79055




THE WORLD BANK GROUP HISTORIAN'S OFFICE


          ORAL HISTORY PROGRAM




           Transcript of interview with


          ATTILA KARAOSMANOGLU




  November 17, 1994, and January 10 and 18, 1995
                Washington, D.C.


  Interview by: Jochen Kraske and William Becker
Session 1
November 17, 1994
Washington, D.C.

KARAOSMANOGLU: My name                 IS   Attila Karaosmanoglu. I am one of the Managing
Directors of the World Bank.

Q: I am William Becker, Professor of History at George Washington University:

Q: I am Jochen Kraske, the Bank's Historian.

Q: And I am David Milobsky, the assistant to the Historian.

Q: It is a pleasure to meet you.

KARAOSMANOGLU: The pleasure is mine. Thank you.

Q: We would like to start by asking you to talk a little bit about your personal background and
about your schooling and education.

KARAOSMANOGLU: I come from Turkey. I was brought up on the western coast of Turkey,
in Izmir. I went to public schools in Turkey. I studied at Ankara University and received my
Ph.D. from Istanbul University. Following my graduation from Ankara University I had spent
two years in the United States, one year at Harvard as a visiting scholar and one year at New
York University as an exchange faculty member. When I returned to Turkey, I started teaching
and doing research at both Ankara University and the Middle East Technical University.

Q: What courses did you teach?

KARAOSMANOGLU: At Ankara University I was teaching Economic Theory and Foreign
Trade. At the Middle East Technical University I was giving a course on the structure of the
Turkish economy.

Q: And what research were you doing?

KARAOSMANOGLU: For my Ph.D. I worked on terms oftrade theory and Turkey's terms of
trade. I constructed the first terms of trade indices for Turkey. I also wrote about foreign trade
issues and the structure of the Turkish economy. There was not much that had been written on
those subjects in those days.

Q: Why did you decide to study economics? Did you come from an academic family?

KARAOSMANOGLU: No, I did not come from an academic family. I wanted to study at what
was then the most prestigious college in Turkey, the School of Political Science at Ankara
University. There I became interested in economics by reading, among my first assignments,
Adam Smith's The Wealth of Nations. Ankara University at that time had a number of young,

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995   Final Edited
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dedicated economists on its faculty who stimulated interest in economics among the students. I
became very interested in economic issues.

Q: What did you do after you left Ankara University?

KARAOSMANOGLU: I accepted a position in the Government's Planning Organization. As a
result of pressure exerted by the OEEC [Organisation for European Economic Cooperation]--the
organization which later became OECD [Organisation for Economic Co-operation and
Development]--Professor Jan Tinbergen had been invited by the Turkish Government to look at
the process of economic planning in Turkey and assist in the preparation of a development plan.
Turkey's energy planning agency offered to support Tinbergen's work while he was in the
country. However, the agency was asked by the government not to involve staff from the
university in this work because the government viewed the university as a hotbed of opposition.
Tinbergen asked nonetheless for the economic publications of the university. As he was going
through the articles, he noticed my work and asked to meet with me. We soon discovered that we
had been at Harvard at the same time and that I had audited his classes. So he asked me to work
with him, and a special arrangement was made for me to become a consultant to the Turkish
Electricity Board. That was when I started dealing with economic planning.

Soon after my appointment, a military coup brought in a new, civilian government. Serious
economic difficulties had prompted the coup; careful economic planning was therefore a key
component of the new government's approach. The people desperately wanted some relief.
Meanwhile, at the university, we young faculty members thought that we could contribute to the
new government's efforts by preparing a paper which described what planning is, how it could be
done, what form it should take. We presented the paper to one of the ministers who happened to
be a professor from our school. He thanked us for the paper but indicated that he had some other
ideas and that a Harvard group would help him prepare the plan.

Some of us felt uncomfortable with the idea that the development plan of our country should be
prepared by outsiders. So we objected strongly. Eventually a special committee was established
in the Prime Minister's office, and I was invited to participate in its work. I became the secretary
and the spokesman of the committee which prepared the law establishing the planning
organization. As soon as the planning organization was created, I had to leave because I had a
United Nations fellowship to Oxford University to work on the theory of economic planning.
Although I was looking forward to the Oxford experience, the Turkish government more or less
drafted me to join the planning organization.

Q: What were your responsibilities?

KARAOSMANOGLU: I was in charge of the Economic Planning Department which was
responsible for the preparation of the first Five Year Plan of Turkey. It had both analytical and
managerial responsibility. We brought together over 200 people from academia, private business,
separate government agencies. Together with a core group of planners in the Planning
Organization--following the French type of indicative planning--we formulated a roadmap for
the expansion of the Turkish economy.


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
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The people working with me were experts in particular sectors. I divided them into different
sector groups. The basic structural parts of the plan were prepared in the Planning Organization,
and the sector groups prepared the sectoral plans which we incorporated into the overall plan.
But when the plan was completed, we had a big disagreement with the government. The
government wanted to make changes in our prescriptions but without changing the growth
targets. But my colleagues and I disagreed. We felt that the Government could either set a
growth target and accept the strategic and policy changes needed to achieve the target or insist on
certain policies and accept the resulting growth rate. The Government wanted to determine both
sides of the equation. I could not agree to this and, as a result, I resigned along with three of my
colleagues. This almost caused a political crisis, and I soon became persona non grata.

In fact, I was drafted in the army because I had not done my two-year military service. When I
had finished my military service, I was invited to work at the OECD and prepare a paper on
planning of scientific and technological research for development.

Q: Can you say a little bit more about the plan you had prepared for the Turkish economy? How
comprehensive was it?

KARAOSMANOGLU: It was a very comprehensive plan. It had indicative targets for the
private sector, and dealt specifically with public sector investment. It covered all sectors, trying
to identify not only objectives but how the objectives should be achieved. The Five-Year Plan
was prepared with the idea that it would be translated into annual plans which determined, for
example, the budgets of state economic enterprises. There were incentives to stimulate the
necessary action in the private sector. There were issues, though, which brought us into conflict
with the government, such as the question of land reform, reform of the state economic
enterprises, changes in the government structure and taxation.

Q: Did you rely on input-output models to determine the shape of the investment program?

KARAOSMANOGLU: Sure. Tinbergen was our mentor. He would come every three months
for two or three days and we would test our ideas and our experimentation with him. Curiously,
he had not done a Five-Year Plan himself either; he had prepared annual plans for the Dutch
Planning Institute. So this was an adventure which we shared.

Q: What happened after you left? Did the Government alter the plan in the ways that they
wanted?

KARAOSMANOGLU: Yes. They changed the plan, and the rate of growth went down, as I
had suggested it would. Not by much, but by the amount that I had forecasted.

Q: Would you like to talk a little bit about your work with OECD?

KARAOSMANOGLU: As requested, I wrote a paper on the planning of scientific and
technological research. The paper was presented to a group of Nobel Laureates and scientists
who felt somewhat uncomfortable with the idea that science or technological research could be
planned or that social needs could be predicted. Unfortunately, I could not sell the Egyptians on

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
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this notion either. One of the examples in my paper was that the Aswan Dam would change the
fauna of the southeastern Mediterranean. Therefore, the Egyptians should start developing new
techniques of fish farming, which would be suitable under the changed conditions. When I came
to the Bank, I could not persuade the Egyptians of the merits of the adaptation, but then I
discovered that the Israelis were doing it. Not on my advice, but they were doing it.

Q: Why did you, in 1966, decide to leave OECD and come to the Bank?

KARAOSMANOGLU: Well, my contract in OECD had been for one year. At the conclusion
of my study I tried to sell the OECD management the idea of establishing a Technology Bank, a
bank which would buy licenses or patents and give them on credit to the developing countries.
OECD got excited and I was granted an audience with the Deputy Secretary General and others
to present my proposal. Unfortunately, they felt that what I was proposing was against the basic
premises of capitalism. They wouldn't accept the idea of a Technology Bank, and I felt that my
useful function in OECD was coming to an end.

I came back to Turkey to look for new opportunities, but discovered that I would still have
difficulties to find an appropriate job. However, there was a [International Monetary] Fund
Mission in the country headed by a Mr. Ernest Sture, who was Director of the Exchange and
Trade Relations Department at the time. Mr. Sture knew me from earlier encounters between the
Planning Organization and IMF [International Monetary Fund] missions. The two of us began to
talk. Mr. Sture had heard that I was in town and found out that I would not have much hope in
finding a job in Turkey, so he offered me a job in the Fund. I told him that that was very kind of
him but that I really was not very interested in the Fund's work because I was interested in
development issues. In those days, the Fund was not seen as an institution interested in
development. So he asked whether I would be interested in a job in the World Bank. I replied
that I would think about it if they offered me a job.

