indian rupee procured 18.3 million tons of took the spotlight away from grain and made available Sir John Crawford's important 18.8 million tons for retail agricultural sector review. public distribution through 8,000 fair price shops. About observed that India's The Crawford report observed 80 percent of that procurement farmers were unlikely to that India's farmers were came from only three states. adopt new technology unlikely to adopt new This system of public unless there was public technology unless there was procurement and distribution, intervention through price public intervention through however, is now in need of supports and an efifective price supports and an effective major reform. pvublic system of grain public system of grain procure- ment, which would increase The Crawford Report also profitability by raising and recommended: would increase profit- s stabilizing producer price ability by raising and levels. It recommended an * Substantial increases in stabilizing producer price increase in support prices for imports of fertilizers and their levels rice (which were raised by allocation to irrigated areas nearly a third from 1964 to and to progressive farmers 1969) and wheat (raised by who had the capacity to take almost half). It also supported risks in the adoption of new the newly established technology. 78 The Food Crisis in South Asia * A timely supply of high- with Indian agricultural quality, improved seed. scientists to undertake experiments on high-yielding * A liberal and timely supply varieties of wheat (developed in of agricultural credit to Mexico at the International The Rockefeller facilitate the use of fertilizers Center for the Improvement of Foundation, meanwhile, and other inputs. Maize and Wheat) and rice had been working with (developed in Taiwan and at the * Cost-effective and socially International Rice Research scientists to undertake desirable use of fertilizer Institute in the Philippines). subsidies where prevailing Both had shown dramatic experments on high- prices discouraged the liberal results. Where there was ample yielding varieties of wheat use of fertilizers. water and high doses of fertiliz- . . . and rice ers, they yielded 6 to 8 tons as * Reliance on and expansion compared to 1 to 2 tons with of the irrigation system. traditional farm practices and few inputs. Yet in India, there Influenced by the Crawford was considerable resistance Group, Bank lending to India from scientists and admin- increased in the 1970s, istrators. The Rockefeller contributing significantly to Foundation concluded that maintaining the momentum of India's agricultural research, the Green Revolution. The extension, and seed production Bank was less successful, system needed radical revamp- however, in mobilizing the ing if it was to meet the practi- promised aid to meet India's cal needs of Indian farmers. It growing import needs. Net recommended administrative foreign resource transfers changes in the Indian Council (20 percent of both gross of Agricultural Research (ICAR) domestic investment and cen- including vesting leadership in tral government expenditures scientists rather than adminis- in 1966-67) declined to a mere trators and tying salary and 1.7 and 1.9 percent in less than promotions to well-defined five years in 1970-71."3 performance standards for farmer-oriented researchers. The Rockefeller Foundation, USAID, which supported policy meanwhile, had been working changes, recommended a land 79 The Evolving Role of the World Bank grant system of universities regional income disparities, responsible for research, social scientists opposed the extension, and training in place concentration of fertilizer and of the departments of credit in states with the most agriculture at the state level. water control. Some argued Such reshaping was crucial to that land reform needed to ensure the high returns to the precede the introduction of pricing, fertilizer, and credit new technologies. policy reforms recommended by the Crawford Group. India's economic crisis and inadequate foreign aid pushed To implement reforms in the Prime Minister Shastri and face of widespread opposition, later Mrs. Gandhi to go along Prime Minister Shastri, in a with the recommendations of shrewd move, persuaded the the World Bank and United strong and able C. Subra- States. But the prime movers maniam to take on the behind the reforms, apart from agricultural portfolio. Mr. C. Subramaniam was his To implement reforms Opposition came from several Secretary of Agriculture, Mr. in the face of widespread quarters. India's scientists Sivraman; and the Director Ministr .resisted the changes being General of ICAR (and later oDpposition, Prime Mtntster sought in research. Leftist Secretary of Science and Shastri, in a shrewd move, political parties opposed the Technology), Dr. M. S. persuaded the strong and importation and distribution of Swaminathan. Scores of Indian able C. Subramaniam improved seed on grounds that scientists and administrators to take on the agricultural it increased India's dependence played a key role in adapting portfolio on the West. The Ministry of and multiplying hybrid wheat Finance was reluctant to and rice and developing the allocate foreign exchange and network of services to meet the budgetary resources to import complex needs of India's seed and fertilizer and pay for millions of farm households. In higher producer prices. State the midst of a foreign exchange governments opposed the crisis Mr. Subramaniam divestment of research and persuaded India's cabinet to extension, to autonomous import 18,000 tons of wheat agricultural universities. On the seed from Mexico. Ten years grounds that it would increase later, India had raised producer 80 The Food Crisis in South Asia prices and instituted a large imports of fertilizer and other food procurement system, inputs. Although lending for adapted and developed over agriculture continued to 200 wheat and rice varieties, increase until the mid-1980s, and greatly expanded the agriculture's share of total Although the Bank played supply of irrigation water, agri- lending dropped to 33 percent only a small role in cultural credit and fertilizers to in 1982-87's and has fallen creating the physical and millions of small farmers. sharply in both absolute and institutional infrastructure relative terms since. for launching the Green Sustaining the Revolution Revolution Indians saw This decline stems from the Although the Bank played only global shift toward increased to agricltue in the a small role in creating the efficiency, an emphasis on physical and institutional (macroeconomic) policy mid-1960s as crucial to infrastructure for launching the reforms, the role of markets the launching of the new Green Revolution, Indians saw and prices, and a reduced strategy its assurance of assistance to emphasis on public invest- agriculture in the mid-1960s as ments. Growing food surpluses crucial to the launching of the in OECD countries, and declin- new strategy."4 More ing world prices of cereals and significantly, the Bank became a fertilizers reduced returns on long-term partner of the investment in irrigation and Government of India. Bank fertilizer production capacity. lending to India for agriculture India's agricultural subsidies, and rural development in the which had grown to equal total McNamara years (1968-8 1) planned public investment in increased from $124 million in agriculture and its growing 1950-68 (6 percent of all foodgrain stocks also became a lending to India) to $687 mil- cause for concern.'6 Moreover, lion (31 percent) in 1969-74. the expanding lending came at Agricultural lending increased the expense of addressing even more sharply to about fundamental problems in $4.2 billion (50 percent) in Indian agriculture. This led to 1975-81. In addition, through growing criticism by Bank staff nonproject lending in about the quality of the agricul- 1967-76, the Bank provided tural portfolio and externally $311 million to support by environmentalists about, for 81 The Evolving Role of the World Bank example, the adverse environ- accounted for a small share, mental impact of irrigation and they were instrumental in chemical inputs. Such criticisms alleviating seed shortages (for have contributed to a decline in example, the Tarai Seed the Bank's global lending to Project). They also spread new agriculture, of which India was crop technologies among only a part. millions of small farmers through location specific India's share in the Bank's adaptive research, training and total agricultural lending to visit extension. Likewise, area the South Asian region, development projects played a which stood at 73 percent small role, but financed in 1975-8 1, declined to technology and infrastructure 56 percent in 1988-93. The components. Forestry and number of projects financed by watershed management the Bank showed a similar followed later. trend. It had increased from nine in 1950-68 to twenty-four IDA has played a critical role in 1969-74 and sixty-two in in sustaining the Green 1975-81. By 1981, agriculture Revolution, financing eighty- and rural development and six of the ninety-six operations related lending accounted for by 1981 and 135 of the 159 48 percent of the projects and operations by 1993. It has also programs financed by the Bank provided over 90 percent of IDA has played a critical in India, but that dropped, to lending commitments in the role in sustaining the 26 percent in 1988-93. 1968-81 period. Without Green Revolution, financ- IDA, the Bank would not have ng eighty-six of the nine- Irrigation, fertilizer, and credit been able to promote food projects dominated the Bank's production in India. Like most ty-six operations bv 1981 agriculture and rural develop- other developing countries, ment portfolio, accounting for India was hesitant to borrow tions by 1993. It has also over 67 percent of the total. for agriculture on IBRD terms provided over 90 percent Seed, research, and extension because of the long gestation of lending commitments were other agricultural projects lags in achieving response in in the 1968-81 period financed by the Bank to sustain agriculture, its subsistence the Green Revolution. rather than export-oriented Although these projects nature, and the difficulty in 82 The Food Crisis in South Asia capturing benefits of technolo- major restructuring for gy generation from a large improved efficiency and number of dispersed farmers. growth. Fertilizer Supply Seed Production The Bank's support for fertiliz- Despite large initial imports, The Bank supported seed er import and production was shortages of the new high production through an crucial during India's extreme yielding varieties of seed for IBRD loan of $25 million fertilizer shortages in the late wheat, rice, and maize became in 1976 and an IDA 1960s and the 1970s. Without widespread in the late 1960s. credit of $16 million in increased fertilizer use, food This called for supervision and 1978. India's seed production would not have quality control at various stages , , 1 , ,, ,, ,. , , . ~~~production increased from increased to the level it did. of breeding, production of 420 tons in 1966 Funds for the import of foundation seed, and commer- fertilizers, plant protection cial production of seed for a to 28,000 tons in 1973 material, and agricultural market which had not yet been and over 200,000 tons by machinery augmented input developed. High quality seed 1981 supplies in the short-run, while supply needed public invest- lending for the development ments in plant and equipment and rehabilitation of fertilizer for screening and drying. In production built new capacity. addition to the 1969 loan, the By making free foreign Bank supported seed produc- exchange available and tion through an IBRD loan of requiring international $25 million in 1976 and an competitive bidding, World IDA credit of $16 million in Bank projects ensured internal- 1978. India's seed production ly compatible and technically increased from 420 tons in efficient plants. But increased 1966 to 28,000 tons in 1973 fertilizer use in irrigated areas and over 200,000 tons by has now become a cause for 1981. Now a combination of concern as marginal returns to rapid liberalization of seed fertilizer use are peaking. production and distribution, Fertilizer subsidies have now combined with stringent public become a major source of regulation of quality control, concern for the budget, and the will greatly accelerate diversifi- fertilizer sector is in need of cation of Indian agriculture. 83 The Evolving Role of the World Bank Credit ongoing large scale surface irrigation projects and, later, Bank lending to rural credit improvements in distribution projects in 1970-74 amounted systems. This was followed by to more than $325 million, investments in rehabilitation directed mainly at developing and modernization of the groundwater resources in the existing irrigation systems, private sector. While lending to construction of medium and India's irrigation systems public sector tubewells was minor irrigation schemes, and are among the largest in less successful, the Bank has introduction of new technology the world. They present estimated that private sector for public tubewells. complex technological, tubewell irrigation had institutional, and economic rates of return of India's irrigation systems are well over 30 percent, and have among the largest in the world. environmental challenges w impacted over 2 million They present complex techno- in design and manage- hectares with at least that many logical, institutional, and ment, with particular . households. The Bank's environmental challenges in difficulties in efficient contribution to the develop- design and management, with water allocation across ment of a viable rural financial particular difficulties in states, watersheds, house- infrastructure through support efficient water allocation across holds, seasons, and crops of the Agricultural Refinance states, watersheds, households, and Development Corporation, seasons, and crops. These however, has been undermined problems are due partly to by poor loan recovery, subsi- intense competition among dized interest rates, and states for acquiring control of political interference in the scarce water resource. To management. The future of establish political support for Bank involvement in agricul- acquiring water rights, the ture credit remains uncertain. states have tended to design irrigation systems stretching Irrigation access among as many farmers as possible. The resulting The Bank provided about $1.6 overinvestment in physical billion to projects with the infrastructure and underinvest- potential to irrigate 5 million ment in design of institutional hectares. Its early support arrangements to deal with the focused on the completion of complex technical, equity, and 84 The Food Crisis in South Asia efficiency issues has In reality, irrigation problems contributed to a suboptimal tend to be highly diverse, performance of both Indian complex and inextricably schemes and the Bank-financed related to climatic and socio- projects. cultural conditions. Their solution requires active cooper- India has yet to develop a ation among competing states national long-term strategy for and location-specific approach- water management. Due to the es with the active participation politically sensitive nature of of the local communities in the water allocation issues among design and implementation of states, the Bank has been kept water management systems." out of the loop. This has forced it to focus on individual The challenges still facing the schemes rather than the Bank and the Indian govern- development of river basins. ment in the area of water The Bank introduced many management include institu- innovations in its water tional reforms of interstate management strategies, such as allocation of water resources Irrigation problems tend canal lining, the command area and local organizational to be highly diverse development programs, arrangements to deal with tobex hgl divexrse underground piped distribu- water distribution among cmled ineticabl tion, sprinkler irrigation and farmers, the problem of rent- related to climatic and others. Some of these techno- seeking among irrigation sociocultural conditions. logical innovations were officials, and the need for a Their solution requires introduced to solve institution- further reform of rate active cooperation among al problems, and others to structures for both greater competing states and improve the performance of efficiency in distribution and location-specific the main irrigation systems. better cost recovery.' approaches with the active Although these innovations participation of the local proved useful in some areas, Research and Extensionp their uniform applicability communities in the design 'hl nform apph'cablllty across regions, agro-ecosystems Although Bank involvement il and implementation and cropping patterns have agricultural research has been of water management resulted in increased costs modest, the Bank has consid- systems without significant improve- ered its training and visit ment in performance. projects to be very successful. 85 The Evolving Role of the World Bank These promote a message- requirements, the region will oriented approach through a need adequate foreign Less th7an ten years after highly structured training of exchange to import food. The the introduction of the extension workers and their shrinking global capacity to new agricultural strategy systematic interaction with deliver enough food and fertil- in India in 1966-67, the farmers. The principles crucial izers could well affect world area under high yielding to its success include: a time- prices. Future increases in varieties had expanded bound program of farmer visits production, moreover, must be from less than 2 million - and training by extension brought about with less incre- hectares to over workers, permitting close mental use of modern inputs, supervision and merit-based such as water, fertilizers and 30 million bectares. It promotion; concentrated pesticides. The poor must reached over 60 mgilion efforts to achieve a clear and command enough income to hectares in 1990 visible impact by working on have access to food and other the most important crops essentials for a healthy life. within the most promising These are daunting challenges. agro-ecosystems; regular visits and field trials with selected Less than ten years after the farmers who offer the best introduction of the new prospects for a rapid spread of agricultural strategy in India in innovations; and linkages with 1966-67, the area under high a vigorous farmer-responsive yielding varieties had expanded research program."9 Whether a from less than 2 million uniform approach to extension hectares to over 30 million across diverse production con- hectares. It reached over 60 ditions is desirable may need to million hectares in 1990. Over be examined. the same period, fertilizer con- sumption rose from 1.1 million Assessing the Revolution to over 12.5 million tons. Per hectare, use increased ten-fold, By the year 2000, the combined from 7 to 70 kilograms. From domestic production and crop year 1965-66 to 1988-89, imports of the South Asian irrigated area expanded from region will have to feed 30 million hectares to 45 mil- 1.4 billion people and by 2025, lion hectares increasing by two billion people. If domestic 50 percent the area double- production cannot meet these cropped, which now accounts 86 The Food Crisis in South Asia for 27 percent of the sown Output Gains area. Most importantly, by 1989-90, average Indian yields The combined impact of these had increased by more than developments was that food- 100 percent over the drought grain production increased by year yields of 1965-66 and 2.7 percent a year in 1966-90, 1966-67 and by 85 percent compared with 2.3 percent in over the predrought record 1950-66. This was a small yields of 1964-65. Yield increase in overall growth. growth, of course, has been far However, the qualitative greater in the areas covered by difference was immense. Much the Green Revolution.20 of the increase in production Figure 2 Increases in agricultural production are mainly due to improvements in yields INDEX 1949 =100 100- Cultivated PRODUCTION 271 a a ~~(AREA x YIELD)20 460 -10 1989 40- t t - 1 °' .l 1980 20- _ I I . I 0 20 40 60 80 100 120 140 160 180 200 220 -11( Yield > INDEX 1949 =100 87 The Evolving Role of the World Bank prior to the Green Revolution fiscal 1989, 36 percent of food- came from area expansion. Most grain production and 80 percent came from increased yields and of the public cereal procurement multiple cropping on irrigated came from three states that land. Indeed, area under cultiva- account for only 23 percent tion declined in the early 1990s of India's total area under without a decline in growth of foodgrains.2 production (see Figure 2). Because the new technologies The growth in food production were neutral as between large has enabled India to manage and small farms, small farmers disastrous droughts without gained substantially. Employ- food aid-even in fiscal 1979, ment, both direct and indirect, when foodgrain production surged with the spread of new plunged by 22 million tons.-" technologies."3 Recent evidence, The country's ability to stabilize however, suggests that the food supplies and prices for elasticity of employment with years has helped areas most respect to output has declined, vulnerable to food deficits, and that relatively little especially in regions such as additional employment is being Bihar and Eastern Uttar Pradesh. generated. This seems to be the result of the Revolution's Regional Inequities and success in agriculture and of Nevertheless, adoption Employment Growth multiplier effects in other of high-yielding varieties sectors of the economy, which has been concentrated Nevertheless, adoption of high- have caused considerable in the irrigated areas, - yielding varieties has been tightening of labor markets especially Pun jab, .concentrated in the irrigated leading to increased real wvages. areas, especially Punjab (where Certainly, the percentage of Haryana and . 93 percent of the area under population below the official Uttar Pradesh ;foodgrains was irrigated in poverty line is far lower in the 1987-89, compared to the Green Revolution states-for all-India average of 33.2 per- example in Punjab (7.2 percent) cent), Haryana (82 percent) and and Haryana (11.6 percent)- Uttar Pradesh (54.9 percent). than in Bihar (40.8 percent) and Productivity differences among Orissa (44.7 percent). Thus, the regions have widened so that in substitution of capital for labor 88 The Food Crisis in South Asia in these areas seems to be have nor been commensurate mainly a response to labor with the growth in food shortages and higher wages.4 production and that the By the 1980s, the Green reduction in poverty has been Revolution had begun to slow at best.25 Yet where spread to eastern Uttar 50 percent of Indians were Pradesh, Bihar, and Orissa, once poor, poverty today is which have abundant ground under 30 percent overall, and Many feel that benefits to water and fertile lands but poor 33 percent in the rural areas. the poor, particularly in infrastructure and institutions. India's large public food distri- terms of increased food In these states there is little bution system has also helped consumption, have not evidence of substitution of to keep urban food prices and been commensurate with capital for labor. Indeed, had real wages low. The low food the growth in food there been better-functioning prices in turn have helped . . . ~~production and that the institutions (that is secure land maintain political stabilityh tenure, efficient labor, capital and product markets, effective Another concern is the growth been slow at best. Yet state and local governments) of subsidies, which now rival where 50 percent of and better physical infra- planned public expenditures on Indians were once poor, structure (roads and irrigation agriculture in India. Fertilizer poverty today is under 30 systems), the Green Revolution subsidies alone amounted to percent overall, and 33 would have spread much more one percent of GDP,26 a major percent in the rural areas rapidly. Given the high risks fiscal, environmental, and and costs involved in adopting poverty concern. To the extent new technology, it is not that public sector resources are surprising that the Revolution allocated to subsidies, (which came first to better-organized benefit the few), they compete states and richer farms. But with resources that could be India's half-hearted land invested in poorer regions. reform effort has only tended Improvement in infrastructure to make tenants more insecure. helps spread new technologies Institutional reforms are faster and thereby creates more overdue. employment and generates food. Moreover, reduction of Many feel that benefits to the subsidies on irrigation water, poor, particularly in terms of fertilizers and electricity- increased food consumption, which now together amount to 89 The Evolving Role of the World Bank some $4.6 billion27 discourages argument for finding rational, their inefficient and wasteful scientifically sound solutions to use. In these areas, efficient the emotion-charged problems While the agricultural production, environmental pro- of poverty, food security and strategies proposed by tection, and fiscal prudence the environment. various groups for India converge. The World Bank's Contribution contributed to the Green That environmental and Revolution's success, the poverty concerns do not always The World Bank does not work implementation of these intersect is illustrated by the alone. All its operations in India strategies owes much controversial Sardar Sarovar were devised and carried out by to the fruitful partnership Dam Project. One of the largest Indians and often supported by between India and the projects of its kind in the other donors. For example, in World Bank and bilateral world, it is intended to produce irrigation, India had a large donors 1200 megawatts of electric internal capacity for develop- power, domestic water for ment before the Bank arrived. 40 million people, irrigation for The Bank helped to expand its 1.8 million hectares of land, supply and introduced engi- and 3.8 million tons of neering innovations. additional grain, enough to feed Agricultural research and the 18 million people. Its spread of new high yielding costs are environmental varieties of cereals were the degradation and the displace- result of long term collabora- ment of some 100,000 families tive efforts among the Bank, in a country that still contains U.S. official bilateral aid, over 200 million poor and private foundation assistance, whose population is projected and the Indian international sci- to increase by over 500 million entific community. Initially, the persons between 1990 and Bank helped spread the new 2025.28 Yet public debate over technologies more rapidly by irrigation remains sadly fostering seed and fertilizer pro- uninformed, and a systematic duction and increasing small analysis is called for to counter farmers' access to inputs and the incomplete measures now extension. Only recently has it proposed and implemented.29 become involved in supporting The success of India's Green research. While the agricultural Revolution makes a strong strategies proposed by various 90 The Food Crisis in South Asia groups for India contributed to experience shows that even Sequencing and phasing the Green Revolution's success, with spectacular technologies are important. It may be the implementation of these for irrigated agriculture, price necessary to make the strategies owes much to the incentives are essential to ::difficult political cboices fruitful partnership between generate and sustain rapid India and the World Bank and technological change. t and human bilateral donors.30 Although, if sustained, price financiaa supports become a crutch to resources on areas with For its part, India helped the inefficient farmers, they are the highest agricultural World Bank increase its under- crucial in the early stages of potential. In India, such standing of the fundamental development. Notwithstanding concentration provided interactions of agriculture, the many weaknesses of the policy makers with much poverty alleviation, and envi- seed-fertilizer technology, it has needed breathing space to ronmental development efforts. had a tremendous positive a co addzress complex second- In particular, the Bank saw how effect. Policymakers must not :generation challenges of a substantial presence on the throw the baby of the Green ground made it more respon- Revolution out with the bath semiarid areas and sive to India's actual needs. water, and instead must address environmental problems the complex second-generation in irrigated areas Lessons and Challenges problems. The World Bank-India partner- Sequencing and phasing are ship, in sustaining the Green important. It may be necessary Revolution, offers several to make the difficult political lessons for designing and devel- choices to concentrate physical, oping programs and policies to financial, and human resources combat hunger in other parts on areas with the highest of the world, especially Africa. agricultural potential. In India, such concentration provided * For agriculture to move policy makers with much need- forward, productive technology ed breathing space to address and sound and stable national complex second-generation policy are equally indispens- challenges of semiarid areas able. Promoting one at the and environmental problems in cost of the other will yield few irrigated areas. While irrigated results, particularly in rainfed areas were attended to first in areas. Moreover, India's India, in Africa, the choice 91 The Evolving Role of the World Bank often tends to be between areas human capital through of assured high rainfall and education and training and With pressures to reduce good soils and less well develop effective organizational bilateral aid generally and endowed areas with insufficient structures that can simul- the limited resources at physical and administrative taneously address the infrastructure. Donors in Africa productivity and environmental have generally sought to sustainability conundrum. national agencies as the address the problems of the Consultative Group on poorest of the poor households * With pressures to reduce International Agricultural in resource poor areas. It is bilateral aid generally, and the Research (CGIAR), the now time to consider the limited resources at the Bank becomes even more complex preconditions needed disposal of such international important as coordinator to achieve and sustain techno- agencies as the Consultative of partnerships and logical changes that can address Group on International mnobilizer of international the continent's growing Agricultural Research (CGIAR), information, funding .agricultural and food crisis.' the Bank becomes even more information, funding, important as coordinator of and advice 3 The human, physical and partnerships and mobilizer of institutional infrastructure international information, needed to disseminate proven funding, and advice. As a technologies is crucial. To facilitator, the Bank can help to ensure high rates of return on promote institutional reform at past investments in human and the national, state, and local institutional capacity, the Bank levels to promote technology in India helped expand existing transfer vital to the future of physical infrastructure. Today it the world's developing must help countries generate countries. The authors gratefully acknowledge the discussions with and comments from S. Aiyer, S. Barghouti, D.J.W. Berkoff D.E. Brown, G. Donaldson, R. Grimshaw, W David Hopper, WI. Jones, J. Kraske, R2 Narayan, D. Seckler, R. H. Slade, M.S. Swaminathan and C.H. Hanumantha Rao; research assistance from R. Cryan, and the generous help of C.P Zigler and his staff in locating documents in the World Bank's Archives. 92 The Food Crisis in South Asia Notes 1. This paper uses the Bank's traditional definition of South Asia as including Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka. 2. Lending for agriculture and rural development is defined to include both lending for agriculture and rural development (as defined in the World Bank's annual reports) and lending for related projects such as fertilizers, rural electrification, and others. 3. The World Bank, IDA in Retrospect, 1982. 4. Pakistan's agricultural output was growing at an annual rate of over 6 percent in the late 1960s. See IDA in Retrospect, 1982 for details. 5. Johnson 1971. 6. The World Bank Since Bretton Woods. The Brookings Institution. Washington, D.C. 1971 (p. 675). 7. Lele and Goldsmith 1989. 8. Lele 1991. 9. Rosen 1985. 10. Subramaniam 1979. 11. Johnson, ibid. 12. As a result of the recommendations made by the Agricultural Prices Committee chaired by L.K. Jha, the APC and FCI were permanently estab- lished in mid-1964. The World Bank's claim in IDA in Retrospect that these institutions were established as a result of Bell Mission recommenda- tions is incorrect. However, the Bank's insistence of incentive prices since the mid-1950s must have had some influence on their creation. 13. Table IX.1, page 219 in John W Mellor, The New Economics of Growth, Cornell Univeristy, Ithaca, N.Y. 1976. 14. See Subramaniam's statement in IDA in Retrospect. 15. Since the Bank's lending for ARD accelerated after the launching of the Green Revolution in India and McNamara's arrival at the Bank, we have divided the lending period into three periods, namely the pre-McNamara years (1950-1968), the McNamara years (1969-198 1), and the post-McNamara years (1982-1993). The latter two periods have each been further divided into two sub-periods of almost equal duration to show trends throughout the periods. 93 The Evolving Role of the World Bank 16. Balu Bumb "World Bank Conditionality in Irrigation Projects: An Assessment." Unpublished World Bank paper. May 1986. 17. Berkoff 1990, Frederikson and others 1993, and Wade 1982 18. Balu Bumb, op cit. 19. D. Benor and J. Q. Harrison, Agricultural Extension: The Training and Visit System, World Bank, Washington D.C., 1977. 20. Ministry of Agriculture. Indian Agriculture in Brief, various issues. Delhi: Government of India, 1978-1993. 21. This decline is almost identical to the sum of declines in foodgrain produc- tion in 1957-58 (5.5 million tons) and 1965-66 (17 million tons) both of which triggered major food and foreign exchange crises. 22. Based on Bank lending for 7 million hectares of additional irrigated area, realization of 80 percent of irrigation potential, and incremental yield of 2 tons to 2.5 tons per hectare, the Bank may be estimated to have con- tributed 11 to 14 million tons of additional annual food/grain production. 23. Mellor, ibid. 24. C. H. Hanumantha Rao. Agricultural Growth, Rural Poverty, and Environmental Degradation in India. Delhi: Oxford University Press, 1994. 25. Sarma 1981 and 1990. 26. World Bank. 1993 27. World Bank 1991. 28. David Seckler. The Sardar Sarovar Project in India: A Commentary of the Report of the Independent Review. Center for Economic Policy Studies: Arlington, Virginia, 1992. 29. G. Le Moigne., S. Barghouti, and L. Garbus. "Developing and Improving Irrigation and Drainage Systems: Selected Papers from World Bank Seminars." World Bank Technical Paper Number 178, 1992. D.J.W Berkoff, Irrigation Management on the Indo-Gangetic Plain. World Bank Technical Paper Number 129, 1990. 30. Ministry of Agriculture 31. Uma Lele, ed. Aid to African Agriculture: Lessons from Two Decades of Donors' Experience, Johns Hopkins University Press, Baltimore, 1993. 94 The Food Crisis in South Asia Works Cited Ahluwalia, Montek S. "Rural Poverty, Agricultural Production, and Prices: A Reexamination," in Mellor and Desai, 1985. Bardhan, Pranab K. "Poverty and 'Trickle-down' in Rural India: A Quantitative Analysis," in Mellor and Desai, 1985. FAO Agrostat-PC, 1993 (computer data set). Fuhrman, Peter, with Michael Shuman, "Now We Are Our Own Masters," Forbes, May 23, 1994, pp. 128-138. Johnson, Lyndon Baines. The Vantage Point. New York: Popular Library, 1971. Lele, Uma, and Manmohan Agarwal. "Four Decades of Economic Development in India and the Role of External Assistance" in Leleand Nabi, 1991. Lele, Uma, and Arthur Goldsmith, The Development of National Agricultural Research Capacity: India's Experience with the Rockefeller Foundation and its Significance for Africa, monographic the Managing Agricultural Development in Africa series, 1989. Lele, Uma, and Ijaz Nabi, eds. Transitions in Development. San Francisco: ICS Press, 1991. Mason, Edward S., and Robert E. Asher. The World Bank Since Bretton Woods.Washington: The Brookings Institute, 1973. Mellor, John W "Determinants of Rural Poverty." in Mellor and Desai, 1985. Mellor, John W The New Economics of Growth. Ithaca, N.Y: Cornell University Press, 1976. Mellor, John W, and Gunvant M. Desai, eds. Agricultural Change and Rural Poverty. Baltimore: The Johns Hopkins University Press, 1985. Ministry of Agriculture. Indian Agriculture in Brief, various issues. Delhi: Government of India, 1978-1993. Ministry of Finance. Economic Survey, various issues. Delhi: Government of India, 1974-1993. Paddock, William, and Paul Paddock. Famine, 1975!: America's Decision: Who Will Survive. Boston: Little Brown, 1967. 95 The Evolving Role of the World Bank Rao, C.H. Hanumantha. Agricultural Growth, Rural Poverty, and Environmental Degradation in India. Delhi: Oxford University Press, 1994. Report on India's Food Crisis & Steps to Meet It, sponsored by the Ford Foundation. Delhi: Ministry of Food and Agriculture, 1959. Rosen, George. Western Economists and Eastern Societies. Johns Hopkins University Press, Baltimore, 1985. Sarma, J.S. Growth and Equity: Policies and Implementation in Indian Agriculture. Washington: I.FP.R.I., 1981. Sarma, J.S., and Vasant P Gandhi. Production and Consumption of Foodgrains in India: Implications of Accelerated Economic Growth and Poverty Alleviation. Washington: I.F.1R.I., 1990. Schultz, T.W Transforming Traditional Agriculture. New Haven: Yale University Press, 1964. Seckler, David. The Sardar Sarovar Project in India. Arlington, Virginia: Winrock International, 1992. Sen, Amartya, "Food, Economics, and Entitlements," in The Political economy of Hunger, Volume 1, ed. by Jean Dreze' and Amartya Sen; Larendon Press: Oxford 1990. Sen, Amartya. "Dharm Narain on Poverty: Concepts and Broader Issues." in Mellor and Desai, 1985. Subramaniam, C. The New Strategy in Indian Agriculture. Delhi: Vikas, 1979. Wall Street Journal. "India's Market Reform Requires Perspective," June 6, 1994, P.'1. World Bank. India: Agriculture Public Expenditure Review. Washington, D.C., 1993. World Bank. Report on India's Economic Development Effort ("The Bell Mission Report"). 1965. IDA in Retrospect, 1982. 