I returned to Paris because my contract with OECD had not come to an end. About a week after
my return I received a call from the Bank's office in Paris asking me to fill out an application
form. So I went to the Bank office in Paris, filled an application form and listed Tinbergen,
Nicholas Kaldor and Thomas Balough as references. About ten days later I received an urgent
call from Tinbergen. He asked me if I would consider going to the United Nations instead of the
Bank. He told me that the Dutch Government was financing work on a World Plan to be
prepared by the United Nations but the work was going nowhere. He encouraged me to go to the
U.N. and straighten out the work on this plan.

OECD at the same time was offering me a further extension but I was not much interested in
that. So I called the United Nations, and they confirmed that Tinbergen had recommended that I
should be offered a very senior position. The U.N. bureaucracy balked. The position was too
senior for someone my age; moreover, there was no quota for a Turkish national at that level. I
was told that I would be most welcome to join and assume the responsibilities outlined by
Tinbergen but that I would have to accept a position at a much lower level. I thanked them for
their offer, but informed them that I found discrimination on the basis of age and nationality
difficult to accept. Not long after that I accepted a job offer by the Bank; I was hired by the Bank
without any interview.

                                    Attila Karaosmanoglu
                  November 17,1994, and January 10and 18,1995 Final Edited
                                                                                                5



After I had accepted the offer to join the Bank, I received a call from Mr. [L. Peter] Chatenay in
the Paris office who asked me where I wanted to work in the Bank. Not knowing anything about
the Bank's structure at the time, I suggested that I work in the Economics Department. And that
is where I went. So I came here to work for a year or at the most two, as I thought at the time,
until I would once again find appropriate opportunities for work back home.

Q: What were your responsibilities when you first came to the Bank? You were a senior
economist?

KARAOSMANOGLU: I was an economist in the Economics Department. At that time, in
1967, there was little hierarchy in the Bank. We had Andrew Kamarck as the department
director, Sandy [Alexander] Stevenson, who was his deputy, and Bob [Barend A.] DeVries as the
chief economist. The rest of us were just plain economists. My first assignment when I came to
the Bank was in the international capital flows division. The first thing my boss gave me was to
prepare a table, which in Turkey would have been handled by someone three or four levels
below. I was wondering whether I was being tested or whether this was the type of thing that one
did in the Bank. I completed the task very quickly and went to the office of my supervisor, where
I found him preparing a similar table himself. In those days, the Bank did not have research
assistants and economists had to do elementary statistical work without assistance.


Substantively I worked on a number of things. I dealt with issues related to the supplier credit
crisis and worked with Ben [Benjamin B.] King on the improvement of the debt reporting
system. I also worked on the estimate of capital requirements of the developing countries.

In the middle of 1967, when we had finished the preparation of the new reporting system
procedures, my boss thought that I should have some experience with economic missions. I
agreed, and he wanted me to go on a mission to Malawi. I asked what I was supposed to do on
this mission, and my boss said just to go along and to keep my eyes and ears open. I did not feel
comfortable with this arrangement. So I agreed with the mission leader, John Edelman, that I
would construct, from whatever data available, the national accounts for Malawi and prepare
some projections.

I went on the mission and constructed the national accounts. While I was in Malawi, I was very
much struck by the environmental impact of World Bank projects--Malawi was one of the most
disease-stricken countries in Africa in those days--so on my return I wrote my back-to-office
report on the impact of World Bank projects on the ecological balance of countries like Malawi.
I argued that we had to pay some attention to ecology because our irrigation projects were
creating additional still waters that were causing bilharzias and other water-borne diseases. I
described what needed to be done to address the potential problems resulting from our
interventions.

I circulated my back-to-office report widely, and not long after that my boss called me in and,
looking over his glasses, asked me to define "ecological balance." I tried to explain the concept
to him, but he q~ickly interrupted me and asked, "Where is 'ecological balance' in your terms-of-
reference?" I replied that it was not mentioned in my terms-of-reference but I had been sent to
                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                   6


Malawi to look at the development prospects of this country and the ecology clearly had an
important bearing on those prospects. He then asked why I did not mention in my report the long
term projections which I had prepared. I told him that I did not think they were worth reporting.
My boss did get quite upset with me because I had not cleared the change in the focus of my
work with him. He ordered me to recall the back-to-office report. That was one of the times
when I seriously thought of quitting the Bank and going back. But about six months after that
incident, the Bank hired its first environmental adviser.

Q: What were your responsibilities after this first mission?

KARAOSMANOGLU: A personnel officer asked me whether I would be interested in working
as a country economist. I said I would be interested. He also asked me what I would see myself
as in five years' time. I said maybe an economic adviser--in those days chief economists were
called economic advisers. He almost fell off his chair and told me that being ambitious was a
very good thing but one had to be very realistic and that I should not have exaggerated
expectations. I told him that I was not expecting much but merely expressing my wishes.

I was assigned to work on Egypt as a country economist. Relations with Egypt had not started
then. Egypt had debts which she did not service; the government had nationalized private assets
without compensation--circumstances which did not augur for an active Bank program. My first
task was to prepare an economic report; Hugh Collier was initially the mission leader. But soon I
was leading the Bank's economic missions and became involved in the preparation of some
projects, two in particular, a railway project and a drainage project for the Nile delta. As a result
of the Aswan Darn there was more water which was causing quite a bit of salination, but Egypt's
debt service deficiencies presented a big problem to the resumption of any lending. The U.S. did
not want to have anything to do with Egypt.

In the meantime [RobertS.] McNamara had arrived and wondered why we were not lending to
Egypt. He had the idea of preparing comprehensive country program papers, and I believe the
first country program paper prepared in the Bank was the one I prepared on Egypt. I suffered
quite a bit because of it. McNamara would send my drafts back and say, "No, No, No, put this
table in the first page;" or "change the size of the table or the location of the table." So I spent
quite a bit of time not on the substance but on the presentation of this paper. Finally, there was a
meeting on the paper, and apparently he banged the table saying that this was a damn good
paper. My director, Michael Lejeune, felt sorry that he did not take me along to the meeting.

Of course, the major problem remained Egypt's treatment of its debts. Before he presented the
final version of the CPP to McNamara, Lejeune asked me, "Attila, I am going to talk to
McNamara now. What do you think we should be doing about Egypt's debts?"! I replied that the
problem was not going to be solved unless Egypt started to see the need to deal with its debt
obligations not only as a World Bank lending issue but as a problem reflecting their entire
balance of payments situation. I thought that the Egyptians could be persuaded to look at their
obligations in that light and look at the repayment of their debt in the context of the needed
capital flows. Of course, this was still during the [Gamal Abdel] Nasser period when Egypt
relied heavily on the support of the Soviet Union and people were taking me to the port in
Alexandria to show me with great pride the Russian navy vessels. That was the atmosphere.

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
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Lejeune was not convinced by my argument, but he presented it to McNamara anyway. Much to
his surprise McNamara agreed with the approach. He asked that I meet with him in his office
where he told me to discuss the matter with the Egyptians along those lines.

The U.S. completely disowned the whole thing. They said they would be happy if Egypt's debt
problem could be sorted out. The people in the U.S. Government were willing to listen to me but
they did not, not give me any indication of their position; they did not support me in any way,
but they also did not interfere in what I did.

I made maybe close to ten trips to Egypt, sometimes over the weekend. Egyptians started to call
me Economic [Gunnar V.] Jahring. There was a gentleman whose name was Jahring, a Swedish
gentleman who was involved as negotiator in one of the Middle Eastern crises, so they used to
call me Economic Jahring. They listened and tried to understand, but somehow their responses
were always late.

It occurred to me that they really did not understand fully the mechanics of calculating the
different balance of payments scenarios. One day, on a Saturday, the Undersecretary of the
Ministry of Economy had invited me for lunch. We were having lunch, and I said, "Why don't
we go to your office and work on the alternative scenarios together?" I didn't suggest that I
would teach him how to do it, but I was asking whether we could go and work together so things
could move faster.

So we went to his office after lunch. The Egyptians used a Friden calculator. I was accustomed
to working with another model--I don't remember what the name of it was, but it was also a big
machine like that--so it took us about half an hour to figure out how to work the machine. The
Undersecretary was carefully following how I was calculating the different balance of payments
scenarios and began to understand what I was trying to demonstrate. Following this encounter,
things started to move faster and the issue of Egypt's debt could be addressed in a systematic
manner. In tum, Egypt could once again become an active member of the Bank. Actually,
operations in Egypt did not resume until some time later when I came back to the Bank as Chief
Economist and then Country Director. But the debt issue was effectively brought to the point
where a solution could be worked out, which happened in 1971 while I was in Turkey.

I also worked on Yemen. I was the first Bank staff member to visit North Yemen on an official
mission. According to their statistics there were six foreigners who visited Yemen in that year
when the civil war was still going on. There was a Russian planning team that was helping the
North Yemenites. Later, I also went to South Yemen a few weeks after they attained their
independence.

Q: How were you assigned to work on Yemen?

KARAOSMANOGLU: Because I was quick in producing reports. So every time I finished a
report, I was asked to lead another urgent economic mission. This was in 1969. I went to Yemen,
then to Yugoslavia and to Iran. I wrote four economic reports in that year.