96 The Latin American Debt Crisis Sebastian Edwards When the debt crisis erupted in August of 1982, most analysts thought that Latin America was facing a liquidity problem. Thus in the early years of the crisis, countries improvised to generate massive resource transfers to the industrialized world. Argentina, Brazil, and Peru experimented with heterodox plans (which ignored the need for fiscal discipline) to reduce inflation. These were the last massive adjustment efforts based on the traditional Latin American structuralist approach to economic development. Their rapid failure ignited deep soul-searching among political leaders and intellectuals in the region.' Since 1987-88, economic thinking in Latin America has been transformed. Protectionism and interventionism have given way Since 1987-88, economic to openness, market orientation, and competition. Four main thinking in Latin America causes exist for this transformation: the realization that the bas been transformed. traditional, government-led development policies failed to create Protectionism and a modern economic system; the example of East Asia, with its interventionism have high growth; the fall of Eastern Europe and the realization that given way to openness, socialism had led to generalized failure and frustration; and the market orientation, and policies of the multilateral institutions-especially the competition International Monetary Fund (IMF) and the World Bank-that conditioned their funds on the implementation of major reforms.2 97 The Evolving Role of the World Bank All this resulted in a new Latin design of specific policies. Bank American consensus driving the resources helped cushion the The initial reaction by region's reforms.3 This severity of the crisis, especially consensus, shared by most during its early years. And Bank the creditor countries policymakers and analysts in conditionality provided disci- was that the debt crisis the region, is based on four pline and financial credibility to could be solved with a basic tenets. First, macro- the reform process. combination of macro- economic stability is economic adjustment, fundamental for achieving Initial Approaches to the Crisis debt rescheduling sustainable growth with equity. agreements, and Second, the Latin economies' With the sudden halt of foreign massive (and largely unilateral) capital in 1982, every country trade liberalization should help in Latin America was forced to to transform exports into the finance debt payments through region's "engine of growth." large trade surpluses. The initial Third, massive privatization reaction by the creditor and deregulation should countries was that the debt increase the role of markets and crisis could be solved with a competition in development. combination of macroeconomic Fourth, policymakers and adjustment, debt rescheduling political leaders recognize that, agreements, and structural to consolidate reforms, the reforms. issues of poverty and inequality must be addressed. To this end, This approach was promoted new programs targeted at the by the United States govern- poorest and at social sectors are ment and coordinated by the being devised in many IMF and the World Bank. countries.4 The official approach called for "new monies" (up to The World Bank played an $20 billion) to be lent to important role in the way Latin countries engaged in structural America dealt with the debt reforms. The banking crisis and has helped to shape community endorsed this view, its reforms. The Bank's although it argued for shifting analytical work facilitated the burden of new financing to dialogue and contributed to the multilateral and official 98 The Latin American Debt Crisis institutions: ". . . realism nations could reduce the demands an increased share of magnitude of their resource new money to be furnished by transfer to the rest of the official sources during the next world. Between 1980 and several years."' Debt- 1986, the World Bank more restructuring operations, IMF- than doubled its net sponsored programs, and disbursements to Latin World Bank structural America, increasing them adjustment loans were the most from $1.2 billion to almost important elements of the early $2.8 billion. In the same official strategy. Between 1983 period, the net resource and 1988, Latin American transfer from the Bank (net nations engaged in twenty-nine disbursements less interest) debt restructuring operations increased from $600 million to with private banks. almost $1.1 billion. The IMF channeled even larger resources The 1984 issue of the IMF's into the region at the start of World Economic Outlook and the crisis. While IMF net the World Bank's World transfers to Latin America and Development Report included the Caribbean had been optimistic projections, negative $173 million in 1980, Although the multilatera predicting a steady decline in they reached almost $6 billion institutions had failed to the debt-export ratio of Latin in 1983. grasp the size of the debt American countries. Things did crisis during its early not work out that way. In the From the early stages of the years, they did contribute following years, analysts came crisis, the World Bank was significant resources to to recognize that the magnitude concerned with helping to Latin America so that of the problem had been engineer a smooth, sustainable debtor nations could seriously underestimated.6 adjustment to promote macro- reduce the magnitude of economic stability; to restore Although the multilateral growth, including a minimum their resource transfers to institutions had failed to grasp increase in consumption; and the rest of the world the size of the debt crisis during to reduce the debt overhang. its early years, they did Within this framework, contribute significant resources ensuring consumption growth to Latin America so that debtor during transition was 99 The Evolving Role of the World Bank considered crucial from both Argentina and Brazil- economic and political prompted a change in the standpoints. Without it, official debt strategy. In March, countries would lack the will to U.S. Secretary of the Treasury undertake reforms and would Nicholas Brady announced a tend to stagnate. new initiative based on voluntary debt reduction. He Selowsky and van der Tak proposed to exchange old debt (1986) argued that this type of for new, long-term debt with a adjustment could not be lower face value. The conver- achieved overnight. During the sion ratio and new instruments early stages, debtor countries were to be negotiated between needed additional foreign the debtor countries and their resources to gain time to imple- creditors. ment the domestic reforms required to accelerate growth To make this new approach and reduce the debt burden. attractive to creditor banks, One aspect of the Selowsky- industrial nations and multi- van der Tak analysis was that, lateral institutions-including in some circumstances, initial the World Bank-agreed to conditions were so severe that provide a substantial amount the only way to restore a viable of resources ($30 billion or so) debt-output ratio was for the to guarantee "Brady" Ensuring consumption creditors to forgive debt. In the concessional bonds. Typically, growth during transition late 1980s, this line of principal payments on these ,was considered crucial ... argument began to make new securities were backed by Without it, countries . headway among officials in thirty-year, zero-coupon U.S. creditor countries as it became Treasury Bills, with interest would lack the will to evident that some debt reduc- payments subject to rolling undertake reforms and tion would benefit both debtors three-year guarantees.8 would tend to stagnate and creditors.' To be eligible for Brady Plan The Brady Plan and the Bank negotiations, countries had to show some history of and will- In early 1989, lack of progress ingness to engage in serious in two of the large debtors- economic reform. This was 100 The Latin American Debt Crisis seen as a way to reward with creditors to reduce debt countries committed to under the Brady Plan. modernization reforms. It was Venezuela and Uruguay also expected that in some followed in 1990 and 1991, countries this requirement and Argentina and Brazil both would lift the debt overhang signed draft agreements in burdens associated with 1992 (see Table 1). In this extremely high payments. table, the first column contains the total value of In 1989, Mexico and The World Bank has the debt covered by each Costa Rica became the supported Brady deals through agreement. In the cases of first countries to reach a number of mechanisms. Argentina and Costa Rica, it broad ageements with Together with the IMF, the includes both principal and creditors to reduce debt Bank has been instrumental in arrears. The debt subject to within th rady Plan . . . . . . . . . ~~~~~~~~within the Brady Plan helping countries design the each arrangement was quite steps required prior to reform. large. In the case of Mexico, framework The Bank's involvement in the almost $49 billion was design of reforms has been exchanged for concessional indirect-through its bonds-a figure substantially Economic and Sector Work higher than the $6.7 billion (ESW), and direct-through converted under the Mexican its adjustment loans. The 2008 bond scheme. World Bank has also supported Brady agreements The next three columns in by waiving negative pledges in Table 1 illustrate the amount their loan agreements, of debt eligible for conversion allowing them to use U.S. under three different options. Treasury zero-coupon bonds as guarantees. The Bank has also One conversion option is a provided fresh loans to most debt buyback, in which old countries involved in Brady debt is canceled by a cash agreements. payment at a fraction of the original liability. In Costa Rica, In 1989, Mexico and Costa $159 million was used to retire Rica became the first countries old debt with a face value of to reach broad agreements $991 million. This operation 101 The Evolving Role of the World Bank Table 1 Debt and Debt-Service Reduction (DDSR) in Selected Latin American Countries (Millions of dollars) Conversion options Date of Face value Discounted Par bond New money Total DDSR of eligible Buy-back bonds (interest (interest debt Country agreement debt (discount) (discount) rate) rate) (Dec. 1991)a Argentina 1992b 23,160' n.d. n.d. n.d. 0 56,273 (35%) (35%) (4-6%)d Brazil 1992b 44,00We 0 n.d. n.d. n.d.g 118,148 (35%) f Costa Rica 1989 1,602h 991 0 579 0 3,966 (84%) (6.5%) Mexico 1989 48,089 0 20,851 22,427 4,387 98,263 (35%) (6.25%) (L+ 13/16) Uruguay 1991 1,610 633 530 0 448 3,049 (44%) (L+1) Venezuela 1990 19,098 1,411 1,794 10,333 6,060 34,081 (55%) (30%) (6.75%) (L+7/8) n.d. Not yet determined (subject to banks' choice). a. Including IMF and net short-term debt. b. Agreement in principle with creditor banks; not yet finalized. c. Estimated. In addition, there are S8.6 billion in arrears, including imputed interest. d. Interest rate increases from 4 percent the first year to 6 percent in the 7th year; 6 percent from then on. e. Estimated. In addition, there are $6 billion in arrears, including imputed interest. f. There are several par bonds offered, with different maturities periods, interest rates, and collateral: A. 30/30 years, rate 4 percent to 6 percent first 7 years, 6 percent from then on, full collateral principal, 12-month interest. B. 15/9 years, rate 4 percent to 5 percent first 6 years, LIBOR + 13/16 from then on, 12-month interest collateral for 6 years. C. 20/10 years, rate LIBOR + 13/16 but interest above the rate in bond B is capitalized, no collateral. D. 20/10 years, rate 8 percent interest above the rate in bond B is capitalized, no collateral. E. 18/10 years, rate LIBOR + 7/8, no collateral. g. New money equivalent to 18.18 percent of debt tendered for debt conversion bonds (see f option E). h. Including past-due interest. Source: World Bank. 102 The Latin American Debt Crisis carried a discount of The Brady-endorsed debt 84 percent-each $1.00 of reduction packages have old debt was exchanged for helped Latin American $.16 cash. countries by reducing debt burdens and allowing them to The second option is using concentrate on implementing , . ~~~~~~~~The Brady-endorsed debt discounted bonds to retire the reforms. In Mexico, for original debt. Creditors receive example, the World Bank reduction packages have long-term (usually thirty-year) estimated that such debt relief helped Latin American bonds in exchange for the would reduce the net transfer countries by reducing debt debt. Although the new bonds to creditors by $4 billion a burdens and allowing carry a market interest rate, year between 1989 and 1994, them to concentrate on the exchange between old debt or close to 2 percent of implementing reforms and new bonds takes place Mexico's GDP. Even so, some at a ratio below one-to-one. countries-notably Chile and The actual conversion ratio Colombia-have declined to has varied from country to participate in the Brady Plan, country. Argentina, Brazil, and arguing that the strategies they Mexico negotiated a have followed until now-a 35 percent discount, but combination of multilateral Venezuela could obtain only a support, economic reform, and 30 percent discount. market-based debt reduction- have worked well enough. The third option consists of exchanging old debt for Most countries in the region new bonds with the same are still suffering from the face value-so-called par consequences of the debt bonds-but at a below-market explosion of the 1970s and interest rate. The collateral early 1980s. Interest payments on the principal and the on foreign debt still represent guarantee on interest payments high percentages of GDP-in are similar to those on Colombia almost 3 percent and discounted bonds. The recent in Brazil almost 2 percent. In a Argentine and Brazilian agree- few countries the size of the ments included several types debt is so large (more than of par bonds. three times GDP in Nicaragua, the prime example) that 103 The Evolving Role of the World Bank Figure 1 massive debt reduction agreements will Turning the corner on debt :vbe required to achieve a longer-run solution. Total external debt as a percentage of total exports Despite these continuing problems, 400. 400 many countries feel that the debt crisis 300 9 < is behind them. Recently, the price of some countries' debt in the secondary 200 market has increased, and after almost ten years of negative net resource 100 transfers, Latin America had positive transfers from the rest of the world in 0 1975 1980 1985 1990 1991. Net capital inflows into the region increased dramatically in 1992, Total external debt as a percentage passing $20 billion. To a large extent, of GNP this turn-around of net resource 80 transfers reflects the fact that many of 60\ the countries in the region (Argentina, Chile, Colombia, and Mexico) have 40 J 4_ - regained access to voluntary capital market financing.9 This alone is an indi- 20 cation that, in some Latin countries, the debt crisis is almost over (see Figure 0 1' 1975 1980 1985 1990 1 Debt service as a percentage Paradoxically, the recent increase in of total exports capital flows into Latin America has 80 generated serious problems related to 60 real exchange rate behavior. As capital comes into these countries, foreign 40 exchange becomes overabundant, appreciating the real exchange rate. 20 This results in a loss of international competitiveness and pressures 0975 1980 1985 199 politicians to implement policies that compensate exporters. Source: World Bank. 104 The Latin American Debt Crisis The Power of Ideas part to the central role it gave to trade liberalization. Several Some authors (notably Bank studies showed empirical- Williamson 1990) have suggest- ly that less distorted economies ed that the new approach outperform those that impede towards development policy in the development of markets. Latin America was imposed Early studies by Balassa (1982, from the outside by the U.S. 1985) and Feder (1983) Treasury, the World Bank, and suggested that countries that the International Monetary pursued outward-oriented Fund-the so-called policies encouraging exports Washington consensus. But grew faster than countries that while these institutions played followed protectionist strate- roles in forging new views, it is gies.'° In a more comprehensive an exaggeration to give them work, Agarwala (1981) argued top billing. Fundamental soul- that distortions in addition to searching began in Latin trade protectionism also slowed America early on, when its growth. A series of Bank studies traditional programs failed and pointed out that careful deregu- following the Chilean experi- lation of the financial sector ence. Still, the multilateral insti- would result in a more efficient tutions exercised important allocation of investment-and influence in forging the new eventually more rapid growth." convergence of doctrinal views The 1987 and 1991 World in Latin America. These institu- Development Reports provided tions-and chiefly the World a wealth of evidence to support Bank-influenced policy in these notions, and the evidence The World Bank did have Latin America partially through in these documents was .. , . , . . . . . ~~~~~~~an intellectual influence empirical research, analytical particularly influential in Latin an inteetual rin work, conditional lending prac- American policy design. In the in shaping the reform tices, and policy dialogue. late 1980s and early 1990s, process, due in great part Latin American policymakers to the central role it gave Trade Policy Reform increasingly began to look at to trade liberalization East Asian countries for The World Bank did have an guidance on what type of intellectual influence in shaping policy to pursue. the reform process, due in great 105 The Evolving Role of the World Bank World Bank-sponsored regimes and investigated the economic and sector work has most appropriate ways to also been influential in implement liberalization. determining the mechanics of Issues related to sequencing, liberalization attempts. For speed, and transitional costs example, a series of studies were analyzed and compared. presented at a 1983 confer- By and large, the results sup- ence addressed issues related ported the view that countries to the sequencing and timing with more intense, sustained of reforms. Even at this early liberalizations have stage, most essays warned outperformed those with failed policymakers of the dangers liberalization attempts. associated with temporary real Moreover, avoiding real exchange rate appreciations exchange rate overvaluation during the transition toward was the single most important market orientation. It was also factor in the success of trade pointed out that, under most liberalization. Findings from circumstances, the appropriate this and other World Bank sequencing of liberalization research were disseminated required an early elimination widely in Latin America of the fiscal deficit followed by through conferences and talks. trade reform, and later, by This helped regional leaders capital market liberalization.12 become aware of historical The same conference dealt regularities and, in some cases with the crucial role of credi- (such as Brazil, Mexico, and bility to reform success, an Colombia) had an important idea that has gained popularity impact on decisions to in the past few years. implement trade reforms."4 In the 1980s, the World Bank Studies sponsored by the undertook a monumental nine- World Bank also investigated Avoiding real exchange teen country comparative study the link between distortions rate overvalu(ation wvas thve on trade liberalization (in particular, trade single most important (Michaely, Papageorgiou, and restrictions) and the creation of factor in the success of Choksi, 1991).I1 The project employment. In summarizing trade liberalization analyzed the characteristics and the experiences of eleven consequences of different trade countries, Balassa (1982) 106 The Latin American Debt Crisis points out that, since primary Industry. But World Bank- activities and manufacturing sponsored policy discussions, for exports are more labor including public seminars in intensive, "reducing tariffs will Mexico, helped create broader In 1985 ... the World tend to benefit employment." support for these measures, Bank approved a loan for The most ambitious study on strengthening the position of Mexico to build a policy the labor market effects of then secretary of Budget and b f trade liberalization reforms is Planning Salinas and of Central trade liberalization Michaely, Papageorgiou, and Bank governor Mancera within Choksi (1991), which found the Mexican government. In that, in most successful 1985, almost two years after structural reforms, medium- work had begun in this area, run net effects on employment the World Bank approved a have been positive. This loan for Mexico to build a finding has had an important policy basis for the country's role in the recent acceleration trade liberalization. The World of trade liberalization reform Bank also helped create early in a number of countries- awareness in Mexico of the including Argentina, Colombia, need to implement public and Nicaragua. As political sector reforms and embark on leaders discover that the a major privatization program. political costs of reform (in terms of unemployment) Brazil provides another are not as high as once example. In 1987, the thought, they are willing to Government of Brazil move more swiftly. announced its intention to implement gradual trade An illustration of the influence reform. It did not contemplate and persuasive powers of the reducing nontariff barriers multilateral institutions is the (NTBs) in an aggressive World Bank's role in the design fashion. The World Bank of the Mexican reforms. Early considered the program too on there was opposition to timid, and discussed it with the trade liberalization in some authorities. To increase the Mexican circles-especially Brazilian public's awareness of those associated with the the benefits of opening the Secretary of Commerce and economy, the Bank organized 107 The Evolving Role of the World Bank seminars and conferences. This undertaken by the countries exchange of ideas generated of Central America have been reports that were discussed largely successful. Honduras, with Brazilian officials and Nicaragua, and Panama, for intellectuals. As a result, the example, were the only three As a result of the Bank's Collor government was in a countries in Latin America advice and financial position to act rapidly on with single-digit inflation in support, some countries reform in 1990, when most 1992. have implemented NTBs were eliminated and the tariff reduction program was Social Programs emergency social-invest- instituted ."r ment funds geared to As a result of the Bank's community-based projects Reform in Central America advice and financial support, that provide work to the some countries have unemployed while solving The multilateral institutions implemented emergency basic infrastructure also played a role in shaping social-investment funds geared problems economic reforms in Central to community-based projects America. Through reports, that provide work to the meetings, conferences, and unemployed while solving discussions, a new generation basic infrastructure problems. of political leaders was Those projects have worked persuaded to shift from the old successfully in Bolivia and interventionist policies toward Jamaica and are now being market-based reforms. For implemented in Nicaragua. example, early involvement of The World Bank's support the World Bank and the IMF in of Mexico's Programa de Costa Rica helped set the stage Solidaridad has helped make for reform and paved the way that program a successful for an early deal with private instrument for efficiently banks on debt reduction. The dealing with poverty and World Bank and the IMF were social problems. The World also intimately involved in Bank's position on the launching the April 1991 importance of nutritional Nicaraguan stabilization programs directed at children, program, which put an end to pregnant women, and other hyperinflation. The macro- vulnerable groups has also economic adjustment efforts been accepted by most 108 The Latin American Debt Crisis political leaders in the region An Era of Reform and is increasingly included in social programs."6 Although it is difficult to pinpoint the beginning of The Role of Conditionality economic reform in each country, it acquired full and Table 2 Conditionality Content Multilateral lending programs generalized force in Latin of World Bank Programs also played an important role. America in the late 1980s and By conditioning the release of early 1990s, after attempts to percentae ofdprogsw By conditioning ~ ~ ~~~~~~~~~~~~a:particular conditions) funds on the implementation use traditional structuralist of certain basic reforms, the policies to solve the crisis had Trade multilateral institutions forced failed. Each country, of course, Iliberalization 79 Latin American authorities to faced different initial condi- develop comprehensive and tions at the time reforms were Exchange consistent reform programs. initiated. Some faced rapid rate action 45 Conditionality within World inflation and highly distorted Tax and Bank programs has covered incentive systems; others fiscal policy highly diverse areas, including began with more moderate and reform 67 trade reform, privatization, manageable conditions. The and financial liberalization economic role of the state also Financial reform 51 (see Table 2). varied, as did the importance of state-owned enterprises. refom and Some nations initially resisted Although the intensity and privatization 65 some of the conditions, but as scope of the reforms have time passed and adjustment differed, it is possible to Note: Refers to all adjustment loans proceeded, many countries classify them into four broad (mostly SAl5 and SECALs) during began to move more rapidly groups according to their 1982-89. See World Bank (1990) for details. than required to by the multi- approximate time of initiation: lateral agencies. Mexico's priva- early, recent, very recent, and tization program, for instance, future-reformers. greatly exceeded the original World Bank goals. Likewise, the Generally speaking, early extent and speed of trade liber- reformers are further along in alization reform in Colombia the process of transformation went beyond what the multilat- and have made progress in erals had originally requested."' many areas. Chile represents a 109 The Evolving Role of the World Bank case of its own, having Macroeconomic Stabilization initiated reforms in 1975, almost a decade before anyone Macroeconomic stabilization, else." Mexico initiated including the reduction of the reforms in 1985 and has also debt burden, has been the moved broadly and deeply, centerpiece of reform. building new institutions to Recognition by industrialized help consolidate the new nations that the crisis was more economic system. than a liquidity crunch was a fundamental step toward stabi- Recent and very recent lization. In general, voluntary reformers vary in intensity and debt reduction agreements-the scope. Some countries, such as Brady deals-were undertaken Argentina, have dealt with only after the country in many sectors rapidly and question had made significant simultaneously. Others have progress in reducing fiscal moved selectively on structural imbalances, curbing inflation, reforms or have not been able and achieving macroeconomic to enact credible macro- stability.20 economic programs. Policy questions related to In almost every Latin sequencing and speed were American country, the early often addressed by policy- post-debt crisis years makers designing stabilization (1982-87) saw severe declines programs: Should macro- in per capita GDP. After 1987, economic adjustment precede per capita GDP generally structural reform, or could both began to recover. Interestingly, be undertaken simultaneously? growth has shown a stronger Should gradual stabilization be trend among advanced reform- attempted, or would abrupt ers than among those coun- policies be more appropriate?2 tries that delayed adjustment."9 In some countries, fixed nomi- In 1992-93, most Latin nal exchange rates have been American countries, with a used as anchors in the anti- few exceptions, experienced inflationary effort. But this has respectable to strong growth. been a controversial policy. While a number of analysts 110 The Latin American Debt Crisis argue that fixing the exchange particular, the avoidance of rate provides credibility to a overvaluation-has played a stabilization program, others key role in the success of trade point out that fixed rates reforms. The pressure that contribute to real exchange rate massive capital flows have overvaluation during the transi- recently exercised on real tion to lower inflation, exchange rates throughout the Trade liberalization is the undermining the sustainability region, therefore, has been a core of structural reform. of the stabilization effort.22 cause of concern among policy Throughout Latin analysts. America, it has reduced Trade Liberalization import tariffs from an Reorienting Government average of 70 percent to Trade liberalization is the core a-round 12 percent and of structural reform. Through- A salient feature of the recent * h~~~~~~~~~~~as almost eliminated out Latin America, it has Latin reforms, and one that reduced import tariffs from an distinguishes them from past sorteriod average of 70 percent to near efforts, is the emphasis on 12 percent and has almost reducing the size of the state eliminated nontariff barriers in through massive privatizations. a short period. As a result, the In many countries, privatization Latin countries have has been linked to debt experienced rapid productivity reduction schemes based on improvements and significant debt-equity swaps. As a result, expansion in exports. foreign firms have played an Recently, this unilateral open- important role in reshaping ing process was supplemented Latin America's manufacturing by efforts to create (or and financial sectors. This revitalize) regional trading development constitutes a blocks-such as MERCOSUR, marked change from a the Andean Pact, the Central traditional history of mistrust of American Common Market, foreign firms. Although and CARICOM.' And most privatization has taken different countries have expressed forms in different countries, in interest in joining the North many it has created thousands American Free Trade Area of new shareholders. While (NAFTA).24 A competitive real Latin American policymakers exchange rate-and, in have also discovered that a 111 The Evolving Role of the World Bank modern regulatory framework behavior of private savings is is needed for the efficient rapidly becoming one of the functioning of a newly most pressing issues in Latin privatized sector, progress in American analysis. this area has been uneven throughout the region,25 and Poverty Reduction labor market deregulation has shown little improvement. In Latin America has a long most countries labor market tradition of poverty and duality continues to exist, and inequality, and many social labor distortions negatively indicators have further affect the public welfare and deteriorated since the eruption international competitiveness.26 of the debt crisis. There is now a general recognition that Financial Sector Deregulation economic growth and education are the main long- For years, most Latin American run determinants of reduced countries controlled capital poverty. Yet both take consider- markets, quantitatively allocat- able time to effect change. As a America's capital markets, ing credit and keeping interest result, many governments and investment and savings rates below inflation.27 But multilateral institutions have remain low in most financial sector deregulation decided to implement programs countries. Explaining the has been an important compo- directed at alleviating poverty behavior of private savings nent of most countries' and inequality, an approach is rapidly becoming one Of reforms. Interest rates have that contrasts acutely with the most pressing issues in - been freed, and the creation of traditional practices. Instead of new financial institutions has providing blanket subsidies Latin American analysis Latin Amrcbeen encouraged. Some impor- through price controls and tant policy debates in this area other distortions, targeted have dealt with the optimal subsidies are being directed timing of financial reform, the toward the most vulnerable role of capital market supervi- segments of society.2 It is sion, and the opening of the argued that, to help the poor capital account. But despite and avoid a return to populist reforms of Latin America's practices, it is necessary to capital markets, investment and tackle social problems savings remain low in most effectively and to develop new countries. Explaining the institutional settings that ensure 112 The Latin American Debt Crisis stability and protect the econo- Latin America faces tremendous my from short-term, myopic challenges in the years ahead. If political impulses. Many have the reforms of the 1980s and pointed out that this type of 1990s are to be sustained, reform will not only help main- policymakers will need to tain the path toward growth address such pressing issues as and prosperity but is also likely maintaining prudent macro- to strengthen the region's economic management, nascent democracies."9 alleviating poverty, reducing inequality, increasing domestic The Future of Reform savings, and creating the solid economic, social, and political Despite the real progress made institutions that are the by most Latin American foundation of long-term If the reforms of the countries, problems persist. growth. Physical infrastructure has sustand po9icyars deteriorated severely, and in The World Bank should contin- willaned to ad es many countries poverty has ue to play an important role in increased. Inflation continues to the region's development in the pressing issues as main- be high, and even where it has years to come, helping to taining prudent macro- been cut dramatically it often consolidate its reforms. In some economic management, remains in the double digits. In countries the Bank will play its alleviating poverty, some countries, economic traditional role, in others it will reducing inequality, reforms have not been accom- provide technical assistance, in increasing domestic panied by the modernization of still others it will help create s political institutions, which can modern institutions. solid eno cial, lead to political unrest. Serious Throughout Latin America, the crises have already arisen in Bank will be active in social and and political institutions Brazil, Guatemala, Haiti, Peru, infrastructure projects, for it is that are the foundation of and Venezuela. Additionally, clear that now is not the time long-term growth large capital inflows have to scale down Bank involve- recently financed increasingly ment in the region. In grappling large current account deficits in with problems of equity and many countries, generating growth, Latin America needs to sizable pressures for real be able to rely on the Bank's exchange rate appreciation. experience and strength. 113 The Evolving Role of the World Bank Notes 1. Edwards (1986) discusses the extent to which the international financial market anticipated the debt crisis. See also Edwards (1984). For a detailed discussion of the muddling through years see Edwards (1988). 2. For an evaluation of the early relationship between the IMF and the developing countries see Edwards and Santaella (1992). For critical eval- uations of the IMF role in the initial years of the debt crisis see Edwards (1989b). On the initial evolution of Latin American thinking in the post- crisis period see Edwards (1989a). 3. Some analysts have referred to this process as the "Washington Consensus," and have suggested that the new policies were imposed on Latin America by the U.S. Treasury, the IMF, and the World Bank. This interpretation is overly U.S.-centrist and clearly misses the internal Latin American political dynamics. 4. For details on the social consequences of structural reforms and labor market behavior during adjustment, see Edwards (1993b). 5. Morgan Guaranty (1987), p. 2. 6. See the 1986 issue of the IMF's World Economic Outlook. 7. Work undertaken at the IMF under the leadership of Jacob Frenkel was highly influential in this area. 8. See Cline (1989) for a discussion of the genesis of the Brady Plan. 9. A nontrivial proportion of the capital inflows have been reverse capital flight. See Calvo, Leiderman, and Reinhardt. (1992). 10. See Fishlow (1991) and Edwards (1993a) for some methodological criti- cisms of these studies. 11. See, for example, Hanson and Neal (1985). 12. Lal (1985), however, argued for an early liberalization of capital controls. 13. The countries covered were Argentina, Brazil, Chile, Colombia, Greece, Indonesia, Israel, Korea, New Zealand, Pakistan, Peru, the Philippines, Portugal, Singapore, Spain, Sri Lanka, Turkey, Uruguay, and Yugoslavia. 14. For a discussion of the way in which the World Bank influenced policy making in Latin America during the reform process, see Hicks (1992). 15. ibid. 16. See World Bank (1992). 114 The Latin American Debt Crisis 17. Miguel Urrutia, current Governor of the Central Bank of Colombia and former Planning Minister, documented the World Bank's role in forging the Colombian trade liberalization program in Colombia Williamson (1994). 18. On the Chilean reforms see Edwards and Cox-Edwards (1991). 19. It is important to note, however, that dspite recent growth, by 1991 only thirteen countries in the region had income per capita that exceed- ed that of 1980: Colombia, Chile, Paraguay, Bahamas, Barbados, Belize, Jamaica, Antigua, Dominica, St. Kitts and Nevis, St. Vincent and Grenadines, and St. Lucia. 20. The recently approved Brazilian deal is a departure from this norm. 21. On the sequencing issue see Edwards (1990). On the debate over the opening of the capital account see Edwards (forthcoming). 22. On this debate see Edwards (1993e), Bruno (1991), and see also Edwards and Losada (1994). A number of recent analyses have related inflation and the fate of stabilization policies to political economy devel- opments. See, for example, Cukierman, Edwards, and Tabellini (1992) 23. On Latin America's integration efforts see Edwards (1993d). 24. On trade reform and economic performance see Edwards (1992, 1993a). 25. See, for example chapter 6 of Edwards (1993c). 26. For an analytical discussion of some of these issue see Edwards (1988b). 27. McKinnon (1991) documents that the ratio of loanable funds to GDP in Latin America was significantly lower than that of Asia during 1960-85. 28. See chapter 8 of Edwards (1993c). 29. On these issues see the detailed discussion in chapter 8 of Edwards (1993c). 115 The Evolving Role of the World Bank References Agarwala, Ramgopal. 1981. "Price Distortions and Growth in Developing Countries." World Bank Working Paper 575. Washington, D.C. Balassa, Bela. 1982. Development Strategies in Semi-Industrial Economies. Baltimore: Johns Hopkins University Press. Balassa, Bela. 1985. "Exports, Policy Choices and Economic Growth in Developing Countries After the 1973 Oil Shock." Journal of Development Economics 18 (2). Bruno, Michael. 1991. "High Inflation and the Nominal Anchors of an Open Economy." New Jersey, Princeton Essays on International Finance. Calvo, Guillermo, Leonardo Leiderman, and Carmen Reinhardt. 1992. "Capital Inflows and Real Exchange Rate Appreciation." Working Paper 62. International Monetary Fund, Washington, D.C. Choksi, Armeane, and Demetris Papageorgiou, eds. 1986. Economic Liberalization in Developing Countries. Oxford: Basil Blackwell. Cline, William. 1989. "From the Baker Plan to the Brady Plan." In Ishrat Husain and Ishac Diwan, eds., Dealing with the Debt Crisis. Washington, D.C.: World Bank. Corden, Warner Max. 1987. "Protection and Liberalization: A Review of Analytical Issues." Occasional Paper 54. International Monetary Fund, Washington, D.C. Cukierman, Alex, Sebastian Edwards, and Guido Tabellini. 1992. "Seigniorage and Political Instability." American Economic Review 82 (3). Edwards, Sebastian. 1984. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation." American Economic Review 74 (4). Edwards, Sebastian. 1986. "The Pricing of Bank Loans and Bonds in International Financial Markets." European Economic Review, June. Edwards, Sebastian. 1988a. "Structural Adjustment Policies in Highly Indebted Countries." In Jeffrey Sachs, ed., The Developing Countries Debt Crisis. Chicago, University of Chicago Press. Edwards, Sebastian. 1988b. "Terms of Trade, Tariffs and Labor Adjustment in Developing Countries." The World Bank Economic Review 2 (1). Edwards, Sebastian. 1989a. "The Debt Crisis and Economic Adjustment in Latin America." Latin American Economic Review 24 (3). Edwards, Sebastian. 1989b. "The International Monetary Fund and the Developing Countries: A Critical Evaluation." In Karl Brunner and Allan Meltzer, eds., Carnegie-Rochester Series on Public Policy 31. 116 The Latin American Debt Crisis Edwards, Sebastian. 1989c. Real Exchange Rates, Devaluation and Adjustment. Cambridge, MIT Press. Edwards, Sebastian. 1990. "The Sequencing of Economic Reform: Analytical Issues and Lessons from Latin America." World Economy 13 (1). Edwards, Sebastian. 1992. "Trade Orientation, Distortions, and Growth in Developing Countries." Journal of Development Economics 39 (1). Edwards, Sebastian. 1993 a. "Openness, Trade Liberalization, and Growth in Developing Countries." Journal of Economic Literature 31 (3). Edwards, Sebastian. 1993b. "Economic Reform, Labor Markets, and the Social Sectors: A Latin American Perspective." Working paper, Institute for Policy Reform, October. Edwards, Sebastian. 1993c. "Latin America and the Caribbean a Decade After the Debt Crisis." Report prepared for the Vice-Presidency of the Latin America and the Caribbean Regional Office of The World Bank. Edwards, Sebastian. 1993d. "Economic Integration in Latin America: New Perspectives on an Old Dream." World Economy 16 (3). Edwards, Sebastian. 1993e. "Exchange Rates as Nominal Anchors." Weltwirtschaftliches Archiv 129 (1). Edwards, Sebastian (ed.). Forthcoming. Capital Controls, Exchange Rates and Monetary Policy in the World Economy. Chicago: University of Chicago Press. Edwards, Sebastian and Alejandra Cox-Edwards. 1991. Monetarism and Liberalization: The Chilean Experiment. Chicago: University of Chicago Press. Edwards, Sebastian, and Fernando Losada. 1994. "Fixed Exchange Rates, Inflation, and Macroeconomic Discipline." Working Paper 4661, National Bureau of Economic Research. Cambridge, Mass. Edwards, Sebastian and Julio Santaella. 1992. "Devaluation Controversies in Developing Countries: Lessons from the Bretton Woods Era." In Michael Bordo and Barry Eichengreen, eds., A Retrospective on the Bretton Woods System. Chicago: University of Chicago Press. Feder, Gershon. 1983. "On Exports and Economic Growth."Journal of Development Economics 12 (1/2). Fishlow, Albert. 1991. "Liberalization in Latin America." In Tariq Banuri, ed., Economic Liberalization: No Panacea. Oxford: Oxford University Press. Hanson, James, and Craig Neal. 1985. "Interest Rate Policies in Selected Developing Countries, 1970-1982." Working Paper 753, World Bank, Washington, D.C. Hicks, Norman. 1992. "The Role of the World Bank in the Latin American Reform Process." World Bank Office Memorandum, Washington, D.C. International Monetary Fund. 1985. World Economic Outlook. Washington, D.C. Khan, Mohsin, and Roberto Zahler. 1983. "The Macroeconomic Effects of Changes in Barriers to Trade and Capital Flows: A Simulation Analysis." IMF Staff Paper 30, Washington, D.C. 117 The Evolving Role of the World Bank Krugman, Paul. 1988. "Financing vs. Forgiving a Debt Overhang." NBER Working Paper 2386. National Bureau of Economic Research, Cambridge, Mass. Lal, Deepak. 1985. "The Real Aspects of Stabilization and Structural Adjustment Policies: An Extension of the Australian Adjustment Model." Working Paper 636, World Bank, Washington, D.C. McKinnon, Ronald. 1991. The Order of Economic Liberalization. Baltimore: Johns Hopkins University Press. Michaely, Michael, Armeane Choksi, and Demetris Papageorgiou, eds. 1991. Liberalizing Foreign Trade. New York: Basil Blackwell. Morgan Guaranty and Trust Company. 1987. "World Financial Markets." Morgan Guaranty International Economics Department, New York. Sachs, Jeffrey. 1987. "Trade and Exchange Rate Policies in Trade-Oriented Adjustment Programs." In Vittorio Corbo, Morris Goldstein, and Mohsin Khan, eds., Growth-Oriented Adjustment Programs. Washington, D.C.: International Monetary Fund. Selowsky, Marcelo, and Herman van der Tak. 1986. "The Debt Problem and Growth." World Development 14 (9). Williamson, John, ed. 1990. Latin American Adjustment: How Much Has Happened? Washington, D.C.: Institute for International Economics. Williamson, John, ed. 1994. The Political Economy of Policy Reform. Washington, D.C.: Institute for International Economics World Bank. 1990. Adjustment Lending Policies for Sustainable Growth. Washington, D.C. World Bank. 1991. Financial Flows to Developing Countries. Washington, D.C. World Bank. 1992. Poverty and Income Distribution in Latin America: The Story of the 1980s. Washington, D.C. 118 The Transition in Central and Eastern Europe and the Former Soviet Union Kemal Dervis, Marcelo Selowsky, and Christine Wallich From Eastern Europe to Central Asia, countries have embarked on a path of systemic transformation, the extent of which has few parallels in history. The Bank, too, is now engaged in one of the greatest efforts in its history. In fiscal years 1990-94, twenty-two states in this region became new members, while the Bank com- mitted US$13.5 billion and opened seven new resident missions. These countries face the task of creating wealth and improving living standards. Both the opportunities and the challenges are B t Both the opportunities immense. Many countries are rich in technology, agriculture, and and the challenges are natural resources. Huge resources, historically devoted to military immense .... Huge output and unnecessarily high levels of investment, can now be resources, historically used to improve the quality of life. devoted to military out- put and unnecessarily In some countries, much progress has taken place on both the high levels of investment, institutional and policy front, especially as regards privatization. can now be used to In many, however, there is still a need to reduce the dominance of improve the quality of life state monopolies and to limit heavy political and administrative interference. All countries share the need to restructure and priva- tize heavy industry. All also need continued fiscal retrenchment. 119 The Evolving Role of the World Bank Successful transformation will prices and exchange rate require macroeconomic adjustments. Thus, transition stability, free prices, the build- economies were faced with a ing of modern institutions, hard choice. Much-needed including a modern state, and stabilization programs had to be the development of financial adopted at the same time as markets with a legal frame- these structural causes were work that supports the opera- leading to output decline. But, i tion of markets. Infrastructure failure to pursue stabilization needs to be revamped to avoid would risk hyperinflation, since hindering restructuring and monetary financing of the recovery. Finally, in most deficit would take place at a * countries, a readaptation of time when the demand for skills and an improved social money was collapsing. safety net will be particularly important. When they joined the Bretton Woods institutions, these Stabilization and Transition countries engaged in discussions with the IMF on stabilization In all transition economies, efforts, and many negotiated * systemic transformation has formal IMF approval for been made more difficult by financial programs. The Bank the serious macroeconomic played a supportive role with a imbalances in place when the series of fast disbursing opera- old order collapsed. Price tions, financing either general controls, along with under- imports (structural adjustment lying budgetary imbalances, and economic recovery loans) had repressed inflation and or agreed on lists of priority In all transition created a large monetary over- imports (critical import and economies, systemic trans- hang. The severing of supply rehabilitation loans). These formation has been made links among enterprises within operations provide non- more difficult by the seri- countries, as well as the dis- inflationary finance to the ous macroeconomic * ruption of COMECON trade, budget, since Bank-financed imbalances - led to economic contraction imports generate counterpart and large output losses. fund revenues (Table 1). Bank Movement to a market loans were, of course, only part economy required freeing of larger financial packages, 120 The Transition in Central and Eastern Europe and the Former Soviet Union including IMF, G-24, and other funds committed. This is due contributions. partly to the fact that many of these loans were "tranched," While committed loans were with tranche release dependent substantial, the actual flow of on agreed policy actions, and disbursements in the first partly to the Bank's procure- twelve months after approval ment rules. IBRD shareholders was only a fraction of total insist that Bank funds be spent Table 1. IBRD and IDA Import Financing Loans and Credits Percentage of Month Dollars Percentage funds disbursed Loan Amount of per of 1 year Country type ($ million) approval capita GDP after approval Albania Critical imports 43 June 1992 12 6.2 22.0 Bulgaria SAL 250 August 1991 28 3.4 56.8 Czechoslovakia SAL 450 June 1991 29 1.4 44.4 Hungary SAL 200 June 1990 19 0.6 100.0 SAL 11 250 June 1991 24 0.8 70.0 Poland SAL 300 July 1990 8 0.5 33.3 Romania Critical imports 150 June 1991 6 0.5 8.1 SAL 400 June 1992 17 2.1 57.7 Russia Rehabilitation 600 August 1992 4 0.7 51.1 Belarus Rehabilitation 120 November 1993 12 1.9 14.7 a Moldova Rehabilitation 60 October 1993 14 2.6 40.4 a Estonia Rehabilitation 30 October 1992 19 1.5 60.9 Latvia Rehabilitation 45 October 1992 17 3.2 35.6 Lithuania Rehabilitation 60 October 1992 16 1.9 47.3 Kazakhstan Rehabilitation 180 September 1993 11 1.8 41.5 b Kyrgyzstan Rehabilitation 60 May 1993 14 3.3 60.3 Slovakia Recovery 80 November 1993 16 0.1 20.0 FYR Macedonia Recovery 80 February 1994 36 3.7 c 100.0 Note: Underlying data on GDP and population correspond to the calendar year of loan approval. a. 7 months. b. 9 months. c. Percentage of GNP. 121 The Evolving Role of the World Bank to finance imports procured in more harm than good, ways that allow competition increasing indebtedness among suppliers. Specific rules without paving the way to the must be followed and docu- sustained growth needed to mentation must be available. avoid a debt trap. Moreover, if Both requirements are difficult the Bretton Woods institutions for new member countries for provided large amounts of whom these procedures are nonconcessional financing to new. Although disbursements unsuccessful adjustment often speed up with experi- programs, they would not only ence, slow disbursement of undermine their credibility but import-financing loans has would build a portfolio of often been criticized. Until problem loans that could lead now, there has been little scope to serious financial problems for greater flexibility in the for them in the medium-term procurement rules. future. Clearly, both flexibility and caution are needed to Debate continues about the prevent a waste of resources role of balance-of-payments where the real economic loans from the Bretton Woods returns on external financing institutions to support are likely to be nil. stabilization efforts. Substantial up-front external finance can Institution-Building and the If there is insufficient make a huge difference by New Role of Government domestic policy effort, helping to stabilize the such financing flows do exchange rate, finance the Lack of appropriate institutions budget deficit in a non- has been an impediment to more barmn than good, inflationary way, and create implementing stabilization increasing indebtedness.. positive expectations. But to policies and a major bottleneck without paving the way to have such a decisive impact, to modernization and the sustained growth need- the external assistance package restructuring. To meet the ed to avoid a debt trap must be of a substantial magni- needs of a market economy, tude and disbursed rapidly. the state apparatus for civil service, the organization of On the other hand, if there is public finances, and the insufficient domestic policy regulatory frameworks all need effort, such financing flows do reform. There are limits, 122 The Transition in Central and Eastern Europe and the Former Soviet Union however, in trying to administration and a broader accelerate institution building, tax base would permit, in turn, especially in some countries of lower tax rates that are less of the former Soviet Union that a disincentive to private sector lack the prewar institutions development. and memory of markets shared by most countries in Eastern Also required are predictable Europe. incentives and the rule of law-reforms in the financial To move a public To move a public administra- and payments systems, administration from a tion from a system based on accounting systems, the system based on direct direct control of the economy introduction of new legal control of the economy toward one based on incentives frameworks, and courts able to toward one based on involves a reorientation of the enforce contracts. To provide incentives involves a state's role-indeed, a reinven- headroom for the private reorientation of the state's tion of public institutions. The sector also requires a Central Bank, for example, reorientation of the state's roleindeed, a needs to be strengthened in fiscal role, including a reinvention of public new functions of indirect mon- reallocation of public expendi- institutions etary control, domestic debt tures and better public invest- and interest rate management, ment programming so that the and bank supervision. Many infrastructure needed to countries inherited centralized support private sector activity state structures that no longer develops. Without such serve them well and are now changes, the supply response strengthening local expected from economic governments that can mobilize liberalization will be damp- resources and deliver public ened, making macroeconomic services more efficiently. The stabilization more difficult to introduction of a market sustain. economy also brings with it a need to strengthen tax adminis- Retooling the state involves tration to ensure that the sensitive issues that are difficult budget will be able to tap to resolve. Initial Bank newly emerging tax bases- intervention in some member consumption and private- countries was through sector incomes. Better tax assistance in strengthening the 123 The Evolving Role of the World Bank institutional capacity to parent are perhaps the most implement reforms in areas important aspects of retooling While it is important to key to transition. Such Bank the state. While it is important While it is important to support, however, is recent to reduce deficits, reducing the reduce deficits, reducing and experience is still being share of public expenditures is the share of public gained. The strengthening of also key to creating the expenditures is also key to core state functions has been economic headroom needed creating the economic supported through free-stand- for the private sector to headroom needed for the ing technical assistance loans, flourish. Economic studies private sector to flourish investment lending, and quick- undertaken early in the disbursing operations-each dialogue with each country focusing on different aspects identified the sustainability and of institution building. rationale of many government Throughout the former Soviet transfers and subsidies. These Union, institution-building were typically provided in loans were designed to nontransparent forms though strengthen economic subsidized credits, uncollected management capacity, debts, tax and social security including aid coordination, arrears, and controlled prices. and to establish modern Moreover, the proliferation of treasuries to improve public extra-budgetary accounts and expenditure and debt manage- parallel budgets make ment. Targeted technical controlling both the level and assistance projects for tax composition of public expendi- administration (in Albania and tures difficult. The Bank has Hungary, for example) have tried to encourage making such sought to bolster resource subsidies explicit and to analyze mobilization-as well as tax their justification-both in policy and its implementa- terms of equity and efficiency. tion-by strengthening tax and customs offices, training tax Important studies of this type officials, and computerizing were undertaken for Russia, tax records. Ukraine, and Uzbekistan, where credit and energy subsidies had Streamlining the state budget, major macroeconomic implica- rechannelling its focus, and tions. In Hungary, work has making its impact more trans- focused on the consolidation of 124 The Transition in Central and Eastern Europe and the Former Soviet Union budgetary, extra-budgetary, Bank loans under way in and other institutional funds, Poland, Albania, and Slovakia whose continued proliferation provide technical assistance to puts fiscal stabilization at risk. improve central banking skills, Work on the sustainability and bank supervision, financial and reform of fiscally costly capital market regulation, and pension systems is also auditing and accounting. continuing. Projects in this area have helped to improve In Armenia, Belarus, administration and computeri- Kazakhstan, and Ukraine, zation of social benefit systems institution-building loans in Hungary and Albania, for focused on strengthening example. banking and financial-sector accounting as well as develop- Finally, development of the ing a modern payments system. financial and economic Even so, major challenges infrastructure needed by a remain. These institutional market economy-including reforms must be followed by payment systems, banking concrete restructuring of : legislation, accounting and financial institutions still securities regulatory systems- burdened by bad loans and old is also being supported: habits. A financial institutions Today neither the level nor development project of $200 composition of public invest- Current public investment million was recently approved ment is compatible with the levels-sometimes as low for Russia-one of the larger growing needs of the private as 2 percent of GDP- technical assistance projects economy. Current public mortgage the future. To approved by the Bank. It investment levels-sometimes ensure that scarce supports the modernization of as low as 2 percent of GDP budgetary resources go both commercial banks and mortgage the future. To ensure where returns are highest, Russia's payments and clearing that scarce budgetary resources system, the strengthening of the go where returns are highest, supervisory capabilities of the reform of public investment investment Programming Central Bank, and an overhaul programming is crucial. The is cructal of accounting and auditing Bank has supported the design standards. of public investment programs 125 The Evolving Role of the World Bank in Albania and Poland and has * In some former Soviet undertaken in-depth public republics, the Bank has also expenditure reviews in the provided direct support for Baltic countries. legal reforms in the areas of privatization, energy legislation, Legal reforms are also key to and banking through grants and the transition but are long-term loans for legal advisers, legal in nature, involving funda- information systems, training, mental changes in institutions, and judicial reform. The redesg oprocesses, and procedures. In the former Eastern Bloc, major Labor Markets, Social Sectors, tor spending is also key to gaps exist in the legislation and Safety Nets fiscal adjustment. Social needed to support economic sector spending now reforms, including the Strengthening social policies absorbs as much as 30 per- definition of property rights, (employment, education, cent of GDP in some coun- commercial and financial laws, health, and the social safety net) tries and without policy banking legislation, and regula- is another cornerstone of reform, could grow, tory systems. For example: economic transformation in compromising stabilization Eastern Europe. Restoration of In initial rehabilitation loans this region's growth and inter- to Russia, Kazakhstan, the national competitiveness Baltic states, and the Kyrgyz depends on the restructuring of Republic, loan conditionality industry, or physical capital, encompassed the legal and and also on the restructuring of institutional framework for human capital to meet the private-sector development, needs of a market economy. including pro-competition and The redesign of social sector anti-monopoly policies and an spending is also key to fiscal environment conducive to adjustment. Social sector foreign direct investment. spending now absorbs as much as 30 percent of GDP in some * In Slovakia and Poland, countries and without policy adjustment operations have reform could grow, compromis- supported the introduction of ing stabilization. At the same bank and securities market time, the government must regulation and anti-monopoly ensure that core social services policies. (such as education, health, and 126 The Transition in Central and Eastern Europe and the Former Soviet Union social welfare) do not Bank Support for Labor and deteriorate over the transition. Employment Policies Toward Flexible Labor Markets STRENGTHENING LABOR POLICIES. The primary goal is to support Output and employment programs that will enhance declines associated with labor mobility by making it transition were greatly under- easier to hire and dismiss estimated. Across Eastern workers, by improving wage Europe and the former Soviet determination policies, and by Union, output has declined by introducing market-driven as much as 60 percent, and training programs for the unemployment in some unemployed. For example: countries has reached 15 percent or more. In Eastern * The Second Russia Europe, unemployment closely Rehabilitation loan now in tracks output decline. In the preparation proposes that former Soviet Union, despite unemployment fund resources large cumulative output be used for unemployment declines, open unemployment only and not for job-creation remains lower-perhaps schemes in state-owned because of labor hoarding, enterprises. often unpaid, which enables workers to continue to avail * In Poland, the structural themselves of enterprise social adjustment loan (SAL) and The primary goal is to benefits. But the direction is employment services projects support programs that clear: as budget constraints are designed to minimize the tighten, the state sector has effects of mass layoffs, with been shedding employees. proactive labor market policies ty by making it easier to Employment growth relies on focused on strengthening hire and dismiss workers, the development of new governmental labor offices, by improving wage deter- activities, and especially of retraining, micro-enterprise mination policies, and by small-scale, private businesses. credit, and other supports. introducing market-driven Policies to reduce labor market training programs for the rigidities and facilitate mobili- * Projects designed to unemployed ty, including housing reform, strengthen labor offices and also need to be developed. services to the unemployed 127 The Evolving Role of the World Bank have been approved for Russia Health care under the and Armenia and are in command system was generally preparation for the Kyrgyz free, and such health indicators Republic and Kazakhstan. as morbidity and mortality in Eastern Europe and (until TARGETED PROJECrS FOR MASS recently) in the former Soviet LAYOFFS. Whether these employ- Union were generally quite ment services projects can meet good. But the command system their objectives will only be emphasized more expensive, seen with time. There is con- curative interventions over cern, for example, that some of cheaper, preventive measures. these policies are better suited Virtually all transition for "frictional" unemployment economies need to move away situations than for countries from the public sector's with high (and likely long-term) monopoly over healthcare, to structural unemployment. Thus restructure health expenditure the Bank is exploring a more to strengthen primary care, and proactive targeted approach, to improve and reorganize the tying labor and employment pharmaceutical industry. Even support to enterprise restruc- with these measures, however, turing or financial sector opera- improved health outcomes may Many countries see the tions that entail mass layoffs, be elusive, since environment need to move . . . toward severe restructuring, or down- and diet factors also play a role. more general secondary sizing. A study of Russia's coal and technical education sector recommends twinning a In education, many countries and technical education targeted labor component with see the need to move from an and better desxgned any projects that restructure or emphasis on narrowly focused market-dniven training downsize enterprises. vocational education and over- that meets labor market specialized training programs needs Redesigning Social Sector toward more general secondary Programs and technical education and better designed, market-driven Many countries of the region training that meets labor have recognized the need to market needs. Curriculum redesign and reorient their redesign-especially for social sector programs in courses in finance, accounting, health, education, and training. and management-related 128 The Transition in Central and Eastern Europe and the Former Soviet Union subjects-is high on the have low financial returns, and agenda. While inflation is countries in the region are often rapidly eroding budgets, loath to borrow for this pur- higher education receives a pose. Their concern is that such disproportionately large share projects do not directly gener- In Hungary and Romania, of spending in many parts of ate income and need to be Bank-supported prOJeCtS Eastern Europe and the former repaid from general govern- have introduced targeted, Soviet Union. ment revenues and scarce for- eign exchange. Because of this, cost-efective public health interventions such World Bank Support to the Bank support to the social sec- Social Sectors tors has been limited. Even so: as the rehabilitation of medical facilities, the The World Bank has used a * In Poland, a health project is introduction of manage- range of vehicles to finance in place to help move the focus ment information systems social sector policy reforms toward primary care and to hospitals, and technical and associated investments. In prevention, improve sector assistance for health some cases-such as management, contain costs, and i -~~~~~~ services management adjustment, recovery, or decentralize and demonopolize rehabilitation operations in the delivery. former Czechoslovakia, Slovakia, the former Yugoslav In Hungary and Romania, Republic (FYR) of Macedonia, Bank-supported projects have and Russia-implementation introduced targeted, cost- of selected social policies has effective public health been an integral part of a interventions such as the Bank-supported structural rehabilitation of medical adjustment program. In other facilities, the introduction of cases (as in Armenia and management information Belarus), World Bank systems to hospitals, and assistance for social sectors has technical assistance for health been provided through services management. institution-building loans or traditional investment loans. * In Albania, a project to rehabilitate schools, ensure While projects in the social textbook provision, and sectors usually have high restructure outmoded curricula economic returns, they may is under implementation. 129 The Evolving Role of the World Bank * In Russia, a management affect competitiveness and the and finance training project demand for labor. The will set up a public-private reallocation of expenditures foundation to strengthen the within this sector is made skills needed in a market somewhat easier by its large economy, such as management, budget share; and for fiscal, finance, and professional labor-market, efficiency, and services. international competitiveness reasons, cutbacks are inevitable. Strengthening Safety Nets The World Bank has supported To maintain consensus and reforms in this area through its support, governments must lending, sector work, poverty maintain the safety net that assessments, and technical protects those hurt most by assistance. Social sector transition. Social expenditures, reviews, typically a prelude to especially pensions, are the project identification, have most explosive element in state been prepared recently for Social expenditures, budgets and are almost Kyrgyz Republic, Russia, certainly unsustainable. Despite Ukraine, Hungary, and Poland. temstecial pensions,iare their expense and generosity, Poverty assessments are based however, some are so poorly on Bank-sponsored statistical element in state budgets targeted that they fail to protect surveys of household income and are almost certainly those most at risk. and expenditure. unsustainable. Despite their expense and Across the region, countries are On the lending front, a rural generosity, however, some focusing on how to reform poverty alleviation project in are so poorly targeted that their pension and unemploy- Albania was designed to test they fail to protect those ment programs and their social different approaches to rural most at risk welfare systems-which in public works and small-scale some countries now consume credit and to create employ- as much as 20 percent of GDP. ment and improve the cash Financed by payroll taxes that incomes of rural households. - sometimes account for over 60 The remarkable success of this percent of wages (including pilot project speaks for its those for health), the system is replication on a larger scale in distortional and thought to urban areas. 130 The Transition in Central and Eastern Europe and the Former Soviet Union Infrastructure involvement can contribute only a small fraction of the Public infrastructure invest- investment needed. Internal ments and private-sector cash generation and private (In infrastructure) the growth are strongly investment are essential. The Bank's role will lie as complementary, and the Bank's role will lie as much in much in coordinating contribution of public coordinating assistance, easing assistance easin investment to private constraints to foreign direct productivity is rarely disputed. investment, helping countries constraints to foreign Efficient investments in trans- frame "market friendly" regula- direct investment, helping port and other infrastructure tory systems, and supporting countries frame "market can make a significant institutional development to friendly" regulatory difference in supply response. raise and allocate resources for systems . . . as in directly In central Asian countries, for infrastructure as in directly financing investments instance, greater integration financing investments. with nearby (but still largely inaccessible) South Asian The World Bank has financed markets and access to a wider some $840 million in infra- range of trade partners will structure and housing invest- depend critically on the ments in FY93 alone. Catching improvement of the region's up on the public investment transport and communications and maintenance backlog is key infrastructure and its oil and gas to attracting foreign direct pipelines. To create a more investment and facilitating trade efficient infrastructure, flows and the supply response however, major policy reforms There are, for example, severe are needed. And across the capacity constraints in region, there needs to be a shift telecommunications-a sector from new capacity-expanding neglected in the past that today investments to rehabilitation suffers from outdated tech- and maintenance. nology. In both the Czech Republic and Slovakia, Large sums will be required. telecommunications projects Countries will have to avoid have sought to expand capacity, "white elephant" projects and establish a regulatory frame- realize that even substantial work, and support commercial- public resources and donor ization that readies enterprises 131 The Evolving Role of the World Bank for privatization. In Hungary, a In Poland, emphasis is on Bank telecommunications loan housing finance. The housing supported one of the largest sector is a challenge. It is often ever privatizations in an highly subsidized, and the infrastructure sector. macroeconomic environment is not conducive to developing In many countries, transport housing finance. needs to be reoriented toward new markets and different * In Albania, a project focuses modes, for example, away on completion of unfinished from rail toward more flexible housing units, and the privatiza- (and more easily privatized) tion of communal housing by road traffic. In Russia, for municipalities. example, a highway rehabilita- tion and maintenance loan is The Role of Guarantees designed to help shift from rail to road for short-haul freight Keeping the emphasis on traffic by improving the indirect support of infra- reliability of roads. structure development, the Bank has also engaged in Housing reforms will help dialogue with countries in the create labor mobility and region on the use of efficient labor markets. They guarantees, which permit will free state enterprises from large-scale investments without Keeping the emphasis on burdensome social assets and directly adding to public sector indirect support of infra- state and local governments debt. Contractual compliance structure development, from the fiscal burden of social guarantees are designed to the Bank has also engaged and communal housing, separate commercial risk from allowing them to turn their contractual risk. They in dialogue with countries I energies from ownership to guarantee loans made by a in the region on the use of .. i public service provision: private lender to a private guarantees, which permit project against the risk that the large-scale investments Bank activities planned for government will not meet without directly adding to Russia include promoting land undertakings critical to the public sector debt market reform, housing privati- project's viability. Several zation, and demonopolization operations have been discussed of the construction industry. concerning motorway projects 132 The Transition in Central and Eastern Europe and the Former Soviet Union in the Czech Republic and technologies. T he main sources Poland and a pipeline project of air pollution are power in Poland. In the first of these, generation, industry, motor private lenders to a private vehicles, and road transport, toll road concession are while industrial effluents cause beneficiaries of the guarantee. a great deal of water pollution. The contractual risk is that the With energy prices sometimes To stop (and reverse) government will not stick to a still at one-third of world environmental damage pre-agreed schedule of toll rate prices, overconsumption is rife. requires both know-how increases critical to financial and financing. Lack of viability of the concession. To stop (and reverse) environ- funds and weak Private financing allows a mental damage requires both implementation capacity government to focus its limited know-how and financing. Lack have impeded environ- spending and borrowing of funds and weak imple- mental improvements capacity on other high priority mentation capacity have and socially desirable projects. impeded environmental But structuring these improvements. But everything guarantees and pricing them is cannot be done at once, and not easy. difficult choices must be made and priorities set. The World Cleaner Environments Bank has supported measures to raise public awareness and Incentives under the command strengthen institutions. It has regime had much to do with also helped governments the poor ecological state of establish incentives to reduce Eastern Europe. Across Eastern energy consumption and adopt Europe and the former Soviet more environment-friendly Union, water and air pollution technologies. continue to undermine both livelihood and health. The Some countries (notably socialist system's underpricing Kazakhstan, Turkmenistan, of energy, its drive to promote and the Russian Federation) heavy industry, and the are major energy producers- prevalence of industrial Russia alone accounts for 20 subsidies encouraged energy- percent of the world's oil and intensive, environmentally gas output. Others (the Baltics, harmful industries and Ukraine, and much of Eastern 133 The Evolving Role of the World Bank Europe, for instance) are heavy successfully slow price importers and, for the time adjustments, reductions in being, reliant on a sole pollution will also be slower, supplier. In producing regions, since lower energy prices mean the aim is to increase the continued high energy efficiency of production and consumption, lower energy exploitation, attract foreign sector profitability, and fewer It is necessary to find investment, and improve funds available for reinvestment ways to move ahead with incentives for energy in pollution-abating tech- conservation through pricing nologies. It is necessary to find energy price reform while and other policies. In ways to move ahead with compensating the most consuming countries, the aim energy price reform while vulnerable groups . is to diversify supply, develop compensating the most regional networks for major vulnerable groups. energy carriers, promote energy saving investments, While some environmental reduce waste, and address the problems will be helped by safety aspects of nuclear power price changes, others will need generation. targeted investments. Bank- supported environmental Adjusting energy prices both in investment projects are current- relative terms (between ly under way in some countries: households and industry) and absolute terms is key in all * In Slovenia, an environmen- countries. Change, however, tal project seeks to help will be neither quick nor easy. households and industry shift Private households-which from polluting fuels (such as benefitted for years from coal) to gas or district heating subsidized energy-are likely to by financing gas-connection resist. So, too, will industrial works and purchases of gas- users, where demand elasticities fired appliances. in the short run are low. Organized labor has also * In the Czech Republic, resisted, fearing what industrial another project is working to power price increases may do improve power system to enterprise profitability and efficiency and reduce air employment. If such objections pollution in northern Bohemia. 