                                     Attila Karaosmanog/u
                 November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                     8


  I remember the report on Yugoslavia was an interesting one. I talked about the need for reform. I
  did not suggest that the state should wither away or disappear, but that it needed to change its
  shape. It had developed into a triangular pyramid representing the party, the enterprises and the
  commune. I discussed the conflicts this presented to policymaking. It seems that the report went
  all the way up inside the government because it questioned the whole system critically but in
  terms which the Yugoslavs did not find offensive but intriguing. I know about this because later,
. when I was in Turkey, the Yugoslav minister sent me a message asking me whether I thought it
  was easier to write a report about a country than to run it. I replied that it certainly was more fun
  to write a report on a country.

 Q: When did you return to Turkey? How did this change come about?

 KARAOSMANOGLU: I left in 1971 to go back toTurkey.

 Q: You were invited back?

 KARAOSMANOGLU: Yes. The Prime Minister-designate called me one morning at five
 o'clock Washington time and asked me to become Minister of Education. I told him that I did not
 have any political interest and that I did not feel comfortable to deal with the issues of education.
 But he replied, "We were on the same panel five years ago and you were criticizing all
 governments from the beginning of the republic for not having paid enough attention to
 education, education of girls, this and that. So you are the person I want to come now and put
 these things right."

 "Sir, that's very flattering," I replied, "but it's easy to criticize. I don't know enough about
 education policy. I wouldn't dare to accept the Education Ministry. I think that somebody with
 more experience in dealing with educational issues should be considered." But he insisted that I
 should come.

 Finally, I agreed, "If you want me to come to help you to prepare for the new government, I
 would be happy to do so." That same afternoon I left for Turkey.

 Q: Had there been elections in Turkey at that time?

KARAOSMANOGLU: No. It was a move by the military establishment. What happened was
that the military strongly protested against Prime Minister [Suleyman] Demirel's policies, and he
resigned. A multiparty coalition was formed, a coalition which also included Demirel's party. I
was a technocrat they were trying to get back because people remembered that I had resigned
from the Planning Organization six years earlier over issues of reform.

Q: So you went back?

KARAOSMANOGLU: I went back, and to my dismay I started learning about politics there.
When I told the Prime Minister-designate that I would come to help him prepare for his
government, I thought I had made it clear that I didn't want to take a role in the government as
such. However, after the Prime Minister-designate had talked to me, he gave a press conference

                                      Attila Karaosmanoglu
                   November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  9


and announced that he had invited me to join the government and that I had accepted. That was a
surprise to me.

Those were agonizing days. I told the Prime Minister that I couldn't take a role in the
government since I did not know how a coalition government could work with totally different
ideas and philosophies each of the parties was bringing to the table. However, he told me not to
worry. The Prime Minister asked me to formulate a government program. He said, "I'll have
everybody I'm going to offer a ministerial job read the program in your presence, and I'll take
them into the Cabinet if they agree with it." So the government that I participated in was
probably the only government where an actual government program was written before the
government was formed and everybody knew exactly what they had signed on to do. The Prime
Minister was true to his promise in the way he proceeded. Only I was naive enough to believe
that if people expressed their agreement with something, it really meant agreement. At that point
I would have been happy to head the Ministry of Finance. But the Prime Minister gave that
position to one of his old buddies, which later turned out to be a fatal mistake. So I accepted a
position as Deputy Prime Minister and sent my resignation to the Banlc

Q: Was there more than one Deputy Prime Minister?

KARAOSMANOGLU: Yes. One for political and one for economic affairs.

Incidentally, that was the only time in Turkey that there were two Deputy Prime Ministers with
special functional responsibilities, because I insisted that I should have a portfolio. The economic
portfolio was mine.

Q: What were your specific responsibilities?

KARAOSMANOGLU: I was to be the Chairman of the High Planning Council and the
Chairman of the Economic Committee of the Cabinet. I was supposed to make sure that the
reforms which were included in the program were carried out. I was personally involved with
land reform and enterprise reform, none of which went through. When I finally had to conclude
that there was no hope that these reforms would be carried out, I decided to resign. So I became
persona non grata once again, because I had triggered a major government crisis. Twelve other
cabinet members resigned with me. Of course, I gave them a piece of my mind, saying that if
they were ready to resign with me, why were they not ready to support the reforms I had
proposed.

Q: Very briefly, what was the problem? Were your proposals politically unacceptable?

KARAOSMANOGLU: Yes. It was difficult. The coalition members did not see the benefits for
their own party in carrying out some of these reforms. The vested interests were very uneasy. For
instance, when we got there, there were very strict foreign trade controls. All the businessmen
and industrialists complained about quotas. Although I didn't have the courage to introduce a
fully liberal trade system at that point because the economic situation was very precarious, I
started to open up the economy. In about two and a half to three months time I had those quotas
doubled and later doubled them again. Once I did that, to my surprise--although it shouldn't have

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
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been a surprise--business became my biggest critic. They literally said, "This damn Attila is
going to fry us in our own fat." With much larger quotas there was at last some competition.
There were more imports available than the economy needed at that point. As a result the
monopolist importers started to have difficulties. They also felt other pressures. For instance,
with my colleague in the Foreign Trade Ministry we established a system to register all
importers. We started recording how much they imported and how much tax they paid. So they
saw that a very big importer not paying taxes year after year or declaring losses year after year
would be questioned. So there was a great deal of discomfort.

I tried to tackle the land reform issue in two stages. The first stage involved a law, which was
meant to restrict the transfer of land ownership for a given period of time so as to preserve the
effects of a new distribution of land for some time. There was a big fight in the Parliament over
this law. At the end of the process the law had changed so much that it was no longer effective
for the purpose it was meant to serve. But emotions were running high, and at some point, when
I was in the hospital with pneumonia, the Government even declared martial law. So, in the end
there were many things which I found very disappointing.

Q: Had you kept in touch with people in the Bank while you were in Turkey?

KARAOSMANOGLU: Of course, there were Bank missions coming to Turkey whom I had to
deal with. But when I resigned from the government I did not think that I was coming back to the
Bank. I applied to the Middle East Technical University to teach. The Academic Council of the
University unanimously voted to have me, but the Board of Trustees unanimously voted to
refuse me.

Q: Can you talk a little bit about your approach to what we call today economic management?
Did your views change in the course of time? Earlier when you worked in the Planning
Organization you seemed to be firmly committed to the idea of centralized planning and control
by the government. Now, you mentioned that you were trying to open up the economy,
especially on the foreign trade side. Did this represent a change?

KARAOSMANOGLU: It represented a change consistent with changing conditions in Turkey.
In another interview I was asked to explain my views about land reform. I mentioned that the
land reform I tried to introduce in the 1960s was somewhat different from the land reform I
thought of putting in effect in 1971. And if I were to go back to Turkey today and--God forbid--
took a political assignment again, I wouldn't think of carrying out land reform as l was thinking
of doing in those days, except perhaps in some very limited areas. For instance, in the area where
the big dam on the Euphrates is being built now, there is a very distorted ownership picture. For
the sake of lasting peace and law and order it would be a good idea to carry out land reform in
that area. But countrywide there is no need for land reform today. Turkey is no longer a country,
either economically or socially, where large landowners dictate the fortunes. When
circumstances change, the need for reform also changes. In this sense, I have to admit that my
views have changed. I have been in this business for 40 years now and our understanding of
economic issues has changed. The world has changed; technologies are changing all the time.
But while the approach you advocate has undergone change, I don't think my values have


                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 11


changed. Mind you, in Turkey there are still some people who think that I am a bloody
communist because I got involved in land reform and tax reform and things. of that kind.

Q: Are you saying that you have always been a pragmatist, someone who was just looking at the
situation, analyzing the underlying factors and devising appropriate solutions?

KARAOSMANOGLU: Yes.

Q: Rather than following changing doctrines, changing from Tinbergen to some other mentor?

KARAOSMANOGLU: No. But you see all the time you are experimenting, and you see what
works, what doesn't work. In this sense working in the Bank is one of the most privileged
positions you can find yourself in. Here you have brought together the best minds in the world,
both in theory and in practice, in politics as well as administration, and you have the opportunity
to see where things work, how they work, and where they don't work. This environment teaches
you to follow a pragmatic approach and to follow where your analysis leads you.

I don't think I ever had a strong ideological disposition. I was always what you would in this
country call a "liberal." I always believed that governments need to be concerned about the
welfare of the poor, that governments are responsible to ensure the equality of opportunities, that
governments have particular responsibilities in education and basic health. For instance, when I
was in Planning we carried out surveys in 40,000 villages in Turkey to determine their priorities.
Did they need roads? Education? Health care? Where did they want to start? Some of the old
bureaucrats thought we were crazy because we would increase the expectations of people. Yet
for me increasing their expectations and desires was in fact something that needed to be done.