134 The Transition in Central and Eastern Europe and the Former Soviet Union The same project also aims to impact of closing polluting reduce lignite consumption by enterprises be on workers and making power plants more nearby towns? efficient, to curtail power plant sulphur dioxide emissions with Foreign investors and those flue-gas desulfurization, and interested in privatization are to increase the reliability particularly concerned with and efficiency of power liability for cleaning up past transmission systems. pollution. Ensuring that environmental policies are In Russia, the Bank helped to "market friendly" is also key. establish an environmental Generally, the Bank has framework program under emphasized the importance of which some $200 million in reducing ongoing pollution pledged funds will strengthen before addressing the clean-up Russia's environmental of already polluted areas, which management and finance must be done over time and resource recovery and pollution when resources become projects-"win-win" projects available. Past environmental meant to generate foreign damage is generally deemed the exchange to pay off investment responsibility of the costs. government, while stricter pollution standards typically The Bank's involvement in this apply to future operations of a area has also included private enterprise or joint environment strategy studies, venture. now completed for most countries. These studies rank Research on environmental The Bank has emphasized environmental priorities on the taxes and other instruments the importance of basis of health impact and cost continues. Vehicle taxes, fuel reducing ongoing effectiveness and can help taxes, and improved traffic pollution before address- clarify a country's policy management, for instance, can ing the clean-up of already regime. The key issues are: contribute substantially to polluted areas, which How strict should environ- environmental improvement. must be done over time mental standards be? How Such economic policies can and when resources quickly should they be often make a difference, but at become available enforced? How serious will the lower cost than direct 135 The Evolving Role of the World Bank investments. These measures substantially increased in real can go a long way toward terms. reducing the demands on the environment that, over time, Other key aspects of energy economic growth would policy reform-particularly in otherwise bring. sector restructuring, commercialization, and Energy Projects privatization-have made less progress. Major energy With varying degrees of enterprises have yet to be success, the Bank's energy privatized, and private projects have sought to support investment, particularly in the policy reform, institution oil and gas sector, has not been building, improved investment substantial relative to needs. efficiency, environmental This reflects political and benefits, and regional economic instability, as well as integration. In addressing the inadequate and uncertain severe underpricing of all regulatory, legislative, and fiscal energy, the Bank has had some frameworks. influence in most countries. For some early reformers This has been achieved through One project that highlights the in Central Europe (for its economic and sector work, importance of policy reform is example, Hungary and the through conditionality in some a $610 million loan (for a $1 Czech Republic) most adjustment and investment billion project) supporting the forms of energy to lending operations, and first major effort to rehabilitate industrial consumers are through ongoing dialogue. For Russia's oil sector. The project now close to or at some early reformers in Central supports major pricing, economic costs, and the Europe (for example, Hungary taxation, legislative, and and the Czech Republic) most institutional reforms to financial positions of forms of energy to industrial encourage new investment, energy enterprnses have consumers are now close to or both foreign and domestic. The also improved at economic costs, and the benefits and economic returns financial positions of energy are high and will begin to be enterprises have also improved. realized when the first round of Further east, progress is slower, equipment arrives at Russian oil although even in Russia, fields. A second project will petroleum and gas prices have build on the first. 136 The Transition in Central and Eastern Europe and the Former Soviet Union Achieving greater efficiency and replacing theni with conservation in energy use is internationally certified plants crucial. For the Baltics, a or with power plants based on district heating rehabilitation alternative fuels. For some project in Estonia and a power countries in the region, this rehabilitation project for transformation is not easy. The Lithuania have just been Baltics, for example, which The challenge of moving approved. Greater efficiency is now rely on a sole supplier of an economy where also an objective of the Bank's gas, might become more 90 to 95 percent of planned power-transmission vulnerable with conversion to productive assets are projects in Slovakia and Poland, gas. The Bank has not to date owned by the state or which will link these countries been involved in financing workers' collectives to one with the rest of the European nuclear projects; that financing where private ownership is grid. is generally led by the private dominant (60 percent or sector or other international Investment projects have financial institutions. dominated the Bank's energy precedent lending, but among adjustment Private Sector Development loans, an energy sector adjustment loan to Poland is The challenge of moving an noteworthy. This loan supports economy where 90 to 95 government efforts to develop percent of productive assets are an energy sector regulatory and owned by the state or workers' pricing framework and to collectives to one where private restructure and commercialize ownership is dominant (60 public utilities. Such steps are percent or more) has no historic needed to attract the precedent. The Bank has used approximately $3 billion in three means to directly support energy investment required by ownership change and private the gas and power sectors over sector development: the next years. * Adjustment loans that In the nuclear energy sector, support specific policies to the Bank has participated in a speed up privatization. G-7 study of environmental clean-up possibilities for * Technical assistance loans to phasing out unsafe plants and finance expertise. 137 The Evolving Role of the World Bank Box 1. World Bank Group Assistance for Privatization in Kazakhstan and Russia Kazakhstan. Following independence in late 1991, Kazakhstan initiated a privatization program. Enterprises were transferred through a slow, case-by-case process and went primarily to worker collectives at highly favorable prices and with restrictions on business practices. By mid-1992, the drawbacks were obvious and the government invited the World Bank to assist in the development of a new strategy. In the fall of 1992, the Bank, together with EBRD and USAID, worked with the Kazakh State Property Committee (SPC) and other agencies to define a comprehensive, action-oriented privatization strategy with policy recommenda- tions on competition policy, capital market development, and private sector development. By March 1993, it was signed by the President. Parliament passed relevant legislation shortly thereafter. The program's four components provide for (a) local auctions of almost all small-scale enterprises by the end of 1994; (b) mass privatization of the roughly 3,500 medium and large, nonagricultural firms between 1994-96 (with most shares sold to investment funds using coupons invested in them by individuals); (c) case-by-case privatization of some very large or special enterprises, mainly through international tender; and (d) privatization in the agricultural sector, with the allocation to individual farmers of long-term use rights for state farmland. This sound program enjoys broad consensus. Execution began by mid-1993 and has proceeded quickly. Pilot pro- grams for small-scale privatization in six large cities and for truck and warehouse auctions have begun. The first international tender for a very large enterprise was also launched, and SPC has started share auctions for mass privatization. Implementation support has been provided by the World Bank, the European Union, and USAID. The World Bank will provide additional technical assistance under two sequential loans, and further Bank projects may help restruc- ture enterprises after their privatization and seek to improve the economic environment in which they operate. Russia. A major turning point in Russia's transition to the market occurred in late November 1991 with the imple- mentation of the Law on Privatization. In March 1992, a Bank team of technical advisors-management consultants, lawyers, public relations specialists, economists, and accountants-helped to construct the detailed mechanics of the program. This detailed exercise provided crucial assistance to the conceptually sound but poorly implemented program. Since that time, the Russian Privatization Fund (GKI) has: * Elaborated an economically defensible and politically palatable privatization program. * Begun the sale of vouchers permitting 146 million Russian citizens to participate directly in the privatization process. * Changed firms to joint stock company status, distributed shares to insider workers and managers, and sold, by March of 1994, much of the remaining stock for vouchers in more than 9,000 medium and large-sized firms-an outcome remarkable in its scope and scale. Between late 1991 and early 1992, before Russia joined the World Bank Group, when GKI was formulating its key privatization policies, IFC maintained a permanent advisor in Moscow who participated in GKI's policy meetings and helped elaborate a conceptual framework of the program-that has stood up remarkably well over the ensuing threc years. In conjunction with the EBRD, the Bank prepared a $130 million privatization loan which was approved by the Executive Directors in December 1993. The Bank and IFC continue to work closely with the Russian privatization program and have assisted firms after they have been privatized. 138 The Transition in Central and Eastern Europe and the Former Soviet Union * Credit lines to augment the terms of "share of value-added resources of banks and to privatized by a certain date," encourage them to lend to the using public offerings or direct new private sector. sales. In the Czech Republic, Slovakia, and Poland, very Through the IFC, the Bank different methods of mass Group has also taken an equity privatization were supported position in private enterprises, by Bank adjustment loans. and MIGA provides insurance Countries of the former Soviet services to foreign investors. Union, too, are pursuing a As discussed earlier in relation variety of approaches accepted to infrastructure financing, the by the Bank and incorporated use of various forms of into Bank-supported guarantees (including liquidity- operations. The Bank also enhancing guarantees for supports privatization of capital markets) could become agricultural land and state an important instrument to farms-just as important as support private sector privatization in the industrial development. and service sectors. Bank Support for Private Sector In addition to its early support Development for Central Europe (particular- ly Poland), the Bank has been poiyBas ngto lThe Bank has not used policy- active in the Russian based lending to promote a Federation, Kazakhstan (see promote a particular particular model of privatiza- Box 1) and the Kyrgyz model of privatization. tion. Rather, adjustment loans Republic-with both economic Rather, adjustment loans were generally used to speed work and technical assistance. were generally used to up privatization following Early support to Russia includ- speed up privatization whatever method or mix of ed technical assistance for the following whatever methods (privatization tracks) mass privatization program, a . ~~~~~~~~~~~~metbod or mix of methods the particular country wanted public information campaign, .. . .. .. . . ~~~~~~~~(privatization tracks) the to pursue. Hungary and and policy advice on such Bulgaria, for example, did not issues as corporate want to use voucher schemes governance, interenterprise to pursue for mass privatization. Bank liabilities, competition policy, adjustment loans set targets in environmental issues 139 The Evolving Role of the World Bank associated with privatization, before privatization. Lines of and divestiture of enterprises' credit were prepared for * social assets. Hungary and Poland in the late 1980s and early 1990s to pro- The Bank's message has Drawing on early experiences vide long-term resources to been that it is more in Poland, the Czech Republic, new commercial banks and to important to move toward and Slovakia, the Bank has encourage them to lend in private ownership than to been active in disseminating support of the transformation. try to perfect any lessons, making transparent A recent loan for restructuring particular privoatization the costs and benefits of private enterprise in Russia will met hod. Experience is different types of mass test the demand for credit by teaching both the Bank privatization, as well as com- the emerging private sector. paring mass privatization (via The project is innovative. It is and member countries,, a vouchers) to case-by-case meth- accompanied by equity funds what works and what ods hased on auctions and spe- and technical assistance centers doesn't cial management or labor buy- (financed by the EBRD, IFC, outs. The Bank's message has and bilateral donors). The been that it is more important credit will be intermediated by to move toward private a selected group of commercial ownership than to try to banks required to comply with - perfect any particular internationally accepted bank- privatization method. ing standards and practices. Experience is teaching both the Bank and member countries Strong demand for investment what works and what doesn't. credit, however, is unlikely to But much depends on the emerge before an economic circumstances of individual upturn, as evidenced by the countries, including the poor initial disbursement of the * political rapport between Polish and Hungarian credit insiders and outsiders in the lines. And wholesale credit that enterprise sector. is supposed to reach new entrepreneurs through the Froml the beginning, there was intermediation of a banking concern about the availability system itself in crisis may be of credit both to newly priva- putting the cart before the tized enterprises and to enter- horse. A stronger banking prises attempting to restructure sector may be a prerequisite for 140 The Transition in Central and Eastern Europe and the Former Soviet Union rapid private sector develop- included agribusiness projects ment in transition economies. in Hungary and Poland, a hotel and an office building in THE ROLE OF IFC. IFC has Warsaw, coal-bed methane gas supported the private sector by recovery in Poland, and gold investment in private enter- mining in Uzbekistan. prises and technical assistance with privatization, capital Capital market projects have markets, and promotion of included the privatization of foreign investment. The banks, the creation of new number of approved IFC banks in Hungary and investments in the region rose Kazakhstan, credit from two in FY90 to twenty- lines-including one to the nine in FY94. Beneficiaries Moscow International Bank, include Bulgaria, the Czech the creation of leasing and Republic, Estonia, Hungary, factoring companies, and the Kazakhstan, Poland, Romania, participation in venture capital Russia, Slovakia, Slovenia, and investment funds both at Ukraine, and Uzbekistan. IFC's the national level-the Ukraine investments have concentrated Fund, for instance-and on a on manufacturing and capital multi-country level. Technical market projects. Examples of assistance in capital market the former include a cement development is also available The number of approved plant in Estonia, float-glass and consists of advice on IFC investments in the and special steel plants in securities legislation, the region rose from two in Poland, and glass container, creation of stock, bond and, FY90 to twenty-nine in wheel manufacturing, carbon commodity markets, the FY94 black, and newspaper framework needed for banking investments in the Czech and leasing, and the registration Republic. In addition, IFC has and custody of shares in newly made telecommunications privatized companies. investments in Hungary (including a joint venture to Technical assistance to small- operate Hungary's national scale privatization is now telecommunications system) under way in Ukraine and and has two oil projects in Belarus. Meanwhile, IFC has Russia. Other ventures have provided advisory services and 141 The Evolving Role of the World Bank assistance to the privatization established. The new regionally of major enterprises, often or functionally specialized (but finding them suitable foreign still publicly owned) banks joint-venture partners. FIAS continued to take deposits and has provided advice on how to make loans. And while much improve the foreign investment was expected of them in legislation and climate. improved credit allocation, directed credit continued and Building the New Financial little in the incentive Sector framework changed. Too rapidly, some thought, the door Systemic transformation from opened to many small private centrally planned economies to banks, even though the market economies requires not regulatory and supervisory only a new banking system but framework was far from also the regulatory and adequate. All this took place payments systems, and other simultaneously with economic infrastructure within restructuring, downsizing, and which true financial intermedi- privatization in the enterprise aries can function responsibly. sector, leading to the continued accumulation of nonperforming T he problem is time. Ideally, the loans and deterioration of the Systemic transformation first step should be to build the balance sheets at new banks, from centrally planned supervisory and regulatory public and private. economies to market environment and create or economies requires not import financial intermediaries While there are important only a new banking with the appropriate staff. Only differences among countries in system but also the then, should these new actors their financial sectors, there are sysemulatory and payments -make the credit allocation enough similarities to suggest regulatory and payments decisions that influence the common issues that need to be infrems,astruot rer path of the economy. In reality, addressed strategically. These economic infrastructure governments have not had this include: improvements in legal within which true luxury and have had little and regulatory systems, financial intermediaries choice but to use the shell of especially in the areas of bank- can function responsibly the old system. Monobanks ing regulation and supervision; were hastily split, and a modernization of payments two-tier banking system systems; restructuring and 142 The Transition in Central and Eastern Europe and the Former Soviet Union privatizing the former state payments system and to update banks, support for moving banking technology. The commercial banks more rapidly Poland financial institutions toward international standards; development loan has aimed at provision of extensive training twinning arrangements in banking services, credit between Polish and inter- operations, accounting and national banks to strengthen auditing and the like; and credit policies and internal moving to market-based credit management practices. allocation by phasing out directed credit and non- In Russia, one of the Bank's The Poland financial insti- budgeted interest rate subsidies. larger technical assistance loans tutions development loan (a $200 million financial insti- has aimed at twinning Technical Assistance and tutions development project) Institution Building aims to build the capacity of a arrangements between core thirty to forty private Polish and international World Bank support for commercial banks, which will banks to strengthen credit financial sector development operate to higher banking policies and internal has tended to have two distinct standards. It also provides the management practices phases. In phase one, there is basis for a private (federal) intense focus on technical clearing system. The project assistance both to the future consists of three components: regulators and supervisors and commercial banking, consisting to bank staff. This involves of institutional strengthening developing banking infra- and a systems modernization structure through basic program; bank supervision, legislation, introducing consisting of the development improved accounting and of on-site supervisory capabili- auditing, encouraging pruden- ties and legal assistance for the tial regulation, modernizing the Central Bank of Russia; and payments system, and training bank accounting, which will staff and managers in project focus on the modernization of evaluation, corporate finance, accounting and auditing stan- and risk assessment techniques. dards and practices. A similar In Hungary, for example, an operation is under way in early modernization loan Kazakhstan. attempted to strengthen the 143 The Evolving Role of the World Bank In Albania, Lithuania, and created to handle insolvency, Moldova, the strategic focus is including the bad debt of state- more fundamental. The World owned banks. Basic issues such Bank is emphasizing the need as supervision, auditing and to establish a proper legal accounting standards, and framework for commercial payments system moderniza- banking, to restructure state- tion are also being addressed. owned banks, and to overhaul In addition, diagnostic studies the payments system. In of the four state banks are Ukraine, where credit policy being financed. has made financial sector reform especially difficult, the In Estonia, where reforms are institution-building loan is more advanced and the macro- financing a twinning arrange- economy has stabilized, it is ment for the state savings possible to be more ambitious. banks, and an institutional Parallel support from the development fund (IDF) grant World Bank and the Swedish is financing technical assistance government aims at expanding in accounting for commercial both commercial bank capital banks. Similarly, in Belarus, and improving banking skills. where reform is just beginning, In Latvia, the World Bank an institution-building loan is supports efforts to restructure providing financing for and privatize state-owned O)nly when there has been twinning arrangements for the savings and commercial banks some technical assistance, savings banks and the largest and to modernize the payments training, and institutional private bank, and an IDF grant system. development can more is financing accounting reforms. ambitious adjustment Financial Sector Adjustment operations be launched In the less developed Kyrgyz Republic and in Uzbekistan, the Only when there has been strategy is different again. technical assistance, training, World Bank technical assistance and institutional development is provided for auditing two can more ambitious adjustment kev banks with problem operations be launched. In portfolios and for training some countries, shell state bankers and bank accountants. banks are being allowed to Under a project now being shrink while newly-licensed prepared, an agency would be private banks expand. In 144 The Transition in Central and Eastern Europe and the Former Soviet Union others, the need to address agent of change for all but a problems in both the banking certain subset of troubled, system and enterprises jointly is indebted enterprises (Box 2). paramount. Dealing with the banks alone would risk that Phase two of the World Bank's future lending would again be financial sector support focuses For some of the more channeled to their traditional on strategies for the recapital- advanced countries in client base-including weak ization of banks and financial Eastern and Central and debt-burdened or loss- restructuring of enterprises that Europe, the enterprise and making enterprises. Solving the should allow the newly financial sector adjust- enterprise problem is a sine reformed, retrained banks to ment loan (EFSAL) has qua non for lasting viability of function as competitive entities the banking system (as distinct with positive net worth. Key coie to restore bk from a one-time overhaul). questions relate to the most desirable form and timing of viability and strengthen Bank assistance recognizes the the inevitable recapitalization, financial intermediation. need to address nonperforming the degree of its linkage to These loans support gov- loans of commercial banks-a bank privatization and to enter- einent policy reforms legacy that has undermined the prise restructuring, liquidation, designed to resolve the dual objectives of restructuring and privatization. debt overhang of state- enterprises and providing owned enterprises and the adequate credit to emerging For some of the more advanced enterprises. In some cases, the countries in Eastern and portfolio problems of limited capacity of the banks Central Europe, the enterprise state-owned banks has necessitated more central- and financial sector adjustment ized approaches in the short- loan (EFSAL) has become the term, with the most problem- vehicle of choice to restore atic enterprises isolated from banking viability and the rest of the banking system. strengthen financial inter- Increasingly, as banks have the mediation. These loans support technical capacity to government policy reforms participate in enterprise designed to resolve the debt restructuring, a lasting solution overhang of state-owned can focus on the active enterprises and the portfolio involvement of banks that had problems of state-owned banks. lent to problem enterprises in Both are needed to unfreeze the first place. In Poland, banks bank lending (much of which is were thought to be the only now tied up in rolling over 145 The Evolving Role of the World Bank Box 2. Enterprise and Financial Sector Adjustment Loan (EFSAL) in Poland In 1993, Poland embarked on a far-reaching enterprise and bank restructuring program (EBRP) supported by a $450 million adjustment loan from the World Bank. The program assumed that banking and enterprise problems must be jointly resolved, and that banks-not the government, a centralized agency, or a "hospital" for sick enterprises- were the only effective agent of change for troubled, indebted enterprises. Banks know their clients best and can dis- tinguish better than a government agency or an outsider between borrowing enterprises that are loss-makers under any scenario (and should therefore be pushed into bankruptcy or liquidation) and those that could be restored to profitability if properly down-sized or restructured and their debt overhang reduced. For this scheme to work: * Banks must face a hard-budget constraint. Practically speaking, this means that they must be privatized, and that they must believe that no further resources are forthcoming to support them. (In Poland, bank privatization is part of the loan conditionality, and the agent-of-change role is already being played by nonprivatized banks governed by a steadfast and determined Ministry of Finance). * The accounting and bank regulatory and supervisory framework must be right, with market valuation of loans in bank portfolios and provisioning required for nonperforming loans. In Poland, a comprehensive program to strengthen bank supervision was supported by the EFSAL. * Banks must be recapitalized to give them a sufficient capital cushion to provision and write off loans to problem or nonviable dcbtors following restructuring or liquidation. * The privatization program and governance framework for enterprises must ensure prudent management and a hard-budget constraint. The Poland EFSAL supports the mass privatization program and sets specific targets for more traditional privatization tracks. * Bankruptcy procedures must function smoothly. Given the expected workload and inexperience of courts, the Polish EFSAL supports a temporary out-of-court conciliation procedure led by banks that would facilitate creditor- led workouts. Banks were given a one-year window to conclude conciliation proceedings. Creditor banks account- ing for 50 percent of loans were also permitted to impose a solution on minority creditors. * For enterprises unable to agree on conciliation or bankruptcy in one year, a government-managed intervention fund was set up with a limited budgetary envelope. Banks will have to write off a large portion of loans handled by this fund. With these incentives, a profit-minded bank will do its utmost to recover valuc from its nonperforming loans, either by pushing the borrower into bankruptcy or liquidation to recover whatever value remains, or by restructuring the borrower's debt (jointly with other creditors) such that the enterprise once again becomes profit-generating. So far, two banks have been privatized and another is in the process. The mass privatization program and privatiza- tion through other routes are generally on track. By the end of the one-year window, banks had dealt with 80 percent of their bad loans in value terms and were expected to complete the job in a matter of weeks. Bank-led conciliations were used to work out 60 percent of bad loans in value terms. The balance was handled through triggering bankrupt- cy or by auctioning off assets. Some of the remaining loans are being "sold" to the intervention fund. It remains to be seen whether these sales will be at prices that reflect the intended punitive nature of state intervention. One might not choose this creditor-led approach, however, where banks are not yet truly banks-as in Albania or Moldova, where banking and credit skills are still rudimentary. This approach is also not indicated where bank pri- vatization is not on the agenda and where government policies for governing public sector banks are not credible. 146 The Transition in Central and Eastern Europe and the Former Soviet Union nonperforming loans) so that technical assistance and credit can be redirected toward institution building. Using performing state-owned twinning arrangements between enterprises and the private Polish and European commer- 0fthe eleven financial sector. EFSALs support govern- cial banks, it has produced sector operations in fiscal ment policies aimed at strength- positive results. 1990-94 (totaling $2.1 ening bank management and billion in commitments), governance and reforming bank Of the eleven financial sector one quarter were adjust- supervision, accounting, operations in fiscal 1990-94 ment loans to help cover licensing, and regulation. (totaling $2.1 billion in com- the budgetary costs of Increasingly, EFSALs mitments), one quarter were incorporate incentives for adjustment loans to help cover bank-led conciliation and the the budgetary costs of bank enterprise restructuring restructuring of enterprise debt recapitalization or enterprise reduction. Such loans have restructuring (Table 2). Other already been made in Albania, operations have aimed to Poland, and Slovenia and are strengthen the banking system now under consideration in in two complementary ways- FYR Macedonia, Bulgaria, directly, through the finance of Romania, and Slovakia. equipment needs or technical assistance to the bank them- Within these loans supporting selves, and indirectly, by financial sector development providing long-term resources and deepening financial that banks intermediate. intermediation, the Bank has also provided technical Aid Coordination assistance for capital market development and the strength- Additional support for country ening of bank regulation and programs can be leveraged by supervision. One such project the Bank's economic work and in Poland supported an action cofinancing. Other donors (the program to strengthen European Union, bilateral financial institutions, the sources, and other multilateral regulatory and supervisory banks) often find the World capacity of the central bank, Bank's analyses useful as a and the policy and institutional framework for aid coordination environment. It included and as a compass for the policy 147 The Evolving Role of the World Bank measures that donor-supported financing. Given constraints on programs finance. A Bank- the absorptive capacity of many Aid coordination is time- assisted public investment countries, aid coordination is consuming but key to review of Albania, for example, also needed to ensure that ensuring concerted policy led to greater donor and gov- donor support will fit govern- advice, tecbnical assis- ernment agreement on a public ment priorities. The centerpiece tance, and investment - investment program, and many of aid coordination is the con- financing t donors have now chosen to sultative group process. In provide financial support. Such Eastern Europe and the former aid coordination is time-con- Soviet Union, the Bank has suming but key to ensuring either organized or participated concerted policy advice, techni- in many EU-led coordination cal assistance, and investment efforts designed to help reduce Table 2. Financial Sector Operations Uuly 1989 to June 1994) Month of Amount Country Name of loan approval (US$ millions) Hungary Financial systems modernization Sept. 1989 66 Poland Agroindustrial exports developmenta Feb. 1990 100 Poland Industrial export developmentb Feb. 1990 260 Poland Financial institutions development June 1991 200 Poland Enterprise restructuring and privatization June 1991 280 Bulgaria Private investment and exportsb June 1993 55 Romania Industrial developmentb May 1994 175 Russia Financial institutions development May 1994 200 Russia Enterprise restructuring June 1994 200 Poland Enterprise and Financial Sector Adjustment May 1993 450 Slovenia Enterprise and Financial Sector Adjustment July 1993 80 Total 2,066 a. With a component for developing the cooperative banking system. b. Includes funds for technical assistance to strengthen the banking system. 148 The Transition in Central and Eastern Europe and the Former Soviet Union constraints on external financ- able to provide guidelines and ing and to coordinate the over- general lessons for all transition all provision of foreign economies faced witlh resources. Sector-specific meet- fundamental changes in their ings have also been held, as, for structures of taxation and example, conferences on the assignment of revenue (includ- agriculture sector in Poland and ing the thorny issue of natural Albania. resource rents) and expenditures among different The Bank's Research and levels of government. Training Support Other Bank-sponsored studies As a knowledge-based institu- have examined how state tion, the Bank offers more than enterprises in Poland and just a financial product, and its elsewhere have responded to research has addressed issues various reforms: ranging from macroeconomic stabilization to enterprise * Comparative studies of Bank macroeconomic behavior. Bank macroeconomic private manufacturing in -studies bave sought to studies have sought to under- Poland, Hungary, the Czech h ,, , . , . , ] . ~~~~~~~~understand the reasons for stand the reasons for the out- Republic, Slovakia, and Russia * * -, - ~~~~~~~~~~~~the output collapse in put collapse in Eastern Europe and a survey of the private t o and the former Soviet Union sector in St. Petersburg have Eastern Europe and the and have drawn lessons from identified factors encouraging former Soviet Union and the experience of early reform- and constraining private sector have drawn lessons from ers. For example, how have the growth. the experience of early successes and failures of reformers macroeconomic stabilization * Comparative analyses of the programs in Latin America emerging legal framework for compared with those in private sector development in Eastern Europe? Another focus Eastern Europe have provided a has been fiscal federalism, baseline to assess the progress where a study compared the of reform. Russian experience to that of, among others, China, Brazil, * Extensive research has been Canada, and India. From these done on agriculture's transi- comparisons, the study was tion, including the collection 149 The Evolving Role of the World Bank and analysis of data on farm- To deal with the problematic level restructuring. area of data and national accounting, the Bank has Since transition implies major produced two editions of its changes for households, an Guide to Historically Planned important focus of Bank Economies. A Bank newsletter, research has been labor markets Transition, represents a specific and poverty. Labor market effort to communicate the studies have identified a grow- results of Bank analyses and ing pool of potentially long- studies to a wider audience. term unemployed and a widen- Circulation is now more than ing of skill premia in earnings 6,000, and demand in the distributions, and have assessed transition economies is strong. the implications of these find- ings for poverty. Transition One of the greatest challenges countries inherited a compre- of transition has been the wide- hensive if inefficient and fiscally spread need for the retraining unsustainable social welfare sys- of mid-level civil servants tem. Estimating the distribu- steeped in the ways of a tional impact of social spending planned economy. They have was therefore a necessary pre- had little exposure to market- One of the greatest chal- lude to effective targeting of based systems, and this lenges of transition has social support and to the pover- mismatch in skills has been the widespread need ty assessments now beginning constrained economic policy- for the retraining of mid- in the region. making. The task is to raise skill levels while seeking level civil servants steeped Research activities have also greater consensus on economic .n the ways of a planned - embodied institution building policy among policymakers economy and extensive collaboration and throughout the with leading analytical population. institutes and statistical offices. Scholars from the region have Since 1990, the World Bank's been brought to the Bank, and Economic Development many joint conferences have Institute's (EDI) efforts have been organized with included direct training, the institutions in Eastern Europe sharing of experience both and the former Soviet Union. within and across regions, 150 The Transition in Central and Eastern Europe and the Former Soviet Union and-increasingly-the training Conclusion of local teachers to train mid- level officials in local institu- The Bank's key challenge in tions and agencies. In Russia, dealing with transitional where demand for retraining is economies has been to enormous, EDI retrained a calibrate the volume and group of teachers recruited composition of assistance so mostly from Russian universi- that it complements domestic Assistance that is too little ties and research institutions. In reform, making it less socially or too late makes reform late 1992, a training center at and economically costly and Moscow State University was more sustainable. Assistance u established that organizes a that is too little or too late may endanger its progress. wide range of courses, targeted makes reform unnecessarily Financial assistance that is primarily at officials and taught costly and may endanger its premature may delay primarily by local staff. This progress. Financial assistance reform and lead to capital model is being replicated in the that is premature may delay flight, adding to debt Ukraine and in Uzbekistan, reform and lead to capital rather than to economic with plans for Kazakhstan, flight, adding to debt rather growth and public welfare Belarus, and Moldova. Similar than to economic growth and programs have begun at the public welfare. When a Center for Economic Research country's need is exceptionally and Graduate Education in large, it may threaten the Prague, and at Warsaw portfolio of the Bank and University. Teachers are being increase the cost of borrowing trained in the former Soviet for other members. Union, at EDI in Washington, DC, and at a recently estab- In identifying the future direc- lished (1993) program with the tion of Bank lending, it is Joint Vienna Institute. Most important to recognize that recently, EDI has begun to restructuring and growth in reach out to journalists, parlia- transition countries will depend mentarians, and the general on addressing two major public to disseminate more constraints: demand-side widely and effectively informa- constraints that impair the tion on the objectives and likely business environment and the results from reforms, both desire to invest (such as lack of macroeconomic and structural. macroeconomic stability, 151 The Evolving Role of the World Bank insufficient liberalization, and a The key challenge is to ensure weak legal framework) and that adequate progress has been * supply-side constraints in the achieved toward an * availability of resources such as environment conducive to credit to enterprises and key restructuring and private sector public infrastructure needed to growth before transferring complement the growth of the significant resources through private sector. The key is to infrastructure and credit: achieve a balance between interventions addressing both * Much legislation and price types of constraints. policy is in the hands of sub- national governments and the Historically, lending operations division of responsibilities The key challenge is to have been well-geared for between these governments ensure that adequate investment operations and and the center is still unclear, progress has been achieved credit lines. But lack of particularly in Russia and toward an environment t progress today in improving the Ukraine. In some countries, it conducive to restructuring ;Wenvironment for restructuring is necessary to await the and private sector growth * and investment may result in: redefinition of political and economic authority between before transferring * Undisbursed credit lines, as local governments and central significant resources occurred in countries where authorities. through infrastructure Bank loans were approved and credit before investment demand and * Privatization alone does not privatization progress required assure improvement in gover- them. nance and depolitization of firms, given the significant role a Balance of payments financ- played by insiders. Thus i ing that ends in capital flight in privatization loans and credit response to an unstable macro- lines to newly privatized firms economic situation. still involve significant risks. * Investments that end in * In some countries, law and under-used infrastructure order has deteriorated as * because the productive sectors governments have not have not yet been restructured. refocused their roles in these areas. This may have a major 152 The Transition in Central and Eastern Europe and the Former Soviet Union effect on the climate for new Russia. In terms of both the investment and private-sector political difficulties in growth. generating consensus and Toughout the rein social support, and the The Bank will also have to technical difficulties in trying already taken place, and recognize that legal and to implement the most perhaps the hope is institutional development appropriate policy measures, justified that through the crucial for economic reforms the task is daunting. systemic transformation of will take time to yield results. Central and Eastern These reforms cannot be In 1994, however, encouraging Europe and the former accelerated with large amounts signs are appearing: Central Soviet Union, a stronger of financial support. Technical Europe has started to grow, and more integrated world assistance faces absorptive- with Poland leading the new capacity limits that must be expansion. Albania, having economy IS emerging recognized. experienced a disastrous collapse in 1990-92, has seen The first four years of the GDP grow at close to 10 transformation from commu- percent for almost two years. nism toward markets and The Baltics seem ready for a democracy have included rebound. And in Russia, the massive output declines, a first six months of 1994 show surge in unemployment, and in better results than anyone some areas, ethnic and expected a year ago. religious conflict. After an Throughout the region, initially cautious attitude by its momentous changes have major shareholders-at least already taken place, and regarding the Soviet perhaps the hope is justified Union-the World Bank that through the systemic Group has taken on the new transformation of Central and challenge of supporting and Eastern Europe and the former financing the systemic Soviet Union, a stronger and transition in more than two more integrated world dozen countries, including economy is emerging. The authors are grateful to their colleagues in the World Bank who provided con- tributions for the paper. 153 The East Asian Economic Miracle Vinod Thomas and Peter Stephens East Asia has been uniquely successful in fostering growth, reduc- ing poverty, raising living standards, and integrating with world markets. The credit for this remarkable achievement belongs to East Asia has been the governments and peoples of the region. They were not alone, uniquely successful in fos- however. Open markets in industrial countries and development tering growth, reducing assistance contributed to progress. Since its first loan to Thailand poverty, raising living in 1950, the World Bank has had a long and active involvement standards, and integrating in the region-in lending some $71 billion through fiscal 1994, with world markets and in policy dialogue (see Figure 1). With remarkable commitment and perseverance, East Asia has practiced the key messages emphasized by the Bank in its devel- opment strategy: macroeconomic stability, investment in people, and building on export growth. The impact of the Bank's involvement is not easily defined in monetary or economic terms; it is better understood through the diversity and continu- ity of the relationship with its East Asian member nations. It is a mature relationship, and there have been differences along the way. For example, the Bank and its member countries have, at times, differed on the allocation of resources across the spec- trum of social and infrastructural services, or on the appropriate 155 The Evolving Role of the World Bank timing of a switch in industry has been achieved in East Asia, policy. And this is as it should but much remains to be done. be: the Bank's advice and recommendations are just part Diversity and Commonality of the menu of options countries may choose from in East Asian economies are managing their development. remarkably diverse. The region includes some of the richest And though the region is the developing nations-such as fastest growing, East Asia's Korea, and some of the record is not unblemished. poorest-such as Vietnam. It Much bas been acbieved Not all countries have sus- includes the world's most in East Asia, but much tamed high rates of growth. populous country, China, as remains to be done . East Asian governments have well as one of the least popu- not always given adequate lated, Laos. Some countries, attention to such crucial issues like Malaysia, have a store of as protection of the environ- natural resources, while Korea ment and investment in infra- has virtually none. structure, which have too often lagged behind rapid No single development formu- economic expansion. Much la lies behind the "East Asian Figure 1. [BRD and IDA Commitments, 1950-94 World Bank commitments to East Asia totalled over US $6 billion in 1994 (S billion) 2 5 ............................I................. .................................... -PA Total IBRD/IDA ast Asa 20. .commitments 15.H lo .........................................................- -.-.. ............... Total IBRD/IDA .................................. -............- ..-commitments East Asia has accounted for 21% to East Asia of total Bank commitments between 1947 and 1994. 0 . . . . . . . . . . . . 1950 1960 1970 1980 1990 156 The East Asian Economic Miracle miracle," and the Bank has not Why has East Asia, with its adopted a single development diverse economies and prob- template. The sheer size and lems, been so successful? There cultural diversity of a region is no simple answer. Policy that is home to 1.67 billion approaches by East Asian eco- O people-about one-third of the nomies have also been diverse. world's population and about The first generation of newly Asan economies have 20 percent of its poor-pro- industrialized economies-with integrated with the global vides a wide variety of devel- the exception of Hong Kong- economy to a remarkable opment challenges and atten- opted for relatively more state extent, and have emerged dant development problems- intervention, as had Japan as the driving force behind including environmental earlier on. Among the second global trade growth degradation, infrastructural generation, Indonesia and bottlenecks, and poverty. Malaysia had little success with early interventions. Less Such problems notwithstand- interventionist over the past ing, today, rapid economic dozen years, they both achieved development is a common markedly better economic feature of much of East Asia. performance. Most recently, There has been a near quadru- newly industrializing economies pling of per capita incomes in and areas such as Thailand and the past twenty-five years, a coastal China, have been marked improvement in health inclined to less extensive and education, a decline in fer- intervention. tility, and a surge in agricultur- al and industrial output. Behind country variations, Outward-oriented East Asian however, are significant economies have integrated common features. One such with the global economy to a factor is human resource devel- remarkable extent, and have opment. In this respect, strong emerged as the driving force public policies were augmented behind global trade growth. with high household Perhaps most important, eco- investments in education in nomic growth has not only most countries. been dramatic, it has been broad-based and, on the whole, Investment in people is closely equitably distributed. linked to the notion of equity 157 The Evolving Role of the World Bank with growth. Some economies, policy design to effective such as Korea, brought about implementation. Pragmatism an early and relatively equitable means the relative absence distribution of land. These of ideology in setting policy countries, and others and the willingness and ability (including, for example, to change failed policies. Malaysia) continued to ensure Socialist economies in that a majority of the transition illustrate both the population shared the benefits costs of ideology and the gains of economic growth in a variety to be made from changing of ways. The result was a course. China's reform striking decline in absolute program has been little short poverty, which is illustrated of breathtaking. most dramatically in Indonesia. The sections that follow are Common to East Asia's success devoted to one important were policies for participation aspect of the Bank's involve- in world markets and macro- ment in each of the six economic stability. Because the countries in the region that economies took international accounted for 95 percent of prices as a primary guide to the Bank's lending to East Asia domestic resource allocation, (see Figure 2). macroeconomic stability was At the core of develop- seen as central to maintenance Investing in People in Korea ment success in East Asia of international competitivness. has been pragmatic policy Moreover, most governments In the 1960s, when the Bank's had a strong aversion to infla- involvement in the region tion, which strengthened the began in earnest, East Asia's design to effective imple- .hands of technocrats. Where people placed high value on mentation. Pragmatism external or internal factors education, which was reflected means the relative absence threatened overall equilibrium, in public and private spending. of ideology in setting governments moved quickly In later years, educational policy and the willingness and credibly to restore stability. investments have provided to change failed policies universal primary education At the core of development and widely available secondary success in East Asia has been education. pragmatic policymaking, from 158 The East Asian Economic Miracle Education was revered not only income had reached $6,790, for its own sake but as a means and by 1995 it will have of achieving economic develop- graduated fully from Bank ment. Equally important was lending.) the emphasis on strong human resources in government, From the 1960s, successive which complemented the Korean governments invested prevalent ethic of public service heavily and effectively in prima- in East Asia. This provided ry, secondary, and high-school In just one generation, fertile ground for the Bank's education. Korea's program Korea has left the ranks of emphasis on human resource involved heavy investments in those qualifying for World development. physical facilities. In 1960-70, Bank loans the number of primary schools Witness Korea. In just one increased from 4,496 to 5,961, generation, Korea has left the and middle schools from 1,053 ranks of those qualifying for to 1,608. By 1989, they had World Bank loans. (Korea reached 6,396 and 2,450, received its first IDA credit in respectively. The number of 1962 and its first IBRD loan in high schools also expanded 1968. By 1992, per capita from 640 in 1960 to 1,672 by Figure 2. IBRD and IDA lending to East Asia by major recipient, 1950-94 Indonesia and China received the largest share of the US $71 billion lent to East Asia Philippines 13% Malaysia 5% Rest of Thailand 7% East Asia 5%/ I \ Indonesia 30% China 28% Korea 12% 159 The Evolving Role of the World Bank 1989. Government financial in 1960-89, with the ratio of support at the primary level primary school students per also extended to targeted teacher falling from 59 to 36, subsidies for items such as and for middle school students, school meals and uniforms. from 40 to 29. Govern-ment education expen- ditures rose from 2.6 percent of Korea's aim was two-fold: to In Korea, adult literacy GNP in 1960 to 3.4 percent in achieve a high literacy rate and, reached 92 percent by . 1989, while-as a proportion by emphasizing technical skills, 1985 and is almost 100 of government expenditures- to create a well-educated work the allocation for education force capable of meeting the percent today rose from 11 percent to almost challenge of rapid and technol- 20 percent. ogy-based economic develop- ment. Korea succeeded on both The impact on school enroll- counts. Adult literacy (and ment was dramatic. By 1970, numeracy) reached 92 percent Korea had 100 percent by 1985 and is almost enrollment in primary 100 percent today. Since the education, while between 1970 1960s, a large pool of educated and 1989, those enrolled in labor, including many women, middle schools grew from 57 to has helped underpin Korea's 99.7 percent of all school-age industry-intensive and export- children. High school enroll- oriented development drive. ment rose from 30.5 percent in 1970 to 78 percent by 1985. Past Bank lending focused on Along with population expan- strengthening science and sion, this meant that the num- technical education to under- ber of primary school students pin Korea's ambitious plans in Korea increased from nearly for industrialization. In the 3.6 million in 1960 to 1970s, lending was mainly for 4.9 million in 1989. Middle expansion and quality improve- school students rose from ment of vocational and techni- 530,000 to almost 2.4 million, cal education in high schools, while high school students junior technical colleges, and increased from 273,000 to undergraduate programs in 2.3 million. The number of science and engineering. In the teachers also increased sharply early 1980s, emphasis was 160 The East Asian Economic Miracle placed on improving policy institutes, in line with the with the aid of two education government's increasing sector loans, which led to concern about environmental institutional improvements in problems. The Bank has also such areas as evaluation and continued lending for vocation- accreditation, personnel plan- al and technical education to ning, equipment maintenance, ensure that training of crafts- curriculum development, and men and technicians keeps pace private education. These efforts with rapid technological change were reinforced by the Sector in industry. A continued Survey of Science Education interest in supporting policy (1982) which set a long-term improvements is reflected in strategy for strengthening the last Bank education loan to science education at the Korea (1994). This includes a secondary and higher levels. range of institutional improve- ments in secondary and higher As Korea's industrial sector science and technical education. moved toward higher value- Building on previous changes, added, technology-intensive these are expected to help production, the government guide policies over the next placed greater importance on decade. strengthening local capacity for research and innovation. In Over the past quarter century, response, Bank lending shifted the Bank made sixteen its emphasis in the late 1980s education loans totaling toward strengthening graduate $906 million (and with total schools of science and project costs of almost engineering (which train $2.6 billion). Lending has, in research personnel) and general, been consistent with Lending has ... been directly supporting selected Korea's needs and priorities in consistent with Korea's national research institutes. science and technical education n a p needs and priorities in and has paralleled the In some recent projects, the increasing sophistication of its science and technical Bank has also focused on industry. There was early recog- education and has strengthening environmental nition that the restructuring of paralleled the increasing science and technology in industry toward skill-intensive, sophistication of universities and research high technology production its industry 161 The Evolving Role of the World Bank would require continuous facilitating financing and upgrading of Korea's skill base. provision of best practices in Bank lending matched this human resource development change in demand. But, in in East Asia. This role is likely addition to helping Korea, the to assume even greater Bank learned much about form- significance in the years ahead, ing workable policies to as countries of the region increase the quality and continue to grow and become relevance of education and ever more competitive. research. It also learned lessons on practical issues (such as Reducing Poverty in Indonesia mechanisms for curricular change and the preparation of An education policy aimed at equipment lists) relevant to a broadening the base of the range of institutional, teaching, work force enables wider and research objectives. These participation in the fruits of lessons are now benefiting the national growth, and can In addition te helping design of projects in Thailand, contribute significantly to Korea, the Bank learned Indonesia, and Malaysia. poverty reduction and social much about forming equity. But poverty must also be workable policies to Human resource development addressed through other policy increase the quality and is still a major challenge in East instruments. Here the East Asia. Problems concern not Asian record has been particu- relevance of education.. only the provision of basic larly impressive. As a result of and research : education in low income rapid economic growth and a economies but also the multi-faceted development provision of adequate approach, involving human secondary and higher education resource development and the and the adequacy and quality of provision of basic physical all education. With the region infrastructure, absolute poverty committed to international in the region has declined by markets, it is crucial that the around two-thirds during the educational system be flexible past twenty-five years. enough to respond to needs of skill formation so that countries The number of absolute poor in remain competitive. The Bank East Asia is estimated to have continues to be a key player in fallen from 400 million in 162 The East Asian Economic Miracle 1970, to 300 million in 1980, improvements in nutrition, life to 180 million by 1990.1 This is expectancy, basic schooling, all the more remarkable given and health of the poor. that the region's population has expanded by some 425 million Three key reasons led to the The number of absolute over the past twenty years. progress of Indonesia's poor: poor in East Asia is Moreover, reducing poverty to ., . . ~~~~estimated to have fallen little more than one-tenth of a Rapid economic growth the region's population generated strong growth in from 400 million in 1970, contrasts sharply with the demand for labor (and so, in to 300 million in 1980, experience of other developing incomes), first in rural areas, to 180 million by 1990 regions. In 1990, the absolute and later in cities. poor still accounted for roughly half the population in South * Relatively free labor markets Asia and Africa and one quarter allowed workers to migrate to in Latin America. How did East jobs, especially from rural to Asia manage to reduce poverty urban areas. to such an extent? Basic infrastructure, health, Indonesia is a good example. education, and family planning Twenty years ago, Indonesia services were expanded and was among the poorest made accessible to most of the countries of the world, with a population, raising productivi- per capita income much less ty and the quality of life, and than that of India, Bangladesh, breaking down barriers to the and Nigeria. Today, Indonesia's movement of goods and GNP per head has reached people. $670, and those living in absolute poverty have dropped Indonesia has achieved from around 70 million sustained and high economic (60 percent of the population) growth, averaging more than at the beginning of the 1970s 6 percent a year in 1970-90. to near 27 million by 1990 More important, this growth (about 15 percent). This is the was broadly based, spreading fastest rate of decline in its benefits to even the poorest. poverty in any country, and it This was because: coincided with enormous 163 The Evolving Role of the World Bank * The government placed provide education, health, emphasis on improving the family planning, and other agriculture sector, on which the social services nationwide. livelihood of most people, Special programs (the INPRES, especially the poor, depended. or Presidential Instruction, programs) covered the country- * The shift to rapid industrial side with roads, primary growth in the mid-1980s schools, and public health emphasized a more labor- facilities. Between 1978 and intensive, outward-oriented 1987, primary school path of industrialization. enrollments among the poorest 40 percent rose from * These two growth processes 78 percent to 90 percent; created new service jobs in non- lower secondary enrollments farm activities and urban trade, rose from 42 to 65 percent; construction, and finance. and the utilization of health services doubled (though it One central reason why so remains low). many poor people were able to raise living standards was that In the 1980s, Indonesia even the great increase in job managed to reduce poverty, in opportunities coincided with both relative and absolute slower growth in labor supply. terms, at a time of difficult Indonesia had been successful adjustment to external shocks. Reducing the growth of in reducing fertility and in External strains severely the labor force and providing basic education and affected the economy, creating in gits quality, per- health to the population. the need for two rounds of rapsi morc than any single Reducing the growth of the adjustment-in 1982-85 and labor force and increasing its again in 1985-88. These strains factor, lics behind quality, perhaps more than any included a sharp decline in the Indonesia's sustained single factor, lies behind terms of trade, falling oil prices, decline in poverty Indonesia's sustained decline in and an appreciation of the U.S. poverty. dollar, which then increased Indonesia's external debt Many of the dramatic gains in burden. Adjustment involved human capital came as a result significant devaluation of the of government decisions to rupiah, reductions in public 164 The East Asian Economic Miracle expenditure, and comprehen- Indonesia still faces daunting sive tax, trade, and financial problems, but why was the reforms. Some of these contin- country able to avoid or ue to be key challenges ahead. overcome some of the problems encountered in other countries Indonesia's attack on poverty, over this period? Credit goes to however, predates the adjust- a clearly articulated long-term ment period of the 1980s. In vision of development, an The Bank. . encouraged the 1970s and early 1980s, it able economic team given development of labor- made use of buoyant oil considerable freedom to make intensive manufacturing revenues to finance rural decisions, a desire for macro- industries . .. to absorb infrastructure (such as economic stability, and a real- labor that might otherwise irrigation facilities, rural ization of the importance of the h ave entered the ranks of electrification, and roads for agricultural sector for economic the poor transporting produce to growth and poverty reduction. market) and to provide fertilizer subsidies. This was in The World Bank played a marked contrast to the supportive and vital role, experience of other oil- providing timely and relevant exporting countries of the economic advice and substantial region. Though much of the financing for Indonesia's public initiative behind these investment program in educa- programs was Indonesia's, the tion, health, agriculture, and Bank was heavily involved in infrastructure. The Bank's certain areas, such as irrigation. policy advice intensified during (The Bank has been prepared the crucial years of adjust- to throw its weight behind ment-the 1980s-on major policies proposed by able macroeconomic reforms. It technocrats-Indonesia's encouraged development of included-to help counter labor-intensive manufacturing political and other vested industries, as an alternative to interests ranged against commodity exports, to absorb economic reform. In the case of labor that might otherwise have Indonesia's attack on poverty, entered the ranks of the poor. however, the decision to pro- These reforms (backed by three tect rural groups found support World Bank structural adjust- at the highest political level.) ment loans) were effective 165 The Evolving Role of the World Bank because the government was onward, East Asian inflation committed to them. It averaged half that of other implemented reforms quickly lower-middle-income countries. and consistently and took Real interest rates averaged a ownership of the reform positive 4 percent (compared agenda, adapting it to suit the with a negative 3 percent country's needs and priorities. elsewhere) ensuring a good return on savings and setting a But while East Asia has had clear benchmark for the cost of great success in reducing capital. poverty, the region still has a large share of the world's poor. East Asia's excellent inflation The task of poverty reduction record is largely the result of remains daunting. Increasingly, sound fiscal policies and bud- the challenge is to reach the so- getary discipline. Over the past East Asia's excellent g, called "hard-core" poor, which twenty-five years, the region's inflation record iS largely requires sustained economic fiscal and current account the result of sound fiscal growth as well as human deficits averaged less than half policies and budgetary resource development and those of other developing discipline targeted poverty programs. countries. Macroeconomic management also gained from Macroeconomic Stability in generally strong and prudent Malaysia and Thailand central banking institutions. Almost universally, successful While East Asian countries East Asian economies have have not completely avoided adhered to sound macro- macroeconomic difficulties, economic policies. Steady they have usually reacted more economic growth and low quickly, and often adjusted less inflation have provided a stable painfully, than have other framework for long-term plan- developing countries. In both ning and encouraged saving, Malaysia and Thailand, for investment, and the efficient instance, the central bank deployment of resources. At the tends to be the most powerful same time, exchange rates have economic agency and has a generally not been overvalued strong preoccupation with in real terms. From the 1970s controlling inflation. But even 166 The East Asian Economic Miracle a conservative macroeconomic export activities. The new out- policy managed by able ward orientation was support- technocrats cannot insulate an ed by other policies, including economy against external a significant depreciation of shocks. Between 1980 and the baht, tax exemptions for 1985, following the second oil exporters, and the setting up shock and a general decline in of export-processing zones. commodity prices, Thailand came under severe financial In the 1980s, when inflation Even a conservative strain, particularly on its exter- and other macroeconomic vari- nal account. Malaysia also ables were threatening to get macroeconomic policy suffered severely, and at a time out of hand, the Bank was managed by able when heavy investments in called upon to intervene more technocrats cannot capital-intensive industries directly. It provided Thailand insulate an economy were absorbing a large part of with its first structural adjust against external shocks national resources. ment loan ($150 million) in 1982 and a second one ($175 But following the second oil million) in 1983. Subsequently, shock-which revealed the Thai economy weathered structural weaknesses in the the crisis: current account and country's balance of pay- fiscal deficits improved despite ments-Thailand adopted a significantly higher world real strong adjustment program. interest rates, weaker export The government redesigned its demand, and less favorable trade and industrial policies to terms of trade. offset the bias against exports. Tariffs were rationalized and The consensus among Thai average rates reduced (though government officials and Bank effective protection rates for staff was that Bank involve- manufacturing remained ment had made a real differ- significantly higher than in ence in helping to solve the other East Asian countries). At country's problems. Here, too, the same time, the Board of the Bank's involvement can be Investments adopted foreign- said to have been cooperative exchange generation as a crite- with the government and rion for approving inward responsive to concerns that investments, thereby stressing were identified early on in 167 The Evolving Role of the World Bank what proved to be a protracted problem had been sown in the period of macroeconomic early 1980s, when frustration stress. with the pace of economic development in Malaysia Bank support through prompted a state-led drive to structural adjustment loans had upgrade industry. This was advantages. First, by underwrit- buttressed by an increase in oil ing a broad structural and gas revenues. By 1981, adjustment program, the Bank public expenditure had reached strengthened the domestic and 58.4 percent of GDP, as external credibility of the effort Malaysia invested in a range of and helped to maintain its capital-intensive manufacturing momentum. Second, by work- activities-mainly through the ing with the Thai government Heavy Industries Corporation on the program supported by of Malaysia. But by 1988, the the loans, the Bank helped inefficiencies associated with translate the structural adjust- this drive became evident when ment strategy into policies and a set of major state-owned speed their implementation. enterprises suffered a net Third, by including policy deficit of M$1 billion. measures under structural By underworiting a broad adjustment lending, the Bank By then, Malaysia's fiscal structural adjustment . helped focus and supervise deficit had ballooned to program, the Bank related technical assistance 16 percent of GDP, and the strengthened the domestic activities. country had generated large and external credibility of volumes of external debt. The the effort and helped to In Malaysia's case, the Bank Bank offered advice on macro- m-naintain its momentum was asked to augment its tradi- economic management, fiscal tional support for projects with controls, tax system reforms, greater involvement in macro- and trade reforms aimed at economic adjustment. By encouraging foreign direct 1985-87 the international investment. It also advised on price of oil had virtually state involvement in heavy halved, and Malaysia's heavy industry. Macroeconomic industry was absorbing a large adjustment continued from part of the nation's investment 1986 to 1990, as government resources. The seeds of this policy began emphasizing 168 The East Asian Economic Miracle market liberalization and Accompanying a reliance on promotion of private sector market forces has been East growth and foreign investment. Asia's dependence on the During this period, too, private sector as the engine of Malaysia's external debt growth. Nonsocialist govern- declined significantly and ments in the region, too, have recourse to external borrowing had public enterprises, but Accompanying a reliance was reduced in favor of foreign their support for the private on market forces has been equity funding and domestic sector is older and deeper than East Asia's dependence on borrowing. The ringgit was it is in other developing the private sector as the depreciated to boost manufac- regions. Supporting this engine of growth. tured exports. While Malaysia approach, the Bank has helped Although nonsocialist did not require adjustment provide adequate financing for governments in the region, lending to carry out the World private sector activities, Bank's policy advice, both the worked with governments to too, have had pubic Malaysian government and the improve the economic enterprises, their support Bank deemed Bank environment, and encouraged for the private sector is intervention successful. governments to increase the older and deeper than range of activities open to the it is in other developing Working with the Private private sector. Formerly regions Sector in the Philippines socialist economies in East Asia have also recognized the East Asian countries have power of the private sector traditionally relied to a great and are now moving, with extent upon market forces. Bank advice and assistance, to Their development strategies encourage rapid growth in cannot be characterized as lais- their own private sectors. sez faire, but they have consis- tently subjected their industries Rapid growth has created large to international price competi- demands for infrastructure- tion. Their ability to penetrate especially in power, telecom- world markets is an indication munications, and transport. But of the validity of this strategy. within their fiscal constraints, Increasingly, East Asian nations are increasingly unable countries are opening their to finance such demands. markets to competition from Governments have begun to abroad. turn to private financiers for 169 The Evolving Role of the World Bank major projects and to explore burden came to dominate innovative forms of project economic policymaking. financing and management to accommodate these private The Bank has worked with R.apid growth has created interests, authorities to redesign policies large demands for infra- meant to promote stable structure.... The Philippines, for instance, growth and to recover from Governments ... unable has led efforts to involve the the problems of the 1980s. to finance such demands private sector in a wide range One Bank-supported activity ... have begun to turn to of development activities, was a market-oriented debt- private financiers . . . and particularly infrastructure. relief scheme that the t Early Bank support included Philippines negotiated with its to explore innovative dialogue with the Philippine commercial creditors. Another government to encourage was a macroeconomic reform and management trade reforms and export program that gave the private development. Bank loans have sector new confidence to supported such development invest in the Philippines. The finance institutions as the Bank has also supported Development Bank of the policies to improve trade and Philippines, as well as industrial incentives that improvement in the financial resulted in increased foreign sector. and domestic competitiveness. While the Philippines' growth While the Philippine govern- over the past twenty years has ment is committed to the not matched that of its neigh- private sector as a mainstay of bors, both the government and development, it has been less the Bank have demonstrated a successful in providing a stable mutual commitment to political and macroeconomic overcome particularly difficult environment or to encourage economic times that efficient investment and strengthens the basis for future competition. Consequently, collaboration. growth did not accelerate in the Philippines as it did in Due in part to difficulties in other East Asian countries, managing its debt and to the and by the mid-1980s, the burden that such debt placed country's large private debt on public finances, the 170 The East Asian Economic Miracle Philippine government has China and the Bank: Partners actively sought private sector in Transition help in providing infrastruc- ture and public utilities. Since While East Asia continues to 1989, it has been working give high priority to a stable with private financiers to carry macroeconomy, there are still out build, own, operate and serious concerns. Socialist build, own, operate, and economies in transition, such transfer projects to produce as China and Vietnam, are power for the electricity- struggling to maintain stability starved Philippines economy. while they carry out structural Already, thirty-three contracts reforms and liberalizing price have been signed and thirteen and trade policy. Far-reaching projects have been complet- institutional reforms-for ed-greatly reducing power example, the restructuring of One of the Bank's key shortages and enabling faster central banks or revenue and tasks will be to bring to economic growth. The Bank expenditure reassignment the table the best practices worked with the Philippine between the center and the in macroeconomic government to provide provinces-are needed. One of m complementary financing for the Bank's key tasks will be to ecnomentrasition additional power investments, bring to the table the best and innovative projects have practices in macroeconomic been started in other sectors as management for socialist well. economies in transition. The Philippines now seems to In 1979, after years of little have a solid policy foundation contact with the world and is moving to restore economy, China was eager to economic stability and growth. learn about the policies and These activities are being experiences of market followed attentively in other economies. It made great use countries in the region. China, of the Bank's accumulated Indonesia, Malaysia, and others cross-country experience and are inviting more private sector information on other involvement in infrastructure as countries. Even today, after well as in more traditional areas having remarkably accelerated of production. its participation in the world 171 The Evolving Role of the World Bank economy, China's government to effect change. The Bank has remains strongly interested in also learned from China that how other countries address where circumstances permit, specific economic issues, an there are merits in a gradual interest sustained and stimulat- approach to economic change. ed by World Bank economic China achieved notable work. progress using this approach in handling price reform, for Chinese leaders have also example. Policymakers invited advice from the adopted a dual-track approach The Bank has learned world's most competent eco- that allowed market prices to important lessons from its nomic analysts. The World coexist with plan prices, while engagement with China. Bank's role here has been to the scope of planned resource These include lessons of gather international experts on allocation was gradually process, of the value of . China and organize brain- reduced. Today, more than open discussion and storming seminars with the 90 percent of goods in China highest levels of China's are at market prices. debate, and of the need toE disseminat ideastoall economic leadership. These conferences began in the early China's approach to levels to effect change 1980s and were repeated every ownership change has been two or three years. At last unusual. It has offered year's conference at Dalian, remarkable encouragement to China confronted several key nonstate enterprises, which macroeconomic issues. More now account for about half of specialized conferences have industrial output. China's been organized around such gradual but steady strides in specific themes as poverty other areas-from establishing (1991) and central banking a land market to giving state (1993). enterprises more autonomy; from financial sector reform to The Bank has learned adopting sophisticated new important lessons from its markets in commodities and engagement with China. These securities-illustrate that, with include lessons of process, of commitment to change at the the value of open discussion highest levels, incremental and debate, and of the need to market reform can work. disseminate ideas to all levels 172 The East Asian Economic Miracle China is now among the Bank's examined such issues as revenue most active borrowers. Serious mobilization and fiscal reform, involvement by the Bank began financial intermediation, and around 1980 with a good deal development of market and of basic work in documenting distribution systems. the size and nature of China's newly-opening economy. Between 1981 and the end of Operational involvement began 1993, the Bank's work in China with technical assistance loans has been backed by loans of to finance university education $9.97 billion and by IDA credits projects and quickly broadened of $6.97 billion, supporting to embrace economic and sec- various investment and tor work and continuous moni- technical assistance projects. toring of the Chinese economy. Conceptually as well as finan- This phase culminated in two cially, the Bank has supported major reports on China-one at China's own efforts throughout the beginning of the 1980s and the transition from a command one in 1985. The second report to a partial-market economy. dealt with industry, agriculture, For example, from the early health, and other economic and 1980s the Bank began doing social aspects of the Chinese significant work on China's economy. It was built around a state-owned enterprises and on uniquely designed long-term collectives and small-scale rural growth model, which estimated enterprises, looking at the kind the conditions necessary to of changes needed to make With commitment to meet targets for overall and them more dynamic and change at the highest sectoral growth rates and competitive. A series of Bank ,, , , ~~~~~~~~~~~~~levels, incrementtal market offered comprehensive recom- reports around this time mendations regarding the infra- emphasized the need to reduce reform can work structure support (social as well the number of government plan as physical) needed to underpin targets and to increase efficien- economic growth. Later studies cy and managerial autonomy in looked at the need for trade state- owned enterprises. Many liberalization and how China of the suggested reforms could exploit its comparative reflected or reinforced ideas advantage in the world already under consideration economy. Other sectoral studies within China itself. 