In the first Five Year Plan we made many mistakes, as every plan suffers from many mistakes.
But one of the more serious mistakes I was a party to was relying on historical trends of
population movements in our projections. We observed that in Turkey people did not move
much from the villages to the cities and accordingly we did not make assumptions about worker's
remittances. Yet in less than three years there was an inflow of $400 million in remittances
because the Government opened the borders and let workers go to Germany because of the
persistent pressure to find employment. So all of a sudden there was a pattern of migration which
resulted in a growing capital inflow.

Q: Eventually you returned to the Bank?

KARAOSMANOGLU: Yes. The Bank invited me to come back. I got a letter from Munir
Benjenk who was Director of the Middle East-Europe Department then. He offered me to come
back to the Bank either as a consultant, on a fixed-term assignment, or as a normal staff member.

Q: So you came back and became chief economist?

KARAOSMANOGLU: Not immediately. I joined with the expectation that I would become
chief economist, but there was still my previous chief economist, Tommy [C. H.] Thompson. I


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 12


waited until he was given an appropriate job. I was senior economist in the chief economist's
office for about six months before I became chief economist.

Q: This means that you came back to the Bank more or less at the time of the 1972
reorganization?

KARAOSMANOGLU: Yes. Somebody had sent a reorganization team to interview me in
Ankara about the 1972 reorganization. So when I returned I had a pretty good idea about what
was going on.

Q: Benjenk, of course, in the meantime had become vice president.

KARAOSMANOGLU: Yes.

Q: Now, what were the issues that you were working on when you came back? Was Egypt one
of them?

KARAOSMANOGLU: Yes, among all the countries in the Middle East. My first concern was
to establish an esprit de corps among the economists working in the region.

Q: How many economists were assigned to you?

KARAOSMANOGLU: There were about 60 to 70 economists in the region. I brought together
the micro-economists in the projects department and the macro-economists in the country
departments to meetings which I chaired. This irritated at least one of the program directors. He
thought that I was building an empire. This was nonsense, of course. I was merely trying to do
internally what we were recommending to our borrowers. I made it clear that I could not be
responsible for the quality of the economic work if I didn't have any say about the promotion of
the economists or the assignment of responsibilities. For instance, I insisted that before any
director could assign an economist as a mission leader, he had to prepare a synopsis of the
economic work on that country as he saw it. That forced the economists to go and look what had
been written on that country before. On the basis of that synopsis he could determine what was
missing and what the upcoming mission needed to look at. At that point I was prepared to clear
the mission.

But this did not sit well with the department directors. At one point, the three department
directors--two program department and one project department director--wrote a memo to the
Vice President complaining about my alleged highhandedness in handling the economic work.
That was the second time I seriously thought of quitting the Bank. But Benjenk simply gave me
the memo and said, "Why don't you read it and tell me what needs to be done about it?'' He
didn't want to get mixed up in this conflict. So I went to all three directors. No, to be correct, I
went to two of them and asked them to give me examples of my high-handed approach which
caused them loss oftime and unnecessary work. Needless to say the problem was quickly cleared
up. In fact, I had a really powerful group in my office and thus could provide effective support. I
had three economists with me, Vinod Dubey, Francis Colaco and Ram Chopra who were clearly
above the cut of the ordinary country economists and did very effective work.

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                   13



Q: What were some of the substantive issues which preoccupied you when you became chief
economist?

KARAOSMANOGLU: Well, some of them are still lingering today. For instance, I wanted to
make sure that we insisted that Morocco pay more attention to social issues: income distribution,
education, and poverty. I was trying to move the Yugoslavs to undertake some economic
reforms, especially in the banking sector. I negotiated with the Romanians the language of our
first economic report, word by word.

For example, at one point the Romanian officials objected to the use of the word "ambitious" in
characterizing their economic plan. They said, "This sounds very bad."

I replied, "But your plan is ambitious. It is beyond what you can do."

"But the word 'ambitious' is very bad," they insisted. I asked them what they would like to say
instead and they replied, "Pretentious." So we agreed that the word "pretentious" would be used
when translated into Romanian.

Of course, I had again had quite a bit to do at that time with Egypt. The debt issue had been
settled, so when I returned to Egypt I discussed with them the reorganization of the economic
enterprises. Missions that are going there now are still talking about reorganization of economic
enterprises and privatization. We had one of the first program loans to Egypt to revive the
industrial sector. We also prepared one of the first so-called basic economic reports on Egypt,
which was handled by Khalid Ikram.

As the chief economist I represented the region among the Bank's economic development
advisers. In this capacity I took part in the preparation of the economic prospect papers which
were the precursors of the World Development Reports. I played an important role in the
preparation of the first prospects paper because it was related to oil. When we came to the
numbers we recommended a readjustment which amounted to trillions of dollars. Everybody
thought we were crazy. I should tell you that in fact I had predicted that the terms-of-trade for oil
would deteriorate before I returned to Turkey. There had been changes in the oil contracts which
were affecting the nature of the relationship between countries which had oil and the oil
companies. I was convinced that a big crisis was in the offing if the oil producing countries
decided to take charge and nationalize their fields.

Q: Which they did in October of'73.

KARAOSMANOGLU: Yes. Yes. I got that memo back with a note from my chief economist
saying "very interesting." But no action.

Q: What had you suggested should be done in case the OPEC [Organization of the Petroleum
Exporting Countries] countries took some action?



                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18,1995- Final Edited
                                                                                               14


KARAOSMANOGLU: Well, we tried to analyze the process of adjustment and predict what
changes would result. Would the absorptive capacity of the oil producing countries be large
enough? What would be an appropriate investment strategy for them? There were some big
names involved from MIT, Harvard, and other places working on the same or similar issues. I
remember one very famous MIT professor replying in response to my question about the supply
function, "The supply function is known. We know everything about supply. We don't know all
that much about the demand." But included in the supply function were assumptions that shale
oil would come into production and that solar energy would become a major power source in a
relatively short time: all of them turned out to be wrong. We had made some arrangements with
some people doing oil research outside of the Bank and had them as our consultants. As a result,
the Bank became one of the places which produced the best analysis on energy and oil issues in
those days.

I didn't stay as a chief economist very long and then moved to the Development Policy stafi at
the insistence of Hollis Chenery.

Q: It was Chenery and not McNamara who made that decision?

KARAOSMANOGLU: McNamara was very much involved in the appointment of Directors.
In fact, at one point, the letter of my appointment--not as Director of Development Policy staff,
but as the director of what had been Mahbub ul-Haq's department--was on McNamara's desk for
signature. Mahbub had left the Bank and returned to Pakistan in the expectation that he would
get an important job. But he couldn't get it and cabled McNamara that weekend to take him back.
As a result I stayed as chief economist another six or eight months and then moved there as
Director of Development Policy to replace Ernie [Ernest] Stern.

Q: In your work as chief economist, did you get involved in any of the Bank's technical
assistance and advisory work in Iran and Saudi Arabia?

KARAOSMANOGLU: Yes. I went with Willi Wapenhans to Saudi Arabia. He was then
Acting Vice President while Munir Benjenk had taken sabbatical leave. We went there to discuss
with the Saudi's first technical assistance program.

As for Iran, I visited there to observe how they were doing but I did not have specific
responsibilities there. The Iranians wanted technical assistance from us. I remember talking to
the Iranian Executive Director in the Fund about their needs. However, they would not accept
anybody short of a Nobel laureate to advise them. During one of my visits to Iran I asked the
Undersecretary for Planning, who later became Deputy Prime Minister, how he saw Iran in 1990.
He replied, "Like Germany." Iran had high expectation in those days. They suddenly found that
the rial could be used as international currency, and, of course, all the big contractors were
running after them. The Iranians, who looked very shabby when I started working on the Middle
East, were wearing suits made by Yves Saint Laurent.

Q: Can you comment on Munir Benjenk? How was he to work with?



                                     Attila Karaosmanoglu
                 November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               15


KARAOSMANOGLU: I think he was very happy when I worked with him as chief economist,
but when I became country director--because McNamara had insisted that he take me--l don't
think he was all that happy. At one point we had some disagreements; then we had very correct
relations. But we were never very close. There were occasional tensions when Ernie, as the
Senior Vice President, would deal with me directly. Of course, I knew how to work within the
bureaucracy, so I would keep Benjenk informed. However, he thought that Ernie and I were
bypassing him and wrote unpleasant notes to me and Ernie.

Q: Was he a person who took a direct interest in shaping the work of the region, determining
priorities and goals?

KARAOSMANOGLU: Yes and no. Only in the sense of making sure that the region produced
many projects, produced its program on time. He was very keen to respond to McNamara's
plans, but I don't remember him feeling all that excited about poverty or the substance of our
work. For him, production, production on time, and having good relations with the countries was
very important.

Q: So he was essentially an operator and not an intellectual sort of person?

KARAOSMANOGLU: I would say yes. Of course, he was considered one of the most
successful Vice Presidents. He loved to move in important circles, and later when he became
Vice President for External Relations he was really moving in the highest possible circles, with
visits to the Pope and heads of state and government, especially in the Middle East after the oil
shock in Iran and Saudi Arabia. He had access to the Kings and Presidents in the Middle East. Of
course, Benjenk had some extraordinary talents. He could speak five or six languages, and he
really was a skillful operator. And not in a bad sense. Where many others would have been
confounded, he could find ways of doing things and doing them quickly.

Q: What was his relationship with the Turkish government?

KARAOSMANOGLU: Correct. Distant. He never was involved in the Turkish bureaucracy or
in Turkish politics, therefore dealing with Turkey presented no problem for him. In contrast, I
declined at one point to become the vice president of Europe-Middle East-North Africa because
Turkey was then the largest country and I didn't think it was appropriate for me to deal with
Turkey on behalf of the Bank. It would not have been fair to the institution, nor to the Turkish
Government, nor to myself. So I turned down the job.

Q: You had a long-standing interest in the issues related to poverty. Do you think that that had
something to do with your good rapport with McNamara?

KARAOSMANOGLU: No. I look at it the other way around. In fact what happened was that
Hollis Chenery loved to travel and loved to stay at home to work, so he wasn't there most of the
time, and I was acting in his place all the time. This role evolved into a relationship with·
McNamara. I was always present when country program papers were discussed--! attended most
President's Council meetings--and I had a close interest in poverty issues. This did not mean that
I agreed with the head count of poor beneficiaries of Bank lending, but I agreed with the need to

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               16


address the problem of poverty, even if it meant sometimes agreeing with McNamara's head
counting.

I remember we had in our rooms special telephones with green buttons for a direct line into
McNamara's office. We used to call them "green hornets." At 7:30 in the morning my green
hornet would start beeping. McNamara would ask, "Attila, did you see this report that came out
yesterday?" It could be a draft report in white or yellow cover, which means not even division
chiefs would have seen it.

Sometimes I would reply, "Yes, I saw it." Sometimes I would say, "I didn't see it, but give me an
hour."

Then he would complain, "Am I the only one who is reading these things?"

And I would tell him, "Yes, sir."

McNamara had a great ability to notice discontinuities in numbers. I don't think he had the
legendary memory everybody attributed to him. He had a good memory, but he focused on
selected numbers and kept them in his mind to use as a benchmark to notice any discontinuities.
When he looked at tables and saw something jump up or down, he would start questioning, and
in many instances there would be something wrong with the numbers. This helped establish his
image as a wizard with numbers.

McNamara was very keen about his speeches. Immediately after the annual meeting, he would
call Hollis Chenery, Ernie Stern, Mahbub ul-Haq, Wouter Tims and myself to a meeting to
develop next year's policy agenda. Next year's policy agenda meant the issues that would appear
in McNamara's next year's speech. And work on the speech would proceed throughout the whole
year. McNamara would read all the papers produced for the purpose, absorbing everything
related to his topic. No wonder that when he got up to give the speech, he would often get
emotional and sometimes shed tears.

His Achilles' heel was in trying to get more numbers than could be had legitimately. For
instance, in the rural development reports we always had hassles with him. He wanted all those
numbers, and when I told him that I did not feel comfortable with those numbers, he would
accept my position. He would agree, "Okay. Keep that column open. Don't put any numbers, but
next year I want them there."

I was not as close to him intellectually as Mahbub or Ernie were, but I was very much a member
of the inner group. We had some significant differences of opinion. For instance, Mahbub was
writing a speech for the UNCT AD [United Nations Conference on Trade and Development]
meeting of 1979, and we were asked to comment at every turn. I was very uncomfortable
because the speech did not say anything about what the Bank should do or could do. It touched
on a number of issues--free trade, health, agriculture--but nothing about the need for resources.
So I kept telling Mahbub, "You have to say something about what the Bank can do." In those
days that there was a clear need for structural changes in the economies of the developing
countries, so I suggested, "Why don't you promise to give loans to countries who want to change

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               17


the structure of their economy to become competitive with the rest of the world? Program loans
to offset the foreign exchange burden imposed by these changes as a safety cushion." Mahbub
didn't like it. He refused to include it.

When we looked at the fifth draft together with Hollis and Ernie, I insisted again that McNamara
should make the proposal and ·both Hollis and Ernie supported the idea. They convinced
McNamara that he had to say something that would encourage the Bank to set its sights higher.
So Mahbub included the proposal in the speech, and this was what attracted the most attention.
This marked the beginning of the Bank's lending for structural adjustment.              ·

Q: Now this was while you were still with the Development Policy Staff?

KARAOSMANOGLU: Yes.

Q: But it would have been close to the end of your tenure there?

KARAOSMANOGLU: Yes. I think it must have been the year when I was preparing the World
Development Report. Ernie had prepared the first of these reports; the second was prepared under
my supervisiOn.

Q: Now, what other responsibilities did you have? You were there for about four years as the
director of the Development Policy Staff?

KARAOSMANOGLU: It was really acting for Hollis Chenery and coordinating the three
departments which reported to him. This meant keeping the development policy staff functioning
as the intellectual base for the economists and the economic work in the Bank. With Chenery we
had a couple of basic rules on which we agreed when I came to work with him. One of them was
that either he or I would interview every professional staff member that was going to join the
DPS. We wanted to be reassured not only of the intellectual strength and experience of each staff
member, but, with the exception of few cases where very specialized knowledge was required,
we wanted to make sure of the fungibility of the individuals. We wanted to determine whether
the person could work in other parts of the Bank. Chenery did not have any ideological hang-ups
in selecting his staff, which was one of his greatest contributions to the economic work of the
Bank. As long as somebody knew what he was talking about and made sense within his frame of
reference, Chenery would hire him. We had Marxists, we had structuralists, we had Chicago
types, we had Keynesians, we had supply-siders. There was a bubbling and very lively
intellectual atmosphere. Mortal enemies in British universities were working side by side as staff
members or consultants in DPS. Chenery also would let people go to other parts of the Bank, if
they wished to do so. He would let them go even if they were in the middle of an important
project. He believed that this would make DPS an important entry point into the Bank and
become the center of a network of people who were familiar with the research potential of the
Bank and would be comfortable using it and stimulate further research.

Q: I suppose Chenery had little time for the administrative side of his vice presidency?



                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  18


KARAOSMANOGLU: That is correct. He more or less left everything to me with the
exception of one thing: the Development Research Center under Jack Duloy, which was
working on large econometric models. Whenever I went to talk to the Development Research
Center, the following day he would go and talk to them himself to make sure that I had not
poisoned their minds. He knew that I would question the relevance of their work to the Bank and
try to shape their work accordingly. But he cherished the work that was being done by the Center
and did not want it to be polluted by concerns about relevance and timeliness.

Q: In the circumstances, how much leadership did he in fact provide in the Bank? To what
extent was he just interested in pursuing his own research interests?

KARAOSMANOGLU: He provided important intellectual leadership at a critical time in the
Bank. It is true that he worked quite a bit for himself, but when there was anything really
substantive and important he would pay close attention. I would tell him occasionally, "Look,
Hollis, there is an important thing that is coming along. You better come." I would not usually
have to bother him when he was travelling or on vacation since I would try to make sure that
these type of things were discussed when he was in town, but he was always there when it
mattered. His heart was in the right place.

Q: How influential was he shaping McNamara's thinking?

KARAOSMANOGLU: Hollis was one of the few people who would stand up to McNamara
and tell him, "This is nonsense," or "You cannot say that." McNamara really respected Hollis.
He had little regard for his managerial abilities, but he looked up to him intellectually. In return,
Hollis genuinely respected McNamara's leadership but this would not keep him from
contradicting him in matters that he felt strongly about.

Q: What was the relationship between Hollis and Mahbub, and how did that influence
McNamara?

KARAOSMANOGLU: That was one of the things which disturbed Hollis. Mahbub would
commit some blunder, like give a speech criticizing the Government of Pakistan or
recommending that all debts be written off, and then he would come back and ask for
forgiveness. McNamara would brush these things aside, but Hollis was not very happy about
that.

Q: Was there an element of competition between the two of them?

KARAOSMANOGLU: Not much. Hollis was beyond that. I don't think he had any feeling of
insecurity. He had a feeling of insecurity vis-a-vis [1. Peter M.] Cargill when the budget was an
issue. Cargill would go up to McNamara and say, "The DPS budget will not be increased."
Hollis would disappear, and then I had to go to McNamara and explain why the DPS budget
should be increased, in what places, for what purpose. Then Cargill would complain, "You are
knifing me in the back. I am trying to put a discipline to the budget. Why are you doing this?"
But then he would invite me to have lunch with him at the Sans Souci restaurant and the matter
was forgotten.

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               19




Q: I wanted to follow up on something you said about DPS being an entry point for people in
the Bank. Before DPS established this informal network of people you described was there any
tension between DPS and the programs departments in any ofthe regions?