173 The Evolving Role of the World Bank Given the size of China's enterprises have traditionally economy, however, the Bank's been responsible). lending assumes less signifi- cance than its technical The Bank has supported assistance and economic advice. China's drive to develop Initially, Bank advice to China collective enterprises to provide initially drew more on the insti- employment and produce daily tution's broad experience with consumer needs. The Chinese East Asian and other developing government, however, has now countries (as well as with indus- widened the scope of its trial countries) than on lessons reforms to include price and learned from other socialist financial market reform as well economies in transition. In any as measures aimed at ensuring Given the size of China's case, China's economy is more macroeconomic stability. The economy, however, the decentralized than other need to develop a social-securi- transitional economies. This ty net, to introduce measures to Bank's lending assumes decentralization has increased increase labor market mobility, less significance than its with the initiation of economic and to offer better health, technical assistance and reforms and center-local fiscal education, and housing services economic advice contracting, which builds on has also been central to the the local self-sufficiency and Bank's policy advice in China. cellular" structure inherited The aim has been to create an from the Third Front policies of internal market within which the Maoist era. change can be introduced. This involves creating competition Yet the fundamental problem of for state-owned enterprises dealing with state-owned from collectively owned, town, enterprises remains. Here the and village enterprises while Bank has supported China's encouraging the state-owned own strategy to work around entities to contract out more the problem rather than to con- production, a system that has front it directly, which would be already begun to make Chinese politically risky in terms of industry more competitive and unemployment and other social dynamic. At the same time, the factors (such as health, social consequences that accom- education, welfare, and pany changes in the role of state housing, for which state-owned enterprises are being addressed. 174 The East Asian Economic Miracle Fiscal and financial reforms- responsibility for the consider- more efficient tax collection, able successes of the region equitable to both the center and rests squarely with the countries the provinces-along with the themselves. Similarly, the coun- creation of a strong central tries have overall responsibility bank, are two other essential, for managing the demanding parallel reforms. agenda of the environmental, poverty, infrastructure, and The Bank's dialogue with China trade issues that will dominate In East Asia, daunting has been at the highest political the economic horizon of the tasks have a way of being and administrative level and has twenty-first century. Country perforned quietly and been characterized by a fruitful commitment and effective poli- efficiently exchange of ideas. China has cymaking is at the root of eco- initiated and implemented nomic success-and failure- much of the reform agenda, both now and in the future. with the Bank providing guid- ance and support for what are The Bank has had a strong and essentially local initiatives. consistent involvement in East Chinese leaders listen to what Asia, providing both money Bank representatives suggest and policy and analytical and adapt bank policy or pro- support. The Bank has helped ject advice to fit their specific to produce tangible results and needs. The occasional policy has learned valuable lessons, differences-for example, over both from the region's the relative priority to be given considerable achievements and to rural education and health- from areas needing much stand out against a background greater attention. But despite of mutually rewarding dialogue. the challenges still ahead, one lesson offers considerable Conclusion encouragement. In East Asia, even daunting tasks have a Whatever the level of World way of getting done, quietly Bank involvement in East Asia, and efficiently. The authors are grateful for contributions from other regional staff 175 The Evolving Role of the World Bank Note 1. Source: Frida Johansen, Poverty Reduction in East Asia-The Silent Revolution, World Bank Discussion Paper 203, East Asia Pacific Region Series. This estimate uses individual country poverty lines that are made broadly comparable. Using another common US$1-per-day poverty line (at purchasing-power parity in exchange rates) yields a 1990 head count esti- mate for the poor in East Asia of 170 million. No comparable estimates exist for 1970. 176 The Challenge of Africa" Ishrat Husain The World Bank's involvement in Africa has spanned three decades and been wide-ranging. It has included direct lending in support of production, economic and social infrastructure, and policy reforms; "intellectual activities" (research and studies) that contribute to the diagnosis of problems and to the definition of priorities and policies of borrowing countries, donors, and the Bank; aid coordination and mobilization of resources; and tech- Th Wold Baks nical assistance and capacity building. i involvsement in Africa has spanned three decades Development outcomes are a product of a wide range of factors (economic, political, geographic, institutional, and cultural). and been wide-ranging External finance and advice is only one element. Moreover, insti- tutional and economic change takes time, and given the shortness of the Bank's intense involvement in Africa, it may be too soon to arrive at a definitive judgment. This paper attempts, neverthe- less, to document Africa's development record since the incep- tion of Bank-Africa relations. It examines the distance that the African region has traveled, identifies key elements of the current situation, both promising and distressing, reviews the Bank's involvement and how it has evolved, and assesses prospects and implications for the Bank's future involvement in Africa. *Throughout this paper, Africa refers to Sub-Saharan Africa. 177 The Evolving Role of the World Bank Hope and Despair Most countries in Africa became independent around Africa's record of the past thirty 1960, a few much later. Many For almost all, economic to forty years is one of of the new African govern- planning was a means of advances and reversals. Wealth ments believed that they had achieving rapid, inward- has been created and destroyed, to intervene in the economy to oriented economic growth institutions revitalized and mobilize resources, establish atrophied, and economies industries, and accelerate pub- stabilized, destabilized, and lic investments. For almost all, restabilized. The current situa- economic planning was a tion is one of both hope and means of achieving rapid, despair. The installation of a inward-oriented economic democratically elected govern- growth; the state was the ment in South Africa, after instrument of such planning. centuries of racial discrimina- Development meant the tion and minority rule, is a mobilization of capital for promising prospect for the industry, which would, in turn, Southern part of the continent. benefit from protection against At the same time, the mass the industrialized economies. carnage and upheaval in Such African socialism took Rwanda reminds us of the root in Angola, Benin, Congo, fragility of the nation state and Ethiopia, Ghana, Guinea, the importance for government Guinea Bissau, Mozambique, to have the writ of its authority. Tanzania, and Sao Tome and Figure 1 Key Social Indicators in Africa Life expectancy at birth Infant mortality rate Adult literacy rate 1960 1992 1960 1992 1970 1992 65 0 All developing 160 100 60 countries 140 80 I All developing 55 / 120 . \\ 60 . >> counties 120 6 Sub Saharan S ar Saharan 40 Africa 5o Africa 100 Su aaa 0Africa 45 :/ 80 , b All developing 40 60 countries 0 178 The Challenge of Africa Principe. Even such mixed has been economic progress, economies as C6te d'Ivoire, too (Figure 2 and 3). The real Cameroon, and Kenya adopted GDP of the continent is 2.3 planning and substantial state times larger today than in intervention in marketing, 1965, not counting the output agriculture, labor markets, of the unrecorded sector which external trade, public has exploded in recent years enterprises, and so on. and is estimated to be as large as one-third of the recorded Africa's development record output in some countries. New over the past thirty to forty physical infrastructure facilities years is mixed. Most social (airports, highways, telecom- indicators have improved, munications, ports, power particularly education and stations) have been built in health indicators (Figure 1). most African countries, Illiteracy and infant mortality although maintenance has not are sharply down, and average always been adequate. life expectancy has increased Agricultural research, support- by more than ten years. There ed through the Consultative Figure 2 Figure 3 GDP Growth Rate per Capita Aid Indicators Annual average percent change 5~ ~~~~~~~~~~~~~~~~~~~~~~1 ...... ..................................... ... . .. --.... _.... .3 _ ~~~~~~~~~~~~~~~~~~10 .. .................... .... --- ............--- 30 4 .... .. ...-..-......-..----. .. .-..-----..-....---...... O DA per capita (S) .-.......... ............ ... -... . ... ...-. . -. -- - - - - 25 3 ..................... ..._. ....... .................................. .................... .. O DA to A f ica 2 * 6 .................... ........./.. 20 2 ........... - -.- ............. ............................. .... ..... 1 9 0 ........ ........... ............ '8-90'1-9 | .....i . ......_...... --- 2 . - . - . --- . - 5 -1 ...................................... ..1975 1980 1986 1992 1960s 1970s sig -9 *Sub-Saharan Africa UDeveloping Countries 179 The Evolving Role of the World Bank Group on International regions began with similar Agricultural Research (CGIAR) conditions and natural resource by the Bank and other donors, endowments and faced the has generated new varieties and same external trading environ- techniques, albeit on a modest ment. The benefits from Economic growth has been . scale compared to Asia. advances in trade expansion, much slower than in other technology diffusion, and developing regions, even Lastly, there has been apprecia- financial market integration that began with similar ble political progress. Twenty- have not been captured in three African countries are at Africa to the same extent as in various stages of political other developing regions. liberalization, transforming Africa's share in world trade from military controlled or has declined from 3 percent to narrow, one-party authoritarian 1 percent; foreign direct invest- regimes to more participatory, ment flows remain extremely broad-based, multi-party low, at 1 to 2 percent of the systems. A few years ago only world's total; and the four countries had a democratic continent has not seen any regime. Freedom of press, technological breakthrough on freedom of association, the scale of the Green discussion of human rights and Revolution in Asia. civil liberties, and increased Furthermore, population participation of civil society in growth has accelerated; the decisionmaking process are environmental stress has risen; gaining acceptance in most and productivity gains have African countries. been weak or absent. The rise in population growth is a con- The tendency in discussions on sequence of improved health Africa is to ignore the successes which, in the absence of rapid and focus on the failures. For economic growth, may increase example, economic growth has poverty in the short run, been much slower than in though not in the long run. other developing regions, even those that started out with sim- There is no single explanation ilar handicaps. The gap for Africa's economic decline. between Africa and Asia has The African panorama is widened although the two diverse. The continent consists 180 The Challenge of Africa of forty-six countries ranging natural disasters, such as from Nigeria, withlOO million drought, desertification, and people, to Sao Tome and floods, have played havoc in Principe with a few hundred many parts of Africa, mainly in thousand. Progress has been the fragile ecological zones of uneven across countries, with- the Sahel and the Horn of in countries, and over time. Africa. The 1992 drought in Southern Africa, however, SMALL ISLAND ECONOMIES. showed that the economic There are ten countries with costs and large-scale human populations of 1 million or sufferings of these natural less-most of them small disasters can be averted by island economies with special advance planning and economic characteristics and coordination. problems. Depending on a handful of major events- * THE CFA ZONE COUNTRIES. external or internal-there There are thirteen former have been wide swings in the French colonies with larger performance of this group. economies, part of a common monetary arrangement with Progress has been uneven e COUNTRIES EXPERIENCING MAN- a currency freely convertible across countries, within MADE DISASTERS. Ethnic strife at a fixed exchange rate. countries, and over time and prolonged civil wars have Until January 1994, the almost destroyed the econom- currency of the CFA zone had ic, social, and physical become seriously overvalued infrastructure of another ten and member countries were countries. Normal economic unable to make full use of and social conditions in these policy instruments at their countries can only follow from disposal. With the recent the restoration of security, law devaluation of the CFA franc, and order, and some the situation has been semblance of political stability. rectified, but the future of Even then, sustained economic these economies will depend growth will take time. on the supply response to this important policy change and * COUNTRIES PRONE TO NATURAL other adjustment measures DISASTERS. From time to time, they will undertake. 181 The Evolving Role of the World Bank * COUNTRIES PURSUING STRUCTURAL a range of viewpoints, and REFORMS. The remaining some of the most strident Either all the difficulties thirteen larger economies, voices were also the most were blamed on economic mainly Anglophone countries, extreme. Either all the mismange tand p have been on a course of difficulties were blamed on mismanagement pors :structural adjustment for the economic mismanagement and d ppast several years and have poor domestic policies or they or they were laid at the seen some positive results in were laid at the door steps of a door steps of a hostile growth, export expansion, and hostile external environment external environment agricultural production. symbolized by declining terms of trade, severe indebtedness, The 1960s were a period of and primary commodity calm and tranquillity for most specialization. The consensus African countries so far as that emerged is that many economic policies were factors have contributed to concerned. Since then, there Africa's situation, including: have been wide variations. Botswana and Mauritius have * The pursuit of an economic performed well steadily. Three ideology represented by star performers of the 1970s- central planning, state controls C6te d'Ivoire, Kenya, and and ownership, protection and Malawi-had serious difficul- discretionary regulation. This ties in the 1980s, while the model created harmful social poor performers of the earlier and economic consequences as period (such as Ghana, it became entangled with Tanzania, and Uganda) turned kleptocratic governments in a around to make significant number of African countries. progress. It is yet to be seen whether this improved * Leadership in Africa was too performance can be sustained preoccupied with consolida- in the 1990s. tion of power and in some instances, with building nation Why has Africa lagged behind states. The attention given to a other low-income regions? long-term economic vision was The debate that took place in at best sporadic and in most the 1980s to explain Africa's cases scanty. The harmful economic difficulties revealed effects of poor governance on 182 The Challenge of Africa economic outcomes were not exports did not permit those recognized at the time by African countries embarked on either the leaders or the the reform path a sufficient external donors. cushion for quick recovery and rapid growth. * Institutional decay in Africa occured at a much more rapid The external environment There is now a broad pace than elsewhere. A fast became onerous at the time consensus that Africa did expansion of the state sector when most African countries n i e not invest enough in its ignored the quality of person- were just beginning policy p u nel, shrinking the number of reforms. The pressures of professionals within the civil political transition also slowed resources efficiently, or service. The large-scale intru- the speed of economic adequately respond sion of external donors and the recovery implementation in to outside shocks fragmentation of donor assis- many cases. As a result of these tance accentuated the problem. and other factors, there is now a broad consensus that Africa * The severe burden of did not invest enough in its external debt and the falling people, utilize its resources prices of major commodity efficiently, or adequately Figure 4 Net Resource Flows to Sub-Saharan Africa, 1970-1973 Sub Saharan Africa received over one fourth of World Bank net flows in 1993. (US $ billions) Sub-Saharan 10 ---------------------------...------------------------------------------Africa 8 ------------------------------------------- - -- - -- - - - - - ....................... . Total World Bank / \ I~~~~~net flows 6 ------------------------------------ -----)------------------- World Bank net Sub-Saharan Africa received 2 .flows to Sub- 19.9% of the net flows from the Saharan Africa World Bank between 1970 and 0 .1993. 1970 1975 1980 1985 1990 183 The Evolving Role of the World Bank respond to outside shocks. It is situation. The new true that Asia's human capital governments were in the base was much stronger than process of defining themselves. Africa's in the 1960s, but this As they fought for could have been corrected in independence, most African The Bank has approached several African countries if leaders identified the private the problems of Africa with other factors were in place, sector-driven model of the best combination of - such as political and economic economic management with hands-on experience and stability, adequate levels of the former colonial powers. investment, and a deliberate Thus, they opted for the state- intellectual tools available i policy of investing in human led model, suppressed private at the time; tbrough its ,... t resources. Unfortunately, initiative and enterprise, and successes and failures, the ineffective functioning of used the state's economic Bank has learned and institutions and a weak apparatus to win political incorporated these lessons government machinery did not favors and consolidate their permit this. power. What little Bank lending occurred in Africa in The World Bank role in Africa the 1960s was for capital has evolved over time and been investment in economic shaped according to changing infrastructure. circumstances. Subsequent i discussions detail Bank respons- The oil price shocks of the es during the various periods 1970s, coupled with the but, at this stage, it may be broadening of the Bank's inter- useful to provide an overview. nal agenda, prompted The Bank has approached the increased inflows of resources problems of Africa with the for a variety of activities in best combination of hands-on diverse sectors such as agricul- experience and intellectual ture, education, and rural tools available at the time; development, together with through its successes and lending for public enterprises. failures, the Bank has learned But the results were generally and incorporated these lessons. disappointing-most countries began heading toward In the 1960s, most African inevitable economic decline countries enjoyed a fairly due to the expansion of state stable and tranquil economic enterprises, close regulation of 184 The Challenge of Africa economic activities, allocation financial and intellectual of resources through adminis- resources. Yet skepticism about trative fiat, increased rent-seek- this approach, especially from ing by privileged few, and the the NGO community, has elimination of private sector remained unabated. elements that could have compensated for these short- In the 1990s, new modes of comings. It was not yet realized operating have been that the growing economic and introduced as poverty financial crisis faced by most alleviation and environment commitments have risen countries in Africa was not a moved to center stage, from US$160 million result of adverse external governance issues were in the late 1960s to shocks but stemmed from incorporated into aid coordina- US$3.4 billion in the underlying economic and tion, and sectoral modes of early 1990s structural weaknesses including operations were introduced to the build up of a large combat the fragmentation of unproductive civil service. donor investment. The challenge for the Bank is to use In the early 1980s, a major the whole array of instruments study undertaken by the Bank at its disposal-lending, advice, analyzed the roots of the technical assistance, and economic malaise in Africa. But coordination-in a pragmatic the Bank's diagnosis and and responsive manner. suggested remedy was hotly contested and only in the last The Bank's Lending few years has there been some convergence to the view that The World Bank has provided macroeconomic stability, incen- US$49 billion to Africa since tives to agriculture producers, it began lending to the liberal trade and exchange rate continent in FY19S1. Most regimes, and a deregulated has gone to agriculture, human economy are necessary for development, and infrastruc- resumption of economic ture. Average annual growth in Africa. The Bank, commitments have risen from along with other donors, has US$160 million in the late begun to address this agenda of 1960s to US$3.4 billion in economic restructuring with its the early 1990s. Almost 185 The Evolving Role of the World Bank 90 percent of new was for electric power and commitments in recent years transportation; only 6 percent have been on soft, highly- went to agriculture and concessional terms (with forty- 1 percent to social services. year repayment, ten-year grace periods, and a 0.75 percent Second, most African countries service charge). The Bank and were just emerging from IDA accounted for 9.6 percent colonial rule, and their of net resource flows (includ- priorities lay in taking control ing grants) to Africa in of the essential elements of a 1991-92 and for 48.1 percent new state-law and order, The Bank and IDA .. of net concessional flows on security, civil service, tax accounted for 9.6 percent debt. FY1992 net flows from collection, and so on. of net resource flows the Bank and IDA are nearly Economic development did not (including grants) to Africa $1.7 billion, compared to the figure prominently. For some in 1991-92 and annual average of $226 million countries, disillusionment with for 48.1 percent of net in the 1970-75 period or near- former colonial powers meant concessional flows on debt ly twice the level in real terms. that the Bank-perceived to be a Western institution-had to 1960s-A Supporting Role be kept at a distance in economic policymaking. In the first phase of its associa- tion with African countries, the Third, most African countries Bank played a supporting (but were eligible to borrow princi- limited) role for several rea- pally from the soft-loan sons. First, the main window of the Bank, IDA, instruments deployed by the created in 1960. IDA, how- Bank financed economic ever, had only modest financial infrastructure projects-ports, resources at that time, and the highways, electric power, and development problems of other public utilities. The India and Pakistan loomed Bank's philosophy at the time larger. These two countries was that investment in accounted for a significant part infrastructure was a pre- of the population of the Bank's condition for development. borrowers living below the Between 1961 and 1965, three poverty line; their develop- quarters of all Bank lending ment problems were daunting; 186 The Challenge of Africa and while they badly needed volume, sector coverage, external resources, they could geographical dispersion of not qualify for the hard terms activities, and size of Bank of IBRD loans. By contrast, staff, all increased dramatically. most African countries were This also brought about a considered better-off due to change in the Bank's attitude their sizable natural resources. and involvement in Africa. Mr. McNamara's Nairobi speech of Finally, in the early part of its 1973,' was a turning point, history, the Bank was fairly changing the Bank's focus from conservative in the ways it the financing of traditional judged the performance and infrastructure projects to the creditworthiness of borrowers, alleviation of poverty. Project concentrating its portfolio in lending for rural development, more creditworthy countries basic education, basic health, and emphasizing its more and low-cost housing increased traditional role as a bank, dramatically. By 1981, lending rather than as a development for agriculture and rural devel- By 1981, lending for agency. Only after 1960, opment had grown to a third agriculture and rural following the creation of IDA, of total Bank lending, almost development had grown did the Bank's role begin to four times the level of such to a third of total Bank change, and the availability of lending over the first twenty- lending, almost four times concessional finance sway the two years of the Bank's exis- the level of such lending Bank to initiate lending for tence. The share of infrastruc- over the irst twenty-two projects with low financial, but ture projects declined remark- high social, returns. ably (from nearly 66 percent to years of the Bank's 39 percent) by 1980. existene 1970s-The Move Toward Development At the same time, African (particularly oil-importing) With Robert McNamara at the countries, suffered two helm, the Bank's role changed external shocks in 1973 and from a traditional bank to the 1979. Africa's response to world's largest lender for these oil price shocks was development in low-income subdued-the recycling of countries. The number of petrodollars by the commercial projects financed, lending banks at negative real interest 187 The Evolving Role of the World Bank rates allowed domestic absorp- financing of imports was tion to remain unchanged. provided in support of policy Asian countries, on the other reforms aimed at addressing hand, embarked on retrench- both short-term stabilization ment of government requirements and structural expenditures. The commodity policy reforms. price booms of the mid-1970s Over time, both also helped postpone the The Bank's lending evolved in adjustment and project immediate adverse effects of this period in three phases, l oil-price shocks. Reflecting reflecting modification of its lending have grown more these developments, net flows approach as both borrowers poverty-focused from the Bank and IDA to and the Bank learnt from their Africa by 1980 had risen to new relationship. The first $707 million, or nearly phase, in the early 1980s, 12 percent of net flows for the emphasized adjustment Bank and IDA as a whole. lending in support of what were largely IMF stabilization Since 1980 programs. The second phase, (in the mid-1980s) recognized The 1980s began with a the importance of structural serious financial crisis. The policy reform to restore second oil price shock, growth, and the need to combined with the cumulative protect the poor during impact of the large increases in adjustment. The third phase, public expenditures in the in the late 1980s, recognized 1970s, led to high domestic that reform efforts need to be inflation, balance-of-payments accompanied by long-term pressures, and severe external policies that support direct indebtedness. The Bank's poverty reduction and invest- approach to lending in Africa ments in people, institutions, was heavily conditioned by and infrastructure to ensure that crisis, and by its decision adequate outcomes. to work selectively with countries willing to undertake Over time, both adjustment reforms with the help of a new and project lending have instrument: structural grown more poverty-focused. adjustment lending, in which Adjustment loans have given 188 The Challenge of Africa increased attention to social FY1992, eleven of the thirteen safety nets and restructuring structural adjustment loans public spending. The most approved and three of the five common safety nets have com- sector adjustment loans con- prised nutrition programs, tained tranche release condi- labor-intensive public works, tions dependent on poverty and targeted food subsidies. reduction measures. Most of The restructuring of public these conditions have expenditure has taken the stipulated the expansion or form of maintaining or maintenance of public Loans are based increasing the share of expen- spending on social services. increasingly on an ditures on social services, assessment of how reforms particularly basic social Social funds and social action will affect the poor-both services. In most cases, the programs were originally during transition and focus has also been on improv- established to protect those in the long term ing the composition of social adversely affected by spending. Loans are based adjustment but can also increasingly on an assessment operate as wholesale financing of how reforms will affect the mechanisms that target the poor-both during transition poor. Such interventions often and in the long term. help to increase political Operations are increasingly support for reform and supporting the systematic mobilize external resources. collection of poverty data and The Bank has supported the monitoring of the impact nineteen such interventions in of adjustment on the poor. seventeen countries, including A growing number of adjust- eleven in Sub-Saharan Africa. ment loans include conditions Usually, these programs for the release of tranches channel resources to small, related to the country's efforts demand-driven subprojects to reduce poverty. The share proposed by a local group of loans that include social (usually an NGO) or a local sector conditionality increased government agency. Typically, from less than 5 percent the programs involve local of all adjustment loans in governments, private-sector FY1984-86 to almost groups, and NGOs in both 30 percent in FY1990-92. In design and implementation. 189 The Evolving Role of the World Bank A recent evaluation of adjust- public expenditure undertaken ment policies2 in Sub-Saharan by Bank staff in collaboration Africa suggests that imple- with African governments. mentation has been uneven but These reviews focus on that the countries that have intersectoral and intrasectoral consistently implemented these trade-offs and ultimately policies have witnessed a contribute to the restructuring positive turnaround in growth of public expenditures. They of GDP, agriculture, exports, examine the equity, effective- and industry. After almost a ness, and efficiency of planned decade of reforms, important spending in the context of the and positive changes have macroeconomic framework taken place in most African and poverty alleviation countries. Domestic price strategy. Possible imbalances controls have been replaced by between capital and recurrent market-determined prices. spending, the impact on the Exchange rates, interest rates, conditions of the poor, and producer prices, and other key analysis of social safety net prices are no longer adminis- programs for cost effectiveness tered by governments. Non- and coverage of target groups traditional exports are begin- are key issues in the underlying ning to appear. Discrimination policy dialogue. against and high taxation of agriculture have given way to The Bank's initial adjustment After almost a decade improved incentives that have loans did not explicitly take of reforms, important and already arrested the long environmental sustainability positive changes have decline in domestic food into account, but a 1989 taken place in most . production. There is some review of adjustment lending African countries evidence, too, that the rural found no evidence that policy poor have benefited from changes associated with such these policy changes. lending were related to environmental degradation.3 A useful instrument that On the contrary, it concluded evolved in the 1980s to under- that adjustment programs pin the allocation and efficient appeared, on balance, to have utilization of public-sector a positive effect on the resources is the review of environment. 190 The Challenge of Africa In the coming years, the Bank Bank's policy concerning expects a stronger thrust in forestry is not to finance any environment and in combined projects in the sector unless "population-agriculture-- they are demonstrated to be environment" projects. environmentally sustainable. Adjustment lending accounts The Bank has also pledged not for only 30 percent of the to finance commercial logging Bank's total lending to Sub- in primary tropical rainforests. Saharan Africa (although, in 1993, it was only about Intellectual Leadership 22 percent), while 70 percent goes to investment and sector In the 1970s, the Bank lending. In FY1991-92, more supported a variety of than 60 percent of total lend- economic systems ranging ing was allocated for invest- from the mixed-economy ment in small-holder agricul- approach of Kenya, C6te ture, human resource develop- d'Ivoire, and Malawi to the ment, and infrastructure. Ujaama Socialism of Tanzania and the Drege Marxism of Procedures have been set up to Ethiopia. The Bank was also categorize investment projects directly and indirectly according to their environmen- responsible for the creation of tal impact and to assess this public enterprises and impact upfront. To encourage parastatals in many African In FY1991-92, more than African countries to countries, mainly to facilitate 60 pecent of total lending incorporate environmental execution of Bank-assisted was allocated for considerations into their projects. Thus, the Bank's investment in small- economic planning and present market-friendly budgeting processes, the Bank approach to development is holder agriculture, human has helped eleven countries not motivated by traditional resource development, and complete National ideology but has evolved over infrastructure Environmental Action Plans time and should be seen in and mobilize donor funding light of several failures, and of for their implementation. The the Bank's experience with its Bank is currently helping own projects, particularly in twenty-two other countries to Africa. A satisfactory recipe develop such plans. The has not yet been found for the 191 The Evolving Role of the World Bank enormous problems faced by for the economic woes of Africa. The Bank's intellectual Africa. It recommended that role, however, has followed an the donor community, evolutionary but pragmatic including the Bank, provide path. financial support to those African countries making The Berg Report genuine efforts to reform their economic policies, remove In the early and mid-1970s, policy distortions, and improve the attention of African the quality of economic policymakers and others was management. diverted, by necessity, toward finding ways to cope with the The Berg report marked an The Berg report marked financial difficulties resulting intellectual watershed and an intellectual watershed from oil price shocks. In provided the analytical and provided the response the Bank designed underpinning for most the Structural Adjustment structural adjustment lending analytical underpinning analZ -a ~' g Lending instrument to provide by the Bank to African for most structural quick-disbursing, balance-of- countries. The report, countriest payment support. This marked however, sparked heated Bank to African countries a shift from the way the Bank controversy among African traditionally provided intellectuals and other Western assistance, namely by financing academics, and not until the specific projects. To sharpen end of the decade was there a the focus of this instrument, broader recognition among the Bank commissioned a African governments of the major study of Africa's eco- need for policy reforms. nomic problems and prospects.4 This study, led by Structural Adjustment Elliot Berg, became known as The Berg Report. The report The conceptual evolution analyzed the respective roles of which the Bank and its part- external factors and domestic ners have undergone in the policy failures, and concluded past ten years occurred in that serious policy distortions three distinct phases (Chart 1). and poor economic manage- In the first period, adjustment ment were the main reasons simply meant stabilization to 192 Table 1. Conceptual Evolution of Structural Adjustment in Africa Adjustment Design Mode of Dominant Period objective Intervention Constraints Outcomes Period I Reduction in external Conventional expenditure *Foreign exchange to meet No growth but Early 1 980s and internal imbalances reduction policies, debt servicing and import improvement in requirements external and internal imbalances. *Recognition of lag on the part of recipients. Period II Resumption of growth; *Continuation of sound *Commitments and ownership Modest growth rates Mid-1980s increase in exports and macroeconomic policies lag on the part of recipients. with reduction in agricultural output. distortions 'Trade, exchange rate, *Depressed commodity prices, agriculture sector reforms; debt expenditure switching; improved efficiency of resource use. Period III Higher but sustained *Consolidation of sound Implementation lag Not yet known Late-1980s growth rates with macroeconomic policies. reduction in poverty *Uncertainties in and in aid dependence. *Continuation of structural extermal environment policies. 'Private sector development, capacity building, mobilization of domestic resources. *Increased social expenditures and social safety nets. C- '.0 0~~~~~~~~~~~~~~~~~~~~~~ The Evolving Role of the World Bank reduce external and internal single universal model has imbalances. The dominant emerged to suit diverse mode of intervention in the country circumstances; it is a early 1980s was expenditure learning-by-doing process. reduction, the normal means of stabilization. Unfortunately, By the mid-1980s, adjustment most countries did not have program design was enough foreign exchange to improving, and with the meet debt service and import launching of the Special requirements.5 There was Program of Assistance in insufficient recognition among 1987(see below), adequate In the case of the . countries of the importance of external financing for these structural adjustment, no stabilization. In many coun- programs was assured. single universal model has tries, there was even internal Something had to be done if emerged to suit diverse dissent and questioning about growth in imports, investment, country circumstances; stabilization as urged by the and exports was to resume. it is a learning-by-doing IMF and the World Bank. The strategy was to help borrowers continue the same p3rocess process As a result, in this first phase macroeconomic stabilization of adjustment programs there policies but to supplement was little or no growth, them with trade, exchange although there were improve- rate, and agricultural reforms, ments in the external and and to reallocate public sector internal imbalances-mainly expenditures to improve the through import compression, efficiency of resource use cuts in domestic expenditures, (weeding out "white elephant" and accumulation of arrears on projects and low-priority domestic and external debt. It recurrent expenditures). The is relevant to stress that the supply-side measures Bank has followed prevailing emphasized improved incen- theoretical and analytical tive structure; deregulation insights to underpin its work. and demonopolization of In many instances, it has used domestic trade; decontrol of its rich cross-country prices; and elimination of experience to shed new light. exchange controls, import But in the case of the licensing, and non-quantitative structural adjustment, no barriers to external trade. 194 The Challenge of Africa The Bank responded to the The Long-Term Perspectives critique of the absence of social Study safety nets, and the need to protect the poor from To shed some light on the transition costs of adjustment controversy about structural by launching the Social adjustment and to place it in Dimensions of Adjustment the context of a long-term (SDA) program directed development agenda, the Bank towards Sub-Saharan Africa completed a Long-Term (SSA).6 Since 1990, the Bank Perspectives Study (LTPS) in has adopted a more 198 9.' The study was carried The Long-Term comprehensive focus on out in consultation and Perspectives Study (LTPS) poverty reduction with a two- collaboration with African was the first attempt to pronged strategy that aims at policymakers, intellectuals, arrve at a consensus broad-based economic growth donors, and other inter- .on what needs to be done to generate efficient labor national organizations. It was demand and improve access to the first attempt to arrive at a education, health, and other consensus on what needs to be sustainable growth social services to increase the done in Africa to achieve of 4 to 5 percent annually poor's income-earning sustainable growth of 4 to 5 over the next twenty years opportunities. percent annually over the next twenty years. The current phase of structural adjustment combines the The strategic agenda efficiency-improving policies of developed in the Long-Term the first phase with general Perspectives Study put forth concerns for poverty reduction, the following: (a) structural protecting the poor and disad- adjustment programs are vantaged in the transitional no more than a beginning; period through social safety (b) economic reforms, though nets, and reallocating public necessary, do not fully address expenditures towards priority long-term constraints; sectors, such as education and (c) programs must protect bud- health. Reforms of public enter- get expenditures on human prises, and financial and public resource development; (d) the sector management also occupy goal of structural adjustment a bigger place in this phase. programs should be to achieve 195 The Evolving Role of the World Bank macroeconomic balance as not only technical efficiency, well as a transformation of but political commitment by Africa's production structures; leadership to implement (and, and (e) an enabling environ- therefore, accept) sweeping ment should support the reforms. The study recom- informal sector in generating mended that without trans- income and employment. parency, accountability, predictability, and rule of law, The differences of views on it would not be possible for Long-Term Perspectives Study African countries to make any prescriptions relate to policy tangible progress in sustainable The experience with instruments rather than to and equitable development.9 implementation goals. The Bank insists that the of adjustment programs roles of price incentives, open Helping the Poor in Africa confirmed that and well-functioning markets, governance had to be a a competitive environment, At the onset of the 1990s, the central concern . trade liberalization, realistic overall framework in which in promoting growth exchange rates, and the private the Bank operated changed. sector are critical. Those There is no longer any opposed to the Bank's policies disagreement over the fact that believe that markets and prices economic growth is necessary cannot solve equity questions, for poverty reduction, but and will in fact complicate concerns have been expressed them, even if the poor have that the environmental conser- access to assets.S vation approach, stressed by donor country governments The most important and a large number of NGOs, contribution of the study was ignores the inevitable trade off to address candidly for the between economic growth for first time the issue of the benefit of the poor and for governance. The experience environmental sustainability. with implementation of adjustment programs in Africa The debate on adjustment and confirmed that governance had poverty in Africa has to be a central concern in progressed without the benefit promoting growth. To work, of solid empirical data. But adjustment programs require experience from other 196 The Challenge of Africa developing countries suggests responses, and a less favorable that sustained per capita external environment than income growth is a necessary anticipated has led to a steady condition for sustainable lengthening of structural poverty reduction, and the adjustment programs. implementation of adjustment policies (including fiscal and Overly rapid measures did not monetary restraint) is succeed in Africa due to factors necessary for the resumption unique to the region, not of such growth. Few countries because they were inherently have been able to reduce wrong. Weak institutional and poverty in the absence of rapid implementation capacity, deep- growth-that adjustment rooted structural rigidities in policies work against poverty factor markets, an embryonic reduction is fallacious. Insofar private sector, underdeveloped as these policies create capital markets, lack of consul- conditions conducive to rapid tation and consensus among economic growth of the type the rulers and the public, and that use land and labor-the the fear of economic domina- two factors that most of tion by ethnic minorities or Africa's poor possess'"-the foreigners all contributed to overall effect of adjustment on dampen program outcomes. the poor would be positive. It has taken many years of The pace of adjustment in each debate, dialogue, and demon- country is shaped by an stration from other parts of awareness of the dangers of the world for most African Experience from other institutional, social, and countries to be convinced r market damage from overly about the need for structural developing countries quick shifts, and the adjustment. Although a few suggests that sustained per difficulties of obtaining countries embarked upon capita income growth is a enough external funding (on limited reforms in the early necessary condition soft terms) for a long enough 1980s, it was not until later in for sustainable poverty period to allow a less the decade that a majority of reduction compressed time scale. The countries decided to undertake evidence of increased more wide ranging adjustment debilitation, more sluggish measures. A dozen countries 197 The Evolving Role of the World Bank which have implemented Mobilizing Resources sound policies steadfastly and consistently have successfully The Bank's experience with turned their economies external donor assistance to around. But the region's adjustment programs revealed overall results have been less several weaknesses and a encouraging and the sustain- widening gap between the ability of reforms remains demand for these resources by tenuous. Despite a positive the recipient countries and the turn around in more than half fragmented and inadequate of the countries in the region, donor supply. The Bank The Bank . . . took the growth rates lag well behind therefore took the lead and lead and established one those of adjusting countries established one of the most of the most successful elsewhere. Private investment successful mechanisms for mechanisms for response, needed to sustain mobilizing external resources mobilizing external economic recovery and and coordinating of aid flows resources and coordinating growth, has not been to African countries that are of aid flows to, African adequately forthcoming. implementing sound economic countries that are Adjustment efforts in the best policies and undergoing performing countries remain economic reforms. Since 1987, implementing sound dependent upon large donor when the Special Program of economic policies and transfers and the movement of Assistance for Africa (SPA) was undergoing economic . international commodity launched, the Bank has played reforms prices. Moreover, policy a leading role in securing change has lagged behind adequate financial resources rhetoric-implementation has for low-income, debt-dis- often proved more precarious tressed countries. The Special than planning. Finally, as Program of Assistance for Rothchild and Chazan argue, Africa was established and has there is a crisis of political grown on the basis that it authority that is just as severe would help provide not only as the well-known crisis of the additional financial economic production. These resources needed but that, two crises are intimately through strengthened aid coor- interrelated, each being both a dination, it would add to the cause and an effect of the quality and hence the other."" effectiveness of lending. The 198 The Challenge of Africa program's conceptual Firm criteria on country eli- framework included the gibility for participation in the following: SPA program with some flexibility at the margin. * Donor consultation on the design of adjustment programs The enthusiastic support for at an early stage and more the SPA initiative can be opportunity to participate in gauged by the fact that, over Bank missions. six years, two phases of this program covering twenty-seven * Preservation of the distinct countries have been completed. identity of individual donors New concessional resources and their financial support. totaling $9.2 billion have been disbursed by bilateral and * Greater attention to the multilateral donors other than social dimensions of adjust- IDA and IMF. There is hardly a ment, building on the initia- significant donor to Africa tives the Bank took jointly with today that operates outside this the UNDP, the AfDB, and forum. bilateral donors. Considering the growing * Closer collaboration fragmentation of bilateral between the Bank and the IMF, assistance for project and in particular through the sectoral purposes, the SPA , . . , . . . ~~~~~~~~~~The entbusiastic support formulation of policy extended its coordination and framework papers. monitoring to sectoral development lending while be gauged by the fact that, - An appropriate balance launching the third phase. over six years, two phases between structural adjustment Donors expect that this tool of this program covering and sector adjustment will improve the efficiency of twenty-seven countries programs. sectoral lending to African have been completed countries. * Sustainability of regular investment lending programs, In addition to the Special along with adjustment Program of Assistance for programs. Africa, the Bank organizes and chairs Consultative Group 199 The Evolving Role of the World Bank meetings for several countries to identify relevant options, in Africa. Eleven such meetings analyze consequences, make Different approaches... took place in FY1994. The appropriate choices, and have all lacked one scope of these groups has follow those chosen. The essential ingredient: they evolved over time to offer continued substitution of have not incorporated the greater opportunities for expatriate personnel for local exchange of views and consul- thinking and implementation central feature of building tations on overall country produces short-term "blips" indigenous capacities- strategy and the direction in that satisfy the sponsoring skills, knowledge, and which each country is moving. donors, but a long-lasting institutions change in policies or Building Capacity institutions is rare. Any move towards sustainable economic Recent Bank studies have growth will depend on each shown an erratic, intermittent country building technological course of policy reform capabilities and competence in implementation in most overall economic management. African countries."2 The reasons for this uninspiring The different approaches record are twofold. In applied in Africa by both countries where the donors and recipient countries governance apparatus is have all lacked one essential dominated by the interests of ingredient: they have not the privileged groups which incorporated the central benefit from current policy feature of building indigenous distortions, the political capacities-skills, knowledge, commitment to bring about and institutions. Experience fundamental changes is lack- shows that despite political ups ing. On the other hand, there and downs, the more successful is a small group of countries countries in other parts of the where governance issues do world have managed to invest not loom large, and where consistently in human capital the leadership is genuinely and institutions. As a result, interested in implementing they have been able to exercise reforms. In these countries, the more control over economic bureaucracy and many domes- events and greater autonomy tic institutions lack the capacity in economic decisionmaking. 200 The Challenge of Africa Africa has been treated differ- ownership of the project and, ently and suffered as a result. most important, the absence of External technical assistance to domestic capacity to manage Africa, mainly in the form of projects after the donors had long-term expatriate advisers withdrawn resulted in many and resident consultants, has failures. Thus, the Bank has increased by 50 percent since had to rethink its approach to the mid-1980s and now stands the project cycle, consider ways at around US$4 billion a year. to involve the recipient About 100,000 expatriate tech- countries in the whole cycle, nical advisers work in Africa and minimize the use of long- today, while an equal number term expatriate experts by rely- of African professionals have ing more on domestic exper- emigrated elsewhere. Excessive tise, and strengthening that reliance on external technical expertise through training. assistance, coupled with the "brain drain," has impaired the In 1991, the Bank, together nurturing of local African with the UNDP and the African expertise. Typically, externally Development Bank, established funded projects, including the the African Capacity Building Excessive reliance Bank's, have been prepared by Foundation to help African on external technical expatriate consultants or firms, countries with institution assistance, coupled with appraised by the Bank or building and the training of the "brain drain," has donor staff, operated with the their nationals. This initiative * ~~~~~mpaired the nurturng help of long-term expatriate will need to be supplemented o l A of local African expertise staff, and supervised, moni- by the greater emphasis now tored, and evaluated by Bank being placed on human or donor staff. The project- resource development and the executing agencies were redirection of external established independent of the technical assistance. The Bank's government's normal own technical assistance procedures, budgetary program is being revamped and controls, and supervision. This, the existing mode of delivery is of course, expedited the fulfill- being replaced. The "training ment of project objectives in and visit" system of agricultur- the time-frame laid out by the al extension, for example, uses donors, but the lack of local local institutions and expertise, 201 The Evolving Role of the World Bank has a continuous training and Perspectives Study's agenda is skill upgrading program for still valid, but whether it can be extension workers, and is implemented on a sustainable closely linked with agriculture basis is uncertain. What instru- research institutions. Reliance ments can be applied to on outside experts is minimal, achieve the objectives? What sporadic, targeted at specific are the respective roles of the skills not locally available, and state and the private sector? accompanied by steps to ensure How can external donors and that these skills are transferred the international community to local institutions. support the Long-Term Perspectives Study's agenda? There is not as yet widespread And what is the role of the agreement about the need to Bank in advancing it? modify the traditional - approach of external technical At present, the outlook is assistance. The Bank is work- uncertain. Even in countries ing with other donors in this with sound policy reforms, difficult area, but the results economic growth is inadequate are not yet encouraging. to make a serious dent on Lessons from past experience poverty. Most countries are in Africa and successful models still suffering from a conflu- The most daunting elsewhere suggest that a ence of poverty, malnutrition, challenge facing African flexible, evolving, and high population growth, cballenge facing African comprehensive approach, in unemployment, and deteriorat- countries is to reduce the which African participation is ing social indicators. For them, incidence and depth enhanced and given the leader- the resumption of growth is of poverty ship role, is the only viable the first and foremost task. means of sustaining domestic capacity building efforts. The scenarios for Africa's growth performance at an Unfinished Agenda aggregate level mask the great variety among subregions as - The most daunting challenge well as among individual facing African countries is to countries. Constraints and reduce the incidence and depth challenges vary by country, and of poverty. The Long-Term the real issue is whether the 202 The Challenge of Africa twenty-six larger economies implemented, and a more open that appear less vulnerable to and participatory approach is natural and man-made adopted in decisionmaking. disasters can accelerate Ghana illustrates the overall growth. The decision to change the importance of consistency parity of the CFA exchange .. . .~~~~~~~~~~~~~ of purpose sustained over Promising events in the newly rate has removed one of the democratic South Africa are major blocks to the revival of the long-term. Although too recent to provide an the thirteen countries in the Ghana's performance has accurate assessment of its zone. But the outcomes from not always been timely impact on the Southern Africa this policy change are likely to and aggressive, subregion. But if South Africa's vary. While most countries in particularly in pursuing leadership continues to follow the zone should not find it liberalization and a path of prudent and rational difficult to reverse their supporting the private economic management, it will economic decline, the outlook provide a greater impetus to for others is less certain. Much secto the gover neighboring countries already depends upon the intensity pursuing serious economic and the tenacity with which adopted reforms. The prospects for the they are able to hold the line Southern African countries and put in place complemen- look better now than they tary measures to stimulate the appeared in the last decade. economy. The quality of economic A group of countries in the policies and institutions in the Western Africa region consist- Eastern Africa subregion has ing of Ghana, Guinea, Sierra also improved in the past few Leone, Mauritania, and The years. The liberalization and Gambia has also displayed deregulation of economies, economic performance convertibility of currency, and standards that augur well for enhanced incentives to the the future. Ghana illustrates agriculture sector have laid the importance of sustaining the foundation for stronger consistency of purpose over growth. The gains can be the long-term. Although accelerated if the existing Ghana's performance has not reforms are consolidated, always been timely and aggres- pending reforms are sive, particularly in pursuing 203 The Evolving Role of the World Bank liberalization and supporting response to four challenges will the private sector, the affect the prospects of all of government has stuck to the Africa: policies adopted, and in terms of results, this is proving to be * How rapidly they are able to more important than spurts of contain population growth virtue, followed by massive rates. Current rates of over 3 lapses. percent per year are eating away much of the gains in The remaining countries in the GDP and constraining access to region are faced with uncertain social services and basic prospects for a variety of amenities. Measures to limit reasons. Nigeria, the most population growth rates populous country in Africa, would help. demonstrated in the late 1980s that it can generate high rates * How to diversify economies of growth if it puts its house in from dependence upon single order. But political instability or few commodities while in the country since 1992 managing the consequences of makes it difficult to guess commodity price fluctuations which path the country in world markets. This will will travel. smooth income and consump- tion trends and avoid the Angola, Zaire, Sudan, Liberia, volatility in foreign exchange Nigeria, the most Somalia, Rwanda, and others markets. populous country are still mired in the quagmire in Africa, demonstrated of civil unrest, ethnic strife, * How to increase productivity in the late 1980s that it and devastated physical infra- in the agriculture sector so as can generate high rates structure. It will take some to achieve food security and of growth if it puts its time for these countries to regain the lost market share in house in order. But achieve a semblance of order international trade. The link political instability in the and security and revive the between a productivity increase country since 1992 makes 0 rudiments of institutions. across the sector and the incomes of small-holder farm it difficult to guess which fIn spite of such differences in households provides a path the country will the prospects for various powerful mechanism for travel groups of countries, the alleviating poverty. 204 The Challenge of Africa * How to establish economic a gap between the need for the policies and practices that state to act and its ability to do enable the private sector in so, given prevailing fiscal Determining the these countries to be difficulties, limited administra- relationsbip in Africa competitive in regional and tive capacity, and poor between poverty world export markets. credibility. alleviation and In order to address the Expanding domestic capacity, sustainable growth, and constraints and the challenges including an enabling environ- economic policy reforms faced by Africa, the Bank's role ment for the private sector, via good governance, in the coming decades is to would help to reinforce the capacity building, and help African member countries Bank's quest for development structural adjustment advance the implementation of effectiveness in Africa, and programs is a complex but economic reforms, domestic specifically for improving the critical task capacity building, including implementation and results of human resource development, Bank-assisted projects. The and governance improvement, Bank's African portfolio has with a redefinition of the role not met with great success of the state. Determining the relative to other regions, and relationship in Africa between various reviews have pointed poverty alleviation and to the connection between sustainable growth, and fiscal fragility and weak economic policy reforms via institutional infrastructure as a good governance, capacity dominant cause. The Bank's building, and structural adjust- current African agenda, having ment programs is a complex evolved gradually through the but critical task. past decade, places great emphasis on domestic The lessons from successful capacity-building and developing countries and improved governance as the Africa's own past reveal an building blocks for enduring unresolved debate around the changes in Africa's economic respective roles of state and policies and institutions. market. The central issue is one of redirecting and Africa is a continent endowed redefining the role of the state with a large untapped poten- in development. There is often tial of natural resources-oil, 205 The Evolving Role of the World Bank minerals, and metals-fertile developing world through soils, and a population that is productivity and technological full of energy, vigor, and gains, the living standards of ingenuity. The recent most of its people will improve expansion of its informal and Africa will join the ranks sector in response to economic of the emerging regions of the incentives attests to this vitality. world. On the other hand, if Due to the preponderance of failed policies and the tendency small-holder agriculture in to insulate Africa from If the younger generation most African countries, income competition and technological in Africa chooses to equip and asset distribution is more assimilation, protecting and itself to equal and equitable than in Latin America preserving inefficient modes of compete with the rest Of . or South Asia, and this makes production and consumption, the developing world . . . the task of achieving shared and blaming the rest of the growth more manageable world for the economic ills the li,ing standards of under a right set of policies. continue, Africa will be mnost of its people will The gap between the best marginalized. The World Bank improve and Africa will practice technological frontier and donor community should join the ranks of the and the actual practices in assist the efforts of those emerging regions of the Africa can also be transformed African leaders and countries world into a source of rapid growth. intent on developing indigenous capacity to manage The future of Africa will be their economies in an open, largely determined by Africans participatory, and competitive themselves. If the younger way and thus help lift generation in Africa chooses to 250 million people out of equip itself to equal and poverty while preserving the compete with the rest of the environment. 206 The Challenge of Africa Notes 1. The McNamara Years at the World Bank, The Johns Hopkins University Press, 1981, Chapter 12. 2. (a) World Bank Adjustment in Africa: Reforms, Results and the Road Ahead (Washington, Oxford University Press 1994) (b) Ishrat Husain and Rashid Faruqee, Adjustment in Africa: Lessons from Country Case Studies (World Bank Regional and Sectoral Studies 1994). 3. World Bank, World Bank Support for the Environment: A Progress Report, 1989. 4. World Bank, Accelerated Development in Sub-Saharan Africa, 1981. S. Throughout this analysis, it is assumed that there is a positive relationship between import levels and GDP growth; otherwise, the analysis would be untenable. 6. The SDA program was launched in November 1987 with funding provided by the World Bank, the United Nations Development Program, the African Development Bank, and several bilateral and multilateral agencies. The SDA program focused on setting up poverty monitoring systems (through the col- lection of household data) and supporting social action programs and social funds to alleviate short-term poverty caused by adjustment. The SDA pro- gram was merged in 1992 into a broader effort of alleviating poverty in African countries under the sponsorship of the Special Program of Assistance for Africa. 7. World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth, 1989. 8. See, for instance, Timothy M. Shaw, Reformism and Revisionism in Africa's Political Economy in the 1990s: the Dialectics of Adjustment, 1993 9. The concept of governance was further developed and elaborated in other Bank studies and presented in a paper to the Board in 1991 (See Governance and Development, World Bank, 1992). 10. More than 80 percent of Africa's poor live in rural areas. 11. Donald Rothchild and Naomi Chazan (eds), The Precarious Balance: State and Society in Africa, Westview Press, 1988. 12. See, for example, Adjustment in Africa: Reform, Results and the Road Ahead, Op.cit. 207 Mobilizing Private Savings for Development IBRD and the Capital Markets Kenneth G. Lay By any measure, the International Bank for Reconstruction and Development (IBRD) has been a bargain for its government owners and their taxpayers and an extraordinarily efficient financial inter- mediary for developing-country borrowers. Since Bretton Woods, e * ' ~~~~~IBRD bas committed close the IBRD has committed close to $250 billion in long-term devel- t b opment finance. Of the amounts it has borrowed to fund these te develont -r ' ~~~~~~~~~~~~~term development loans (see Figure 1), more than three-quarters have been supplied fnce... ( In this by bond market investors worldwide-by pension funds and insur- iod) the IERD's gov- ance companies, banks and endowments, mutual funds and private einent stockold ... trusts, corporations and individual brokerage accounts. The IBRD's have transferred only government stockholders, meanwhile, have transferred only $10.7 $10. 7 billion in capital to billion in capital to the institution in payment for their shares. the institution in payment for their sbares This record continues today, with the IBRD borrowing around $10 billion a year to fund loans and other operations. The low cost of these funds is remarkable. In its most recent fiscal year, the IBRD financed itself in U.S. dollars, Deutsche marks, and Japanese yen at interest rates only a few hundredths of a percent- age point higher than the rates at which governments borrow in their own currencies. How so? By paying meticulous attention throughout its history to the soundness of the IBRD's credit and using innovative, sophisticated approaches to achieve the best possible terms for that credit in the financial markets. 209 The Evolving Role of the World Bank Box 1. The Bank as a Financial Intermediary Like commercial banks, the World Bank performs a credit intermediation function, lending to lesser credits from the proceeds of its higher-quality obligations. However, the features of the IBRD's major loan product are different from those of commercial bank loans. Most commercial bank lending is at floating rates based on LIBOR, adding a margin over their cost of funds that depends on country-specific factors, the most important being the country's creditwor- thiness. By contrast, IBRD's lending rate is the same for all its borrowers and is based on its average cost of funds- repriced every six months-and a 0.50 percent spread (0.25 percent for timely payers). The volatility of the IBRD's lending rate is ten times lower than LIBOR volatility (as measured by their standard deviation around its 1989-94 average). Some other comparisons of IBRD's financial intermediation are provided below. IBRD Terms Compared... ... With Commercial Bank Lending Terms IBRD loans Syndicated loans Grace period 3-5 years 1-3 years Repayment period 15-20 years 5-7 years Interest rate variability quasi-fixed interest rate floating (LIBOR-based) rate IBRD Rates Compared... ...With Commercial Bank Rates IBRD Commercial banks Funding costs Short-term LIBOR-0.25%' LIBID (LIBOR-0.125%) Long-term LIBOR -0.20% b LIBOR +0.60% Lending spreads to developing countries 0.25%/6-0.50% 0.375/o-5 .00% ...With Developing-Country Bond Issue Costs IBRD Developing countries Bond issue costs U.S. Treasuries +0.20% U.S. Treasuries +0.90% (AA- borrower) U.S. Treasuries +2.25% (BB+ borrower) Maturity Unlimited Up to 10 years a. Floating rate equivalent of the cost of a six-month maturity U.S. dollar discount note issued by the IBRD. b. LIBOR equivalent of the cost of a U.S. dollar global bond of ten-year maturity. c. LIBOR equivalent of the cost of funding in the fixed income market by a AA-rated commercial bank. d. The lower bound of this range is based on the syndicated loan spread on a ten-year installment loan to a Al/A+ rated sovereign. 210 Mobilizing Private Savings for Development The Credit Foundation institutions or had it only on prohibitively expensive terms. Most banks are credit interme- The genius of the IBRD's diators, lending to lesser cred- How could an institution per- financial structure ... lay its from the proceeds of their suade financial markets to fund in the way in which it higher-quality obligations. The a portfolio of assets that most applied the sovereign credit difference between a bank's market participants would of its rich shareholders cost of borrowing and its reject funding directly? The key .. . . .~~~~~~~~~ and leveraged it, so that lending rates is one source of was the application of the sov- profits. Fees that other ereign credit of the IBRD's rich- financiers are willing to pay for er stockholders to the credit of by stockholders to the bank's guarantees are the new institution. The genius purchase equity in the another. The World Bank's of the IBRD's financial struc- IBRD has generated founders assumed that its loans ture, however, lay in the way in dramatic volumes of and guarantees would be made which it applied the sovereign development finance from to credits that other banks credit of its rich shareholders private sources and investors found so and leveraged it, so that a mod- questionable that either these est cash outlay by stockholders credits lacked access to finance to purchase equity in the IBRD from traditional financial has generated dramatic volumes Figure 1 Total outstanding borrowings* have increased steadily. $U.S. equivalent (billions) 100 ................................................................................................................................ $95.6 6 0 - ---- - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - --------- -------------------- ....................-; 2 0 -------------------------------- ----------------- .............................. 40.c; 20. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1950 1960 1970 1980 1990 *Excludes short-term borrowings and swaps 211 The Evolving Role of the World Bank of development finance from has meant, of course, disci- private sources. plined attention to the quality of the loan portfolio, to the The IBRD's founders estab- thoroughness and productivity lished the concept of "callable of its lending, and to the capital," which provides "last prospects for its borrowers to resort," rich-country credit repay. The Bank's policy is suc- backing for IBRD's creditors cinct: "No loans are made on a contingency basis, only if which, in the Bank's opinion, necessary for it to make good cannot be justified on economic on its borrowings or guaran- grounds or which would be for tees. The charter also limits the countries not deemed credit- IBRD's leverage: outstanding worthy." loans can be no greater than equity and callable capital. In But it has also meant putting the third of the key "frame- emphasis on reducing risks, work" financial provisions, the principally the financial risks IBRD's charter largely elimi- associated with managing nated the most volatile bank assets and liabilities. To cover financial risk-exposure to itself against disruption in capi- exchange-rate fluctuations- tal market access, the IBRD has by requiring that the IBRD continued to carry substantial lend in the same currencies in liquid assets (currently around The Bank's policy is which it borrows. $20 billion) to meet disburse- succinct: "No loans are ment obligations, debt service made which, in the Bank's Over the years, the IBRD has requirements, and administra- built on this basic credit frame- tive expenses for a substantial opinion, cannot be. .. opinion, cannot be work with policies designed to period without recourse to justified on economic reduce the risk that the unpaid market borrowing. It has grounds or which would portion of its stockholders' sub- focused its financing on the be for countries not scriptions would ever be called. medium- to long-term sector of deemed creditworthy" - Key to this effort is a continu- the market, producing a port- ing awareness that the IBRD's folio of liabilities with an aver- risk-bearing capacity should age maturity roughly equiva- carry the institution's principal lent to that of its loan assets. business: providing loans and More recently, it has charged guarantees for borrowers. This interest rates on loans that 212 Mobilizing Private Savings for Development reflect its average cost of bor- major rating agencies since rowings (plus a small addition- 1959. Against this background, al amount to cover the Bank's the story of the IBRD funding expenses), which has largely activity in world financial mar- controlled interest rate risk. It kets is the story of its efforts to has established a conservative obtain for its stockholders- policy in provisioning against borrowers and nonborrowers the risk in its loan portfolio alike-the best possible value (and currently sets aside 3 per- for this credit. The IBRD has been cent of the total amount of profitable every year outstanding loans and callable Building the Franchise: since 1947 and sets guarantees for this purpose). 1946-80 aside reserves to maintain Finally, management and income capacity stockholders have consistently In its early years, despite its recognized the need for the strong sponsorship and solid (currently aiming at a institution to operate at a prof- credit foundation, the IBRD 13 to 14 percent ratio of it sufficient to build and main- did not find it easy to establish reserves to loans) tain retained earnings as a a franchise as a borrower. principal contributor toward Most of the available money prudent levels of equity capi- was in the United States, but tal. The IBRD has been prof- after the sovereign-bond debt itable every year since 1947 crisis of the 1930s, American and sets aside reserves to investors remained skeptical of maintain income capacity (cur- the IBRD's viability. This, cou- rently aiming at a 13 to 14 pled with the ineligibility of its percent ratio of reserves to securities under many state loans) while it has waived for laws for pension funds, promptly paying clients, in insurance companies, and each of the last several years, other fiduciaries, meant that at least half of the 0.5 percent the IBRD management faced spread it levies on loans. an uphill struggle. Its articles, and the policies The Bank mounted a major built around them, made the effort to establish itself in the IBRD one of the premier cred- U.S. investment community. its in world financial markets, On the legal side, an amend- with triple-A ratings from ment to the Bretton Woods 213 The Evolving Role of the World Bank Agreements Act that had At the same time, the IBRD authorized U.S. membership in was moving into bond the IBRD exempted IBRD markets. Its first offering was securities from some cumber- in 1947, a two-tranche affair some federal regulations. for $250 million-an immense Later, with the help of several amount at the time. The Bank U.S. federal agencies, commer- organized the syndicate of cial banks that were members securities firms and banks that of the Federal Reserve System sold the bonds without the were permitted to purchase customary help of a managing Bank bonds up to 10 percent dealer. Staff decided to invite of their capital and surplus. At "all responsible merchants of By 1959, the bond rating the state level, things were securities to participate in the agencies were awarding more complicated. While trust distribution," and sent triple-A credit ratings : funds, charitable institutions, invitation telexes to more than to lBRD bonds and educational endowments 2,600 firms. The Bank were eligible investors, certain received acceptances that insurance companies and produced a syndicate of 1,725 savings banks required dealers. The bonds were more amendments to state laws. than six-times oversubscribed New York, for example, passed and immediately quoted at a a law allowing its savings premium, although prices banks to invest in IBRD showed some sensitivity to the securities by March 1946. But prospects of the Bank's first in November of the same year, borrowers-Holland and the Wisconsin State Banking France. Commission voted to prohibit the purchase of IBRD securi- The deal was also the first ties by any state bank, savings opportunity for the rating bank, or trust company. agencies to assess the Bank. Securing state eligibilities took Standard and Poor's Cor- most of the decade, but by the poration awarded a single-A, end of the 1950s, the IBRD Fitch Investors Service a dou- had established a comprehen- ble-A. By 1959, the bond rat- sive set of investment ing agencies were awarding eligibilities in most of the triple-A credit ratings to IBRD United States. bonds, and by the 1980s, IBRD 214 Mobilizing Private Savings for Development bonds had become a regular portfolios of non-U.S. feature in the U.S. market for investors. It had also estab- government-related securities. lished a network of relation- The IBRD's international ships with the world's principal character was evident The IBRD's international investment dealers that was to from the outset. Unusual character was evident from the endure throughout the finan- outset. Unusual for the time, cially turbulent years that avrtie ts t the IBRD advertised its first followed. U.S. dollar issue outside the U.S. dollar issue outside United States and attracted Even as the IBRD built this the United States significant interest from non- market franchise, events were and attracted significant U.S. investors, an interest that unfolding that would preoccu- interest from continued during the 1950s. As py its financial managers for non-U.S. investors economic and financial vitality almost two decades. Already in returned to post-war Western the 1960s, as pressure built on Europe, the IBRD began to the U.S. balance of payments diversify the currency composi- and gold position, there arose tion of its liabilities. Its second official resistance to the IBRD's borrowing, in 1948, was in raising and exporting of dollars Swiss francs. In the early from the United States domes- 1950s, the IBRD launched tic capital market. The IBRD's issues in pounds sterling, charter requires the consent of Canadian dollars, Dutch members in whose currencies guilders, and more in Swiss or markets the institution bor- francs. rows, and it became more diffi- cult to obtain such agreement By 1965 the IBRD had become from U.S. authorities. This con- a regular borrower in both tributed to a fall in U.S. dollar German and Swiss markets; borrowing, as well as an aware- indeed, in 1968 it borrowed ness that the IBRD could not more in German marks than it take for granted the market did in U.S. dollars. By the access necessary to meet its "dollar crisis" of the early contractual obligations on loan 1970s and the breakdown of commitments or debt repay- the Bretton Woods exchange- ments. This concern took cen- rate regime, it found itself with ter stage in the 1970s (and per- substantial positions in the sisted into the early 1980s). 215 The Evolving Role of the World Bank In 1969-74, the IBRD bor- placements with the Saudi rowed 70 percent more than it Arabian Monetary Agency. So had borrowed in the previous began a substantial direct call eighteen years. These borrow- on OPEC members lasting ings financed increased lending throughout the 1970s and into The evolution of IBRD but built liquid reserves as well. the 1980s. In 1970 the IBRD finance since 1980 has . The market access lessons of began placing securities in been a response to the 1960s had not been lost, Japan, first with the Bank of two major challenges. and management found it pru- Japan. It launched its first yen The first was volume dent to have enough on hand bond issue in 1971 and drew to stay out of the markets for the equivalent of almost extended periods if necessary. US$600 million from that market between fiscal 1970 Further diversification of and 1972. financing sources was impera- tive, given rapidly rising inter- Concerns about Volume est rates and continuing prob- lems over access to markets. The evolution of IBRD finance The IBRD continued to adapt since 1980 has been a response its fundraising activities to fol- to two major challenges. The low the money. In the late first was volume. Undisbursed 1960s it initiated private commitments remained from Figure 2 The currency composition of IBRD's capital market operations* has shifted since 1980 Percentage shares of borrowings outstanding 1980 Oe 1994 $95.6 billion 5% U.S. dollars 33% US dollars 27% Japanese yen Others 14% 19% Swiss francs .Deutsche 18% mark I11% Swiss francs Deutsche mark 30% Japanese yen 37%/ 60/ *Excluding short term borrowings and swaps 216 Mobilizing Private Savings for Development the tremendous growth in not be completed, or if they lending in the 1970s, while could, that they would be the debt crisis brought new locked into fixed annual inter- requirements for high-volume, est payments of 15 percent or fast-disbursing support for more on five-year and longer structural adjustment. IBRD bond issues. To avoid both, the funding needs went from $5.3 IBRD began issuing short-term billion in fiscal 1980 to over paper in the United States' $10 billion by fiscal 1985. In agency discount notes market, the first half of the decade, a program that continued moreover, in Japan, Germany, throughout the 1980s. and Switzerland particularly, IBRD borrowings were large Volume concerns also sustained compared to market size. And the IBRD's emphasis on direct in all of the major industrial borrowing from stockholders' countries important to its central banks, which have been finances, authorities con- significant buyers of IBRD cerned over the capacity of bonds throughout the Bank's their markets followed IBRD history. Beginning in 1956, the borrowing closely. Some con- IBRD began offering securities tinued to place constraints on directly to these investors in IBRD borrowing. Because of periodic, two-year bond these factors, there remained issues-in U.S. dollars and anxiety among staff concern- Swiss francs-to all central ing the year-in, year-out capa- banks and in private place- In all of the major city of the institution to meet ments in their own currencies industrial countries its funding requirements. with the Bundesbank and the - . . !a~~~~inportant to its finances, Bank of Japan. Finally, in the -tits fnnces, Another worry in the early mid-1980s, with central banks authorties concerned over 1980s was the extraordinarily increasingly emphasizing the the capacity of their bearish tone of the bond mar- need for liquidity in their hold- markets followed kets arising from the industrial ings, Bank staff designed and IBRD) borrowing closely country inflation of the late implemented a special "central 1970s. In 1980 and 1981, the bank facility" in U.S. dollars, IBRD faced the prospect that which offered securities with a medium- and long-term fixed- one-year final maturity, an rate dollar financings could interest rate reset monthly (at 217 The Evolving Role of the World Bank a small spread fixed to one- Bank's finances, was the year U.S. Treasury bills), and increasing volatility of inter- an option to sell the securities est and foreign exchange back to the IBRD on forty- rates. This stemmed from the eight hours notice if the buyer collapse of the Bretton Woods urgently needed the funds. system, the oil price shocks, Direct borrowing from central and the rapid growth in struc- banks, however, was no substi- tural fiscal deficits. In the tute for borrowings in the United States, this led to the market. As bond markets lib- separation of financial instru- eralized and expanded in the ments into distinct, nego- 1980s and 1990s, this direct tiable packages of risk and borrowing declined both in return and to the surge of relative and absolute terms as derivative instruments such as a proportion of total IBRD financial futures and options. borrowing. New communications and analysis technology encour- As the decade progressed, the aged these trends and o concerns over volume waned. prompted governments to lib- The second challenge of The secn c g Projected increases in IBRD eralize, as pressure built for the 1980s, ultimately commitments failed to materi- more efficient cross-border of greater long-term alize, and the borrowing pro- financial activity. importance to the Bank's gram plateaued at $10 to $13 finances, was the billion. At the same time, bond By 1980, the IBRD was only increasing volatility of markets grew dramatically with just beginning to respond to interest and foreign the increasing institutionaliza- these developments. In 1980, exchange rates tion of private savings, elimina- concerns over the extreme dif- tion of exchange controls in ferences in exchange-rate risk industrial countries, and open- of borrowers (because of the ing of capital markets to for- IBRD's essentially unpre- eign participation. dictable selection of currencies for disbursement) prompted Dealing with Volatility the IBRD to pool the curren- cies funding its loans so that The second challenge of the all borrowers would share pro- 1980s, ultimately of greater portionally in the risk. But at long-term importance to the the beginning of the 1980s, it 218 Mobilizing Private Savings for Development was still making unfunded In the early 1980s, in the face commitments of long-term of double-digit interest rates in fixed-rate loans with several- U.S. dollars all along the yield year lead times before dis- curve, the IBRD made a con- bursement, a practice that certed effort to borrow and The 1980s saw the exposed it to excessive interest lend currencies with the lowest market's view of the IBRD rate risk. Interest on IBRD available nominal interest rate: not only unimpaired, but fixed-rate loans reached Swiss francs, Deutsche marks s 11.4 percent in 1982. and Japanese yen. Indeed the continediTs en . | . ~~~continued its unbroken IBRD was the largest nonresi- The IBRD clearly needed major dent borrower in each of these record of profitability... changes in its financial risk major markets during the early and it continued retaining management. In 1982, an years of the decade. With the a significant portion of expansion of the "pooling" revaluation of these currencies profits to bolster its concept set out to cover the against the U.S. dollar after equity position interest rate risk. The new loan 1985, however, this approach product preserved the currency shifted. Responding to its pooling, but instead of a fixed clients' concerns about the sus- rate of interest, it carried an ceptibility of their effective interest rate reset semiannually funding cost to currency fluctu- at a spread to the volume- ations, the IBRD moved in weighted average cost of IBRD 1989 to stabilize the currency borrowings originated during a composition of its lending by specified period. This was a vir- adopting stable ratios of U.S. tually complete pass through of dollars, yen, and Deutsche both currency and interest-rate marks (and Deutsche mark- risk to IBRD's borrowers. It related currencies-the Swiss ensured that all borrowers franc and the Dutch guilder). shared equally in the value of its financial intermediation Market Standing capacity. And it eliminated the interest-rate risk it faced from The 1980s saw the market's unfunded, fixed-rate loan com- view of the IBRD not only mitments without placing unimpaired, but strengthened. material constraints on the tim- The Bank continued its un- ing or currency composition of broken record of profitability its borrowing. (throughout the decade, the 219 The Evolving Role of the World Bank IBRD earned US$8.7 billion), its securities, and its creative and it continued retaining a approaches to negotiating significant portion of profits coupon and price, underwrit- to bolster its equity position. ing commissions, and other A general capital increase in fees. In other respects, though, 1988 and steps to minimize the IBRD largely adhered to the effect of foreign exchange market conventions established fluctuations on IBRD reserves by investors, dealers, and gov- further strengthened its capi- ernments. The reasons are tal. Finally, IBRD's major obvious. The IBRD still had borrowers validated its pre- relatively small financing ferred creditor status by con- needs, major efforts were tinuing to service IBRD loans required to market its credit throughout the debt crisis, and establish the fundamentals even while they suspended of a market franchise, and payments to commercial-bank there was an overriding preoc- creditors. These circum- cupation with access. A sub- stances put to rest any doubts stantial component of the IBRD's major borrowers rating agencies and other fixed-income market, particu- validated its preferred - market analysts may have had larly outside the United States, about the soundness of the remained the province of the creditor status by credito statusyinstitution or of its stockhold- individual investor, whose dis- conitinuing to service er support. Throughout the inclination to trade the hold- IBRD loans throughout transition in its lending-cur- ings in his portfolio matched the debt crisis, even rency policies, Bank staff his extreme sensitivity to cred- wvhile they suispended imanaged funding strategy it. And during most of this payments to commnercial- against a basic objective: to time, the markets were bank creditors achieve the best possible sus- remarkably stable. Exchange tainable value for IBRD credit rates were fixed and even a in the market. one-eighth percentage-point change in government-bond The Pursuit of Value yields was a major market move. In its early years, the IBRD's financial innovation was most In the 1980s, things changed. obvious in its pioneering Institutionalization of savings efforts to open new markets to accelerated in every market. As 220 Mobilizing Private Savings for Development the decade progressed, volatile currencies. Because of ineffi- markets, a large volume need, ciencies in world bond mar- assured access, and a firmly kets, investors in one currency established credit left the IBRD tended to price IBRD securities largely free to push for value. differently (relative to those of By initiating currency And it left its financial staff other issuers) than investors in swaps and using these and free to question the conven- others. In some cases, this phe- other over-the-counter tional wisdom that there is a nomenon was the result of rel- financial derivatives, "right" price for a given credit ative supply and demand. In the IBRD was able to rating, that it is not possible for the early 1980s, for example diversify its borrowings one triple-A borrower to get the IBRD was a heavy user of 9 i~~~~~~~~~~~nto twenty -three curren - better value for its rating than the Swiss franc bond market, another. To do so came to mean and its securities commanded g focusing on the structure and lower prices than similar resulting obligations into imperfections of markets, and instruments offered by other fixed-rate liabilities in the playing a leading role in effect- triple-A issuers. In the U.S. dol- currencies it preferred ing change. As events devel- Jar market, the reverse was oped, financial markets reward- true. This created the opportu- ed the IBRD for its innovations. nity for the IBRD's first swapped funding transaction, Pioneering New Produicts in which it borrowed U.S. dol- lars while another triple-A After 1980 the Bank's borrow- credit (IBM) borrowed Swiss ing program evolved along two francs. The two exchanged the distinct lines. First, by initiating proceeds and, in effect, agreed currency swaps and using these to service each other's debt at and other over-the-counter an agreed-upon exchange rate. financial derivatives, the IBRD This left the Bank with a Swiss was able to diversify its bor- franc liability (which it pre- rowings into twenty-three cur- ferred) at a lower cost than it rencies while converting the could achieve borrowing Swiss resulting obligations into fixed- francs directly, while IBM rate liabilities in the currencies effectively converted earlier lia- it preferred. These transactions bilities in these currencies into were extraordinarily cost-effec- dollars in accord with their tive compared to direct own liability strategy. borrowings in the preferred 221 The Evolving Role of the World Bank Similar situations arose as gov- the financial derivatives used to ernments began liberalizing produce the cash-flow charac- capital markets. Because of the teristics of a conventional bond Bank's global status and repu- issue). But as financial markets tation as a responsible market have liberalized, these "struc- user, some governments began tured financings" are substitut- liberalization by giving it and ing for currency-swapped similar borrowers preferred issues, eliminating the preferred access to their markets. Some capital market access or tax accorded tax treatment that treatment that was a major made IBRD securities relative- source of the IBRD's compara- ly more attractive to investors. tive borrowing-cost advantage The funding-cost advantage in those operations. could be quite dramatic (a full percentage point or more) and Even as the IBRD continued currency swaps permitted the elaborating derivative-based IBRD to deliver these relative tools to profit from market cost advantages into liabilities inefficiency, it was active in the currencies it required. developing other techniques to benefit from promoting mar- The IBRD began to experiment ket efficiency. This required with other ways to take advan- significant improvements in tage of market inefficiencies. In the design and marketing of the 1980s, the same exchange- conventional bond issues in By the early 1990s, the rate and interest-rate volatility the major currencies. IBRD and other borrowers that affected IBRD loans led to found that investors a virtual explosion in sophisti- From the 1950s to the first half would be willing to pay cated bond-investment strate- of the 1980s, the technical con- gies among investors. By the ventions of IBRD's bond a price for customized early 1990s, the IBRD and issues-Eurodollar bonds instruments, resulting i'n other borrowers found that issued in U.S. dollars in mar- a more attractive cost of investors would be willing to kets outside the United States funds to them than pay a price for customized and, less frequently, so-called conventional borrowing instruments, resulting in a more "Yankee" issues in the United attractive cost of funds to them States domestic market-and than conventional borrowing their method of distribution (after factoring in the cost of had little to distinguish them 222 Mobilizing Private Savings for Development from those of other issuers. offering medium- and long- Low transaction costs, non- term bonds in the United U.S. investors' greater familiar- States. The IBRD launched a ity with the IBRD, and the direct investor-relations cam- smaller universe of competing paign in the United States products made the Euromarket around its new program, more competitive than the known as "COLTS" (Con- United States as a source of tinuously Offered Longer- significant product-design dollar funds. Meanwhile, in Term Securities), for the con- innovations in the bond yen and Deutsche marks, tinuous issuance of longer- market in the 1980s began Euromarket borrowing was term dollar bonds in individ- in U.S. dollars.... either tightly controlled by ual transactions as small Os In April 1986 . . . [it government authorities or, in $25,000, with maturities from launched a] new program, the case of marks, prohibited, three to thirty years or longer. knw sCLS and the IBRD made heavy, but Modeled after the "medium- ' ,,~~~~~~~~ (Continuously Offered conventional, use of the term note" programs of the Japanese and German domestic major auto finance companies Longer-Term Securities), markets. As staff began to focus (but novel in its extended for the continuous on evolving investor behavior, maturities and streamlined, issuance of longer-term it became evident that depart- lower-cost clearing and settle- dollar bonds in individual ing from these conventions ment procedures), the IBRD's transactions as small as could gain the IBRD competi- always-available product $25,000, with maturities tive advantage. served as the centerpiece for from three to thirty years direct conversations with The U.S. Market major investors. While or onger Eurobonds continued to be the The IBRD's first significant mainstay of IBRD's fundrais- product-design innovations in ing in dollars, the IBRD was the bond market in the 1980s back again with a serious pres- began in U.S. dollars. By 1985, ence in the United States. Bank management was becom- ing uncomfortable with the As the COLTS program extent to which the institution matured, it became increasingly relied on non-U.S. investors evident that the structure of the for its dollar funding. In April fixed-income market created 1986, therefore, IBRD staff unnecessary obstacles that settled on a new approach to made it difficult for issuers such 223 The Evolving Role of the World Bank as the IBRD to achieve the best prevented the free movement possible terms for bond offer- of bonds from one market to ings. Increasingly, sophisticated another. In 1988, for example, institutional investors were two nearly identical IBRD buying high-grade bonds and bond issues, sold within weeks pursuing investment strategies of each other in New York and that relied on active trading of London, traded at yields one- their bond portfolios on the half a percentage point apart. Increasingly, sophisticated basis of views about interest, or Yet there was virtually no institutional investors exchange rates, or the potential attempt by London dealers to were buying high-grade for changes in the relative value satisfy European demand for bonds and pursuing of securities from different this paper out of the supply investment strategies that issuers. In the U.S. dollar mar- trading in New York. All of relied on actizve trading Of ket, the dramatic increase of this, of course, meant that the their bond portfolios on U.S. dollar holdings in Europe, IBRD had no effective way to the Middle East, and Japan was ensure that any single bond the basis of views about t solidifying a global investor issue would be offered to all interest, exchange rates, or base for U.S. dollar bonds, and potential buyers or that holders the potential for changes the trend toward active portfo- and traders could benefit from in the relative value of ito management was creating a the full range of worldwide securities from different notable homogeneity in the demand for IBRD bonds. issuers bond characteristics these investors valued. Global Bonds Yet the mechanisms for distrib- In an eighteen-month period in uting bonds to these investors 1988 and 1989, the Bank set were unresponsive to change. about to remedy this situation, Bonds on identical financial developing a new method of terms were offered in different distributing and trading securi- forms in domestic and interna- ties that came to be known as tional markets for U.S. dollar "global bonds." The product bonds. Underwriting conven- design was based on extensive tions and costs differed widely interviews with institutional for the same services. The orga- investors (staff met with 125 nization of investment dealers' portfolio managers in sixteen businesses and friction in cross- countries) to ensure that the border clearing and settlement new approach would respond 224 Mobilizing Private Savings for Development to their requirements. Bringing global price for IBRD paper the transaction to fruition emerged, with the securities required detailed technical and now trading at yield levels legal work with major clearing lower than any other dollar and settlement systems, both borrower except the U.S. international and domestic, to Treasury. address deficiencies that sur- faced during product develop- IBRD's financing activity in ment. Finally, a successful out- other major currencies (yen, come depended on the agree- Deutsche marks, and Swiss ment of major investment deal- francs) focused on the same ers to sponsor the transaction issues, but at a different pace as underwriters (despite the and against a more difficult profound skepticism of many) background. In these markets, and to alter their internal busi- the IBRD experimented with ness arrangements to ensure different approaches to that the new bonds would improving the relative value of receive equal attention from its bonds, approaches that had their salespeople and traders in to adapt to rapid structural London, New York, and Tokyo. changes. With the sponsorship of a syn- The Japanese Market dicate of the leading global firms, the IBRD brought the In Japan, IBRD borrowing first "global bond" (for $1.5 grew in a heavily intermediat a syndicate of the leading billion and a ten-year maturity) ed, highly regulated market, global firms, the IBRD to market in September 1989. dominated by immense finan- brought the first Its reliable primary market pric- cial institutions operating in "global bond" (for ing, liquid secondary market, clearly differentiated market $1.5 billion and a and easier cross-market cus- segments and with specifically- ten-year maturity) to tody, clearing, and settlement defined roles in financing market in September 1989 proved to have great appeal for Japan's postwar expansion. investors, leading to significant IBRD borrowing in Japan, improvement in the perfor- therefore, continued to involve mance of IBRD bonds relative large-scale loans from relatively to those of comparable borrow- fixed bank syndicates almost ers (see Figure 3). A single, throughout the 1980s, despite 225 The Evolving Role of the World Bank the cost inefficiency relative to and ultimately benefitted from securities market alternatives. their complete elimination 'The success of the U.S. from globally-distributed yen dollar global bond in At the same time, however, a issues. It led efforts by borrow- 1989 focused attention con yen bond market was begin- ers to renegotiate underwriting the benefits of worldwide ning to grow. As early as 1971 and sales commissions to bring distribution and trading the IBRD and the Asian greater consistency to interna- of large bond issues, Development Bank (ADB)- tional practice, and it began including those in yen at the invitation of Japanese negotiating direct transactions authorities-began offering with major Japanese institution- securities in Japan through al investors to lower the cost of Japanese securities companies bond-market operations in in what came to be known as Tokyo still further. the "samurai" bond market. In the early 1980s, the govern- As these developments unfold- ment cautiously began permit- ed, it grew apparent that the ting these dealers to under- evolving Japanese capital mar- write and distribute IBRD and ket would be fully able to sup- ADB bonds in London in the ply the IBRD's needs without "Euroyen" market. recourse to the (more expen- sive) syndicated loans character- As market liberalization began istic of the formative period of to pick up speed, the IBRD the IBRD's yen-borrowing pro- proved innovative once again. gram. By the end of the 1980s, In 1987, it issued "daimyo" the IBRD was satisfying a grow- bonds that sought (unsuccess- ing share of its borrowing needs fully) to adapt samurai issuing through bond issues, both conventions to permit active daimyo and Euroyen, rather distribution and trading in the than from syndicated loans. At London market. But the IBRD the same time, extremely low helped bring down the high Japanese interest rates in 1986 transaction costs associated and 1987 allowed the IBRD to with borrowing in yen. It prepay important amounts of its achieved reductions in fees outstanding yen loans. charged by the commissioned banks that participated in Meanwhile, the success of the Japanese domestic bond issues U.S. dollar global bond in 1989 226 Mobilizing Private Savings for Development illustrated the benefits of The European Market worldwide distribution and trading of large bond issues, In Europe as well, IBRD including those in yen. financing kept pace with capital Japanese authorities and mar- market liberalization. ket participants had, from the Throughout the 1980s, the second dollar global bond, IBRD was a major factor in key arranged modifications to cer- European markets, particularly tain Japanese domestic market in Germany, Holland, and conventions to permit IBRD Switzerland, where nominal global issues to be sold in the interest rates remained low rel- primary market in Tokyo, and ative to those on U.S. dollars it proved possible to extend and on other European curren- these modifications to yen. cies. Indeed, from fiscal 1980 to fiscal 1985, the IBRD com- IBRD's first global bond in yen pleted 18 percent of its annual came to the market in March borrowing program in Swiss Throughout the 1980s, 1992 after the removal of two francs and another 19 percent key regulatory obstacles. The in Deutsche marks, making it issue was the first in yen to be far and away the largest non- tor in key European mar- offered simultaneously in the resident borrower in Germany kets, particularly in Japanese domestic market and and the largest single borrower Germany, Holland, and internationally, and it was also of any description in Switzerland, where nomi- the first domestic yen issue Switzerland. nal interest rates remained without a Japanese bank in the low relative to those on traditional commissioned bank But these massive demands U.S. dollars and on other role. That ten-year deal (for took their toll, particularly in European currencies 250 billion yen) was soon Switzerland, where-by the established as the most liquid mid-1980s-the IBRD began to yen instrument in the bond encounter significant investor market after the benchmark. resistance to further purchases Japanese government issue. By of IBRD Swiss franc bonds. The 1994, yen global bonds (sup- Bank's response was to pull plemented by occasional struc- back from direct operations tured financings in that curren- and focus on converting liabili- cy) were the predominant vehi- ties in other currencies into cle for IBRD funding in yen. Swiss francs through the swap 227 The Evolving Role of the World Bank markets. This approach had its trend to asset diversification by intended effect. By 1991, the investors seeking to protect Swiss market was receptive themselves against (or take again, and the stage was set for advantage of) the much more the IBRD to improve the relative pronounced volatility of value of its Swiss franc paper by exchange and interest rates led developing larger, more widely- the IBRD to reshape its distributed benchmark issues approach to Deutsche mark designed to stimulate lower-cost offerings repeatedly. At the secondary-market trading. beginning of the 1990s, there were new opportunities IBRD funding activities in through the issuance of innova- Deutsche marks underwent an tive instruments (for instance, even more basic transformation bonds with embedded currency in the 1980s and early 1990s. options and warrants, which the At the beginning of this period, IBRD converted to convention- the IBRD raised a substantial al liabilities by purchasing share of its total financing derivatives with offsetting cash requirements through direct flows) to reduce its borrowing Deutsche mark borrowings, cost. There were early precur- using diversified instruments sors of the IBRD's structured targeted toward retail investors. financings in various currencies As more attractive funding that developed rapidly in the International interest in opportunities emerged in Swiss ensuing few years. Deutsche marks and the francs and Dutch guilders capacity of the Deutsche (together with the introduction Meanwhile, the Deutsche mark mark market were of currency swaps), direct became the anchor of the boosted by the . Deutsche mark issues dimin- European exchange rate mecha- ished over the 1980s. nism. International interest in liberalization of capital Deutsche marks and the capacity flows and the deregula- In part, this was related to of the Deutsche mark market tion and globalization changes in the regulatory envi- were boosted by the liberaliza- of securities markets ronment-for example, succes- tion of capital flows and the that swept the major sive changes in the withholding deregulation and globalization industrial countries tax regime applicable to of securities markets that swept Deutsche mark bonds. This major industrial countries. At development and the increasing the same time, the financial 228 Mobilizing Private Savings for Development requirements associated with IBRD's long-standing franchise German reunification pushed in the German market, built German authorities to liberalize on a thirty-year history of still further and to remove most Deutsche mark borrowing, of the remaining obstacles to with a product that had come participation by foreign bor- of age in the world's other two rowers and intermediaries in an major financial markets. international Deutsche mark As of the summer of 1994, bond market. Of Things to Come almost fifty years of attention to its credit and These changes put the IBRD in As of the summer of 1994, market franchise and a a position, after considerable almost fifty years of attention record of value-oriented development work, to launch to its credit and market fran- innovation have left the the first global Deutsche mark chise and a record of value-ori B bond-a product focused on ented innovation have left the d o d ep 1 1 ' 1- .1 ' I * I I r I ' ~~~~delivering to developing broadening distribution, Bank with the most powerful improving liquidity, and reduc- financial intermediation countries large-volume ing transaction costs. This capacity in its history, capable funding at costs less than effort brought together the of delivering to developing one-half a percentage point higher than the funding costs of the largest Figure 3 . industrial countries in their own currencies The IBRD has earned favorable terms for its borrowing Interest rate point spread (US T-bill rate = 0) 1. ................................. -. -...... ... . - ............. .......................................... 0 8 -...-.--.-.-------........................ . . . . .... ......... 10 year term , fixed rate borrowing in U.S. dollars AAA Financial Index -- AAA Industrial Index 0 .2 ................................... ......................... IBRD 0 1988 1989 1990 1991 1992 1993 1994 229 The Evolving Role of the World Bank countries large-volume funding and the unbundling of financial at costs less than one-half a per- risk and return. But it is centage point higher than the increasingly apparent that the The new financial tools funding costs of the largest new financial tools available available have created industrial countries in their have created opportunities for opportunities for the own currencies (see Figure 3). the IBRD to deliver its IBRD to deliver its fin.an- Market evolution has equipped financial intermediation the IBRD with the tools to capacity in a manner more cial intermediation capac- manage interest rate and cur- adaptable to the needs of ity in a manner more rency volatility and the knowl- individual clients and transac- adaptable to the needs of edge to use them. tions. The IBRD has started individual clients and down this road with a pilot transactions At the same time, however, program that offers LIBOR- there is growing interest in the based single-currency loans at IBRD offering a diversified the same low spreads available array of financial products in the fixed-rate product. rather than the pooled loan that served so well during the As the IBRD enters its second past twelve years. The pooled half-century, it will seek new loan has made a major tools and a globally diversified contribution to the IBRD's financing program so that it evolution-giving it breathing can offer its borrowers the room, in effect, to permit it benefits of its powerful inter- and the markets to adapt to mediation capacity and great post-Bretton Woods volatility flexibility in terms. The auithor wishes to acknowledge the suibstantial contribution of Ms. Eriko Ishikawa, financial counselor in the Bank's External Affairs Department, for material she supplied on the Bank's finances prior to 1980. Ms. Ishikawa drew extensively on two other souf rces for accounts of events in this earlier period: Mason and Asher, Thc %Vorld U.niik Since Bretton Woods, (Brookings Instituition, 1973) and Eugene H. R -t1 '. Tbe Financial Operations of the World Bank," in Brettoni Woods: Lookinig tr1 tilC FuIture (Bretton Woods Commission, 1994). 230 Distributors of World Bank Publications ARGENTINA DENMARK JAPAN SINGAPORE, TAIWAN Crlos Hirsch. SRL Sa-*udsLtteratur E-tern Book Service Gower Asia Pacific Pt. Ltd. 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