KARAOSMANOGLU: No tensions but benign neglect. Of course, DPS provided some of its
best people to the operational side of the Bank. Kemal Dervis, for example, was one of Hollis'
favorites. When I went back to EMENA [Europe, Middle East, and North Africa Region], I
thought that Kemal would be a good person to work as country economist on Egypt. I told
Hollis, "I am taking Kemal," and he didn't say anything. He did not object even though Kemal
was involved in some intricate general equilibrium model which was Hollis' favorite subject. Of
course, there were some people who did not like Hollis. They objected to his using a Bank car to
go and play tennis during working hours, or they objected to some of the travelling he did. In
tum, he could be really rude to people, although I must say he was never rude to me. He didn't
have patience with some people if he thought they were talking nonsense.

I believe that Hollis Chenery made a great intellectual contribution to the work of the Bank,
much greater than anybody else. And I have observed the Bank over a long period of time. I
participated in the Annual Meeting of 1955 in Istanbul. Then I was a member of the Turkish
delegation to the Annual Meetings in 1961. And from then on I followed events very closely.
One of Chenery's key contributions was the establishment of a comparative database. His interest
in the subject led him to exploit the unique opportunity offered by the Bank to assemble data on
all aspects of development. His contribution is also reflected in two or three of his books which .
have become classics: Redistribution with Growth and a book on structural change.

Q: I suppose Montek Singh Ahluwalia worked with Chenery on the subject of income
distribution. Did you work with Montek when he was here in the Bank?

KARAOSMANOGLU: Montek was on several missions with me as a Young Professional: to
Yemen, to Yugoslavia and to Egypt. Our work relationship was very close. When I came to DPS
as Director he was chief of the income distribution division, so we worked again together fairly
closely.

Q: Well, we have kept you for a little more than two hours. We would like to schedule another
couple of hours with you at some point at your convenience. Thank you very much for a very
interesting interview.

KARAOSMANOGLU: Thank you.




                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 20


Session 2
January 10, 1995
Washington, D.C.

Q: It is a pleasure to see you again.

KARAOSMANOGLU: Thank you.

Q: We left off talking about the contribution of Hollis Chenery to the Bank. We thought we
would ask you to talk a little bit more about the role and contribution ofMahbub ul-Haq.

KARAOSMANOGLU: I believe that Mahbub is one of the most capable pamphleteers around.
I have always wondered why, when he had the opportunities in his own country, he did not
practice the things he was preaching in the Bank--things like the focus on the alleviation of
poverty, on income distribution, on the provision of basic needs. He is of course very bright, but
the transition from the intellectual and academic to the practicing politician was obviously
difficult for him. In the Bank he contributed in particular to the preparation of McNamara's
major speeches. He was McNamara's speechwriter in substantive terms. I have told you last time
about the process followed in the preparation of McNamara's annual meeting speeches.
Individual papers were assigned to different people, and when they were completed Mahbub
would put them in the form of a speech. Mahbub was in charge of the economic policy
department, which was the smallest among the departments in DPS. As Hollis wanted, we
allocated within DPS 40 percent of our resources for research, 40 percent for operational support,
and 20 percent for policy work. But Mahbub had a reasonably good group of people reflecting
very different views.

There were a few instances where I had strong differences with Mahbub. I recall one instance of
them now, which was on the Bank's support of the provision of so-called basic needs. When
McNamara started talking about basic needs, I wanted to make sure that we looked at the public
resources that the developing countries were already using to alleviate poverty before we started
another program. I felt that the LDCs [less developed countries] were already devoting a large
amount of resources to this area. When I referred to resources I included not only the relevant
budget expenditures and the subsidies, but also disguised subsidies in the .form of price controls
which take the form of deficits of state enterprises. If you looked closely there was a very huge
amount of resources devoted to the alleviation of poverty and the provision of basic. needs which
did not necessarily produce the expected results. Therefore, I tried to persuade McNamara to
study these problems before we undertook a major basic needs program. Of course, McNamara
always wanted everything yesterday, so in about two weeks' time Mahbub produced a model for
basic needs in Pakistan and I produced a paper on Turkey. I tried to show that a large amount of
resources, directly and indirectly, were spent in Turkey to alleviate poverty and to provide for the
basic needs of people, but many programs were no longer relevant, were not well targeted, and
there was quite a bit of wastage. If we could help the LDCs to improve the effectiveness of
programs already in place, we would not have to place an additional burden on the limited
resources of these countries. But I could not convince Mahbub, and I don't think McNamara was
fully convinced either, but the basic needs program was somewhat tempered as a result of my
intervention.

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                   21



The second instance where I differed with Mahbub was on the preparation of McNamara's
UNCTAD speech in Manila on the subject of program lending in support of structural reforms.
That speech laid the foundation for the Bank's structural adjustment assistance as it exists today.
The speech was made even before the annual meeting speech in 1979 in Belgrade which
introduced the idea more formally. I thought at the time that these loans could evolve much more
effectively than they did. However, the political circumstances in the different countries limited
their appeal.

Q: It is interesting that MeN amara initially was not convinced that this was the proper way for
the Bank to proceed. I understand that he had felt that the solution had to be brought from the
outside. He tended to discount the actions of the LDCs themselves.

KARAOSMANOGLU: Well, that was McNamara's attitude to life. He thought that as long as
you made the right analysis and presented it with all its implications, intelligent people will
understand it and be compelled to act accordingly. But, of course, life is much more complex,
and government action rarely the result of compelling analysis. That was one of the insights
which seemed to be missing from McNamara's outlook on life

I should tell you another thing about McNamara. When I was still chief economist in EMENA,
DPS had a program of basic country economic reports and each region had to nominate a country
for which a basic report had to be prepared. At the time McNamara was preparing his famous
Nairobi speech. As part of the basic report exercise, I was proposing a special approach in
countries where there were no basic data. I thought modem technologies would enable us to
compensate for the shortage of hydrological data, climatic data, etc. Accordingly, I proposed that
we do a basic report on the Yemen Arab Republic as a country of concentration and also
suggested that McNamara should talk about the poorest of the poor countries where there were
no data to work with in his speech. But my proposal was not accepted, presumably because the
absence of reliable data was considered a major obstacle at that point. McNamara got interested
in that subject later on, but not at that point. Incidentally, I also went to the major foundations in
New York, to Rockefeller, to Ford and others and tried to interest them in looking at a hard core
case of development and apply new technologies of analysis in building a comprehensive data
base. But I did not make any headway, at least at that point.

Q: Now, when did you finally leave your assignment in DPS?

KARAOSMANOGLU: You see, it was quite interesting. McNamara had very high regard for
Chenery, but he did not have any confidence in Chenery's managerial acumen; therefore, I stayed
in DPS somewhat longer than I cared for or others thought was appropriate. Mind you DPS was
a very lively place. There were some really interesting characters there. There was Wouter Tims,
Helen Hughes, we mentioned Mahbub. There was Raj Krishna and Jack [John H.] Duloy.
Nobody agreed with anybody, so somebody had to be there to keep the shop functioning.
Therefore I stayed there until 1979. At that point there was an opening in the Country Program
Department in EMENA because Martijn Paijmans was promoted to Vice President of
Administration. Ernie Stem may have suggested my name to McNamara. He was then the head
of operations. McNamara did not want to let me go because he didn't want to let DPS loose. But

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995 Final Edited
                                                                                               22


then Munir Benjenk was making life difficult for personnel by not accepting their candidates. So
McNamara decided, according to the story I was told later, that he wanted to make an offer to
Benjenk he would find difficult to refuse. He mentioned my name to Benjenk, and Benjenk-
reluctantly, I think, not very happily--accepted his proposal because he then announced in the
party given for Richard Frank, who was moving to the IFC, that he would have liked to have
seen him as a program director. So I was more or less imposed on Benjenk as Country Director.
Benjenk was not very happy with that because he thought with McNamara knowing me quite
well and Ernie being Senior Vice President I could bypass him.

Q: What were some of the major problems you handled in your assignment as program director?

KARAOSMANOGLU: My major task was to develop a program with Egypt. Martijn Paijmans
had started to build an operational relationship, but he was impatient and too direct for the
Egyptians' taste. As a result not much was happening. The Egyptians knew me quite well from
before. I think I succeeded in developing a rather healthy and strong program, but I wanted to
press hard for the correction of energy prices, although I knew very well that if you pressed this
sensitive issue, our relations may suffer. And that's what happened. Of course, I pursued that
issue in consultation with both McNamara and Ernie and also Roger Chaufournier. At that time
Chaufournier was the Vice President.

Another country in my department which had important problems was Romania. I must say I
was always uncomfortable with Romania; I always felt that the Romanians were trying to hide
matters from us. At one point I had canceled a big part of a project where there was a very
interesting procurement problem. The Romanians had been pushing us to allow them to procure
equipment, some injection pumps, for a chemical factory from Romania rather than
internationally. Our people felt that Romanian injection pumps were not of the quality which
would produce the necessary quality output. Our missions would go and visit the factory which
was being built with our assistance, but somehow the second or third floor was never open when
our people were visiting the factory. At one point, there was a mistake and the doors opened and,
as our people passed through, they saw that the injection pumps were already there and working.
When they informed me about this, I canceled that part of the project. That was the type of
relationship we had with the Romanians. We had a lending program of around $300 million a
year. The Romanian officials would do everything to have a few more dollars, so they could go
back and present it to [Nicolae] Ceausescu as a measure of their success. But later, of course,
Ceausescu, as you know, denounced Bank lending to Romania and repaid all our loans.

I was also involved in the introduction of Hungary to the Bank. It was a very interesting
experience. They requested a special meeting with the President of the Bank during one of our
annual meetings.

Q: This was still McNamara, then?

KARAOSMANOGLU: No. I think it was [Alden W.] Clausen. They said they wanted to
become a member of the Bank but they wanted to do it in the most confidential manner. So I had
to prepare papers and meetings without even consulting with my staff, except for my senior
departmental economist, Francis Colaco, and of course the Vice President, Roger Chaufournier.

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 23


The communications were very difficult. The Hungarians did not want their embassy to know
about their meeting because they were scared that the embassy would inform the Russians
immediately. So they relied on their trade representative in New York. I would call him using
very guarded language. He would inform the National Bank of Hungary, and then they would
respond to queries or prepare for visits. I made the first visit to Hungary from the Bank. But later
on, I discovered that the Hungarian President [Janos] Kadar had in fact discussed this initiative
with the Secretary General of the Russian Communist Party--the fellow who died very quickly-
[Yuri V.] Andropov. Andropov had been the Soviet Russian ambassador to Hungary earlier on
and established close relations with Kadar, and he had agreed with Kadar that that Hungary
should join the World Bank. Of course, when they became the members, they were most
severely criticized by the Czechs and the East Germans.

Q: Were there any difficult issues involved in your negotiations?

KARAOSMANOGLU: We crossed swords with the CIA [U.S. Central Intelligence Agency]
because we had the Hungarian national income much lower than the CIA calculations, and they
blamed us for trying to introduce a communist country into the Bank and making them eligible
for borrowing from the Bank by cheating on the national account numbers. But then, of course,
after the demise of the Soviet Union, everybody came to the conclusion that the national
accounts as calculated by the CIA or CIA-funded groups were much higher than they actually
were.

Since we are talking about Soviet-Bank relations, I can tell you also an interesting story about
South Yemen. South Yemen was as communist a country as you can get among the Bank's
member countries, but there were a couple of very interesting things. One of them was they
always wanted unification with North Yemen, so I was asked by both South Yemenis and North
Yemenis to try to find some basis for discussions about unification. So in addition to my normal
duties for the Bank, I had to play go-between to help the two countries to talk to each other.
There was one instance where we were about to cancel a fishery project in South Yemen because
the land where some of the buildings would be built was not cleared and as a result the cold
storage component was way behind schedule, so we sent them a strong message, and then I was
going to go there to see myself what was happening. Much to my surprise when I went there,
everything was dandy and well taken care of. I was quietly told by some people that when the
Russians heard that I would cancel the project and the Bank's relations with South Yemen would
be jeopardized, they helped them. They helped them to clean the site, they sent technicians to
make the cold storage work, and so the project was saved and our relations were kept on an even
keel with the South Yemenis.

Q: I suppose at that point the Russians were beginning to look at the financial burden that all
these countries represented to them and were looking for alternatives?

KARAOSMANOGLU: Yes, definitely. Once I went there with Chaufoumier. The day we
arrived, there was also a ministerial level delegation coming from the Soviet Union. At night,
when the Aden radio reported the news, the arrival of the World Bank was the first item and the
arrival of the high level delegation from the Soviet Union was the second item ofthe news.


                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  24


I also went on several missions to Portugal because Portugal was still borrowing at the time. One
thing which was very interesting was that it was among the few countries where the government
did not mind my openly sitting with the representatives of the opposition and discuss economic
policies with them. But of course I was very much impressed by the fact that the opposition
spokesman usually had exactly the same views as the government ministers on major economic
policy issues.

However, this also involved very strange instances, one of them my wife still remembers because
I happened to have her with me on one of the very rare foreign trips which we did together. The
Bank had helped with the land reform in Portugal through a project which was not working. The
Portuguese were thinking whether they should cancel it or change the nature of it. I was told by
the Portuguese, both by the ED [Executive Director] here and the Portuguese in the Ministry of
Finance, that I really needed to talk to the people at the site of the project, the people who were
really involved in the project. Of course, I said, "Fine, we can go and talk to them." So they took
me somewhere in the project area. We entered a big palace, a historical palace. In answer to my
question, I was informed that this was the horne of a foundation. So we entered the palace, and
there was a duchess or a princess or whatever. I was informed, "Well, she's the trustee." Then we
were immediately taken to lunch. Waiters with white gloves would serve the wine as if they were
handling nitroglycerine, trying not to shake it and pouring it very gingerly. There was something
really awkward about the whole atmosphere. I was expecting to meet some people like the
workers or farmer-workers who were now having difficulties in cultivating the pieces of farm
that they had been given; instead, at the end of our lunch there was a guy in a white silk suit, off-
white silk suit, obviously tailored by Pierre Cardin or some other French couturier. He had been
the Portuguese ambassador to the OECD, and he started telling me about the big difficulties and
problems that the former landlords were having because their land had been taken away. He
advocated that we should give it back to those big landowners again. In the middle ofhis speech,
I got up and told my wife, "We are leaving." She still tells me that she has never seen me so rude
in her life.

This was one of the instances where a Bank project which had been initiated under one
government became very difficult to implement when the political regime had changed. There
was a very strong desire on the part of the government to change it in a way that would have very
unpleasant effects on the poor, because as soon as these lands were given back to the previous
owners, the first thing they would do would be to kick out the organized labor which happened to
be the poor elements in the society.

Q: Did you deal with Yugoslavia also?

KARAOSMANOGLU: Yes. I should mention something about Iran and something about
Yugoslavia as well. Iran, of course, was extremely rich. We had an agricultural mission in Iran
headed by Peter Naylor and later by Owen Price, to work with Sir John Crawford and give them
technical advice. As I mentioned last time, the Iranians had very high expectations. Just as in
agriculture, they wanted a group of economists to visit Tehran and look at their economic issues.
They had confidence in my judgment and asked me to give them a list of names of people which
we could send to look at different sectors of the economy. I sent them a list but there was no
economist the Iranians found worthy enough to look at their economy. I had given them some

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995 Final Edited
                                                                                               25


top-notch names and I was dealing with Mr. [Jahangir] Amuzegar, the Executive Director, whose
brother was the Minister of Mines and Petroleum and later Prime Minister, but I could not
convince him to take any of the people I had recommended. Our relations with Iran were very
smooth. In fact, our communications worked very well even when the [Ayatollah Ruhollah]
Khomeini regime had come into power, in terms of getting answers to our cables and receiving
payments. I understand in the beginning,the Khomeini people didn't touch their Central Bank
people. So while we all felt very uncomfortable with that regime, at least at the beginning, our
communications turned out to be smoother than the communications with the Shah's regime.

Q: Now, what about Yugoslavia?

KARAOSMANOGLU: Yugoslavia was a very interesting case. As I told you, before I left the
Bank to return to Turkey my last economic report had been on Yugoslavia. I wrote in that report
that the state was changing its form. It was becoming increasingly more difficult to manage the
economy because the rules of economic policy were being ignored. The emphasis on regional
income distribution was not working well. The states were doing things which were not
complementary to each other. Every republic which had some natural resources wanted to
produce everything based on that natural resource by themselves. The business enterprises
likewise were going into activities which were not their strength in terms of either know-how or
technology or natural resources.

In those days, I used to have summary project portfolios for each country. They would show a
description of the project, the key dates, outstanding issues, disbursements, and in whose court
the ball was concerning the next action. There was also a map at the end of the report, which
showed the site of the projects. This system would show clearly that some of the republics were
moving faster than others in the implementation of projects. Later when Yugoslavia dissolved,
this data apparently helped to identifY who owed the Bank how much. The Bank was taken
seriously in Yugoslavia. However, I could never convince the Yugoslavs about the importance of
the price mechanism. They tended to accept technical advice but resisted suggestions about their
economic policies.

One aspect which I found very interesting was the ethnic diversity and the intellectual role ofthe
Slovenians. Every time I found something unusual, I traced the origins of the ideas. For
instance, they had a national accounts system which was unique. When I traced it I discovered
that it was the Slovenians who developed and introduced it. Every single thing that was very
unique, very different, very complicated came from Slovenia.

Of course, there was not much love lost between the different parts of the country. For instance,
Slovenians did not want to employ people from Serbia, especially from southern Serbia, from the
Kosovo region. And people from Kosovo didn't want to work in Slovenia; they would rather go
and work in Italy than work in Slovenia. Obviously [Josip Broz] Tito had held the place together
because of his moral authority, although during the years I worked there as department director,
Tito had already withdrawn from daily politics. But every time there was a fight on some issue
that they could not resolve, they would take it to Tito, and Tito would say, "Do it this way," and
they would start doing it that way while continuing their fight over how else it could be done or
what should be done.

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                              26



Yugoslavia was close to graduation. In fact, a few years later during a Board discussion of
Korea's graduation a Board member asked for assurance that Korea would graduate 'in five years.
I gave them the example ofYugoslavia. I told the Board, "Look, just before I left Europe-Middle
East-North Africa to move to East Asia, I went to Yugoslavia to discuss graduation. And now
look what has happened." In fact this was also one of the rare instances when I went to the U.S.
Treasury because there was Mr. Beryl Sprinkel, who was very interested in what we were doing.
They were very uncomfortable about what we were doing in Yugoslavia, and Ernie suggested I
go and talk to them. So I went there and explained our approach for graduation. When it came to
Yugoslavia, they didn't object to the idea because there was a five-year period of preparation.
But I left the region at a point where the relation with Yugoslavia was such that we were
developing ,the graduation details and strategy.

Q: Two questions. One relates to the Yugoslav economic system. The Yugoslavs, of course,
developed this peculiar system in which they. tried to marry the centralized communist control
approach with the incentive structure of capitalism. Was that something that the Bank helped
them develop?

KARAOSMANOGLU: No, no, no, no. This was Slovenian. What had them so excited about
my report in 1971 was precisely the fact that I was showing that the system was really not
working and that it entailed an enormous waste of time.

But I must also confess to one thing. Somebody once asked me, "Is there any democratic country
in your department?"

I replied, "Well, if democracy is described as people participating in the decisions which have a
bearingon their lives, well-being and incomes, the only country that qualifies is Yugoslavia."

However, there was so much discussion that nothing was working. In fact, these enterprises were
fine, but because there was no central authority they would not pay their debts to other
enterprises and with the surpluses they would go and invest in things which they had no business
in investing in. I was trying to help them with a consolidation of these debts and clean up the
slate so that things would start moving again. It was very slow going and, after I left, Vinod
Dubey continued to work very hard on those issues.

Q: Now, the second question relates to our involvement with structural adjustment. We did
make a number of structural adjustment loans, I believe. Were you involved in those loans, and
what did they mean to accomplish?

KARAOSMANOGLU: That came after I left. When I left we were graduating Yugoslavia.
When things started to crumble and when the graduation dream had been given up--among
others--in the wake of the second oil shock, the Bank moved in with structural adjustment
assistance.

Q: How was it that you changed jobs and became the Vice President for East Asia?


                                    Attila Karaosmanoglu
                 November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 27


KARAOSMANOGLU: Well, Mr. Clausen called me one day and told me that he wanted me to
take over East Asia as Vice President. I had been long enough in Europe-Middle East-North
Africa. I was getting frustrated with Egypt. This is not to say that I did not like the Egyptians
very much, but I had worked very hard and spent quite a lot of time trying to put things right, and
I discovered that my fuse was getting shorter and shorter. I was too familiar with the country and
liked the people who were suffering as a result of the government's mismanagement. This was
something which was making me uncomfortable in my dealings with Egypt. Yugoslavia was
moving towards graduation; I completed the entry of Hungary successfully; the Romanians
seemed to be on an even keel; and there were very good programs in the two Yemens. Finally,
Portugal was getting ready to join the Common Market. So I thought I had done as much as I
could in Europe-Middle East-North Africa, and when I was offered to move to East Asia, I took
it as a very welcome opportunity.

Q: Had you made your interest in moving known to anyone? Did this promotion come as a
surprise to you?

KARAOSMANOGLU: No. No. I also mentioned this at my retirement party. I never
negotiated any job with anybody in the Bank, with the exception of the '87 reorganization when
they wanted me to move to Europe-Middle East-North Africa. I didn't want to take that job for
reasons which I have mentioned, and I didn't want to return to the Development Policy complex.

Q: So when you started in East Asia what did you see as your major challenges?

KARAOSMANOGLU: One of the major challenges, of course, was China. This was still the
beginning of the relationship with China and of our operational involvement. I also had to
maintain the legendary relationships with Indonesia. The Korea program was going very well.
Thailand was a touch-and-go situation. East Asia has always been a place which everybody
found very interesting to work because of the excitement and the fast pace at which the countries
in that region were growing. This was the period when the East Asian miracle was happening,
and looking back now, I feel very privileged to have participated in its realization.

Q: Could you talk a little about China?

KARAOSMANOGLU: I can remember an episode which was quite interesting. When I first
went to China, in January of 1983, I had a meeting with Yao Yilin, who was one of the members
of the Politburo. Unlike most other leaders of the communist movement he came from a
distinguished family, from a well-to-do family. This included, as I discovered during a dinner,
that he could also speak the King's English, maybe not fluently but well enough to get along. But
the first real shock I had coming from the Middle East-Europe-North Africa region where the
communists were the root cause of everything that was wrong, was that Yao Yilin, who was
Deputy Prime Minister in charge of Economic Affairs at the time, started complaining about
leftists. I couldn't believe my ears. Here I had left the Middle East with the leftists having their
fingers in everything and come to China, of all places, to find that the Chinese were suffering
from the same affliction.



                                     Atti/a Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 28


The Chinese were very concerned about their share of IDA [International Development
Association], and they were also very keen to see what kind of a Bank program would develop.
They wanted to know whether the Bank would interfere in the Planning Commission, which was
a very powerful commission. There was quite a bit one had to do to reassure them that we were
not politically prejudiced and would look at matters on their own merits. We had to convince
them that we did not want to change everything and that we could offer advice on the basis of
our knowledge of how things work or don't work in other countries.

On my next trip to China in May or June 1983, I accompanied Clausen and we met Deng
Xiaoping. That presented another surprise. As you know, the Chinese in their history always
showed great unease about the foreign relations and tended to be inward looking. For instance,
they were always very uncomfortable with the Japanese. But in our meeting with Deng
Xiaoping, he said that there would be peace and prosperity in East Asia and in Asia as a whole,
provided China developed economically. He saw China was a big potential market for the other
countries in the region. Considering China a big international market was the opposite of what I
expected to hear, especially from the top leadership ofthe country.

We developed very business-like and very correct relations with the Chinese. They have their
own peculiar protocol. I think I was probably one of the few visitors who could see more than
one of their top leaders, the Prime Minister and Deputy Prime Minister. Normally, you were not
allowed to see two Deputy Prime Ministers or three Deputy Prime Ministers or two or three
members of the Politburo at the same time.

Every time I went to China, I would spend at least an hour, sometimes longer, with Zhao Ziyang,
who was really a reformist. He would not hesitate to ask all kinds of questions and ask for our
support. He was one of the very few Prime Ministers who addressed the public directly (in the
Chinese papers or in Chinese broadcasts) announcing that he requested the Bank to help them
with the formulation of their forthcoming Five Year Plan. It was an important characteristic of
the Chinese that they have full confidence in their ability to decide things for themselves, so they
did not worry about being dominated by the World Bank.

In this context, I remember an amusing incident. China's planners were projecting a quadrupling
of their gross material product by the year--was it 1990 or 2000? I don't remember now--but I
told Zhao Ziyang that China would not be able to meet the target in the way they had planned. I
told him, "You are underestimating the need for the energy to step up the output."

He asked, "What do you mean, I am underestimating? I have all the energy I need. I can produce
more coal; I have the oil production."

I told him, "That is not the issue. The problem is that the elasticity of demand for energy that you
have put into plan is much below what experience suggests it should be."

They had used a very low elasticity of demand for energy, and the growth of energy output was
very low compared to the growth of other sectors. I don't think he fully grasped what I was
saying, but, anyhow, we moved on to other subjects. Now this meeting took place relatively late


                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995     Final Edited
                                                                                                29


in the evening, around nine o'clock, the time when the Chinese finish their official dinners and
when everybody goes to their houses.

Q: Did this meeting take place in his office?

KARAOSMANOGL U: In his office, yes, in the Great Hall of the People, in one of the great
salons there.

Then the following morning, at around eight o'clock, I had a meeting with the Chairman of the
Academy of Social Sciences, a famous Chinese economist but I cannot remember his name now,
and smiling he told me, "You know, the Prime Minister called me and asked me about the
elasticity of demand for energy. He wanted to know whether our Planning Commission or the
World Bank was right. I told him that you were right." That shows you how interested he was in
a real meaningful dialogue.

His disregard for matters of formality was also evident on another occasion, on the day he ceased
to be Prime Minister to become Secretary General of the Party. He invited me to talk to him
about the Plan and the state of the economy. We were meeting in the Great Hall of the People.
He insisted on seeing me, even though there was a dinner he was giving in honor of the Vice
President of Syria. People were coming in to remind him, and I could hear the military bands
performing outside, yet he wanted to make sure to hear what I had to say. Finally, he asked me,
"Mr. Vice President, do you have any questions to ask me?''

And when I replied, "Not really," he proceeded to say, "Well, there's one more thing I have to
tell you. I am leaving the Prime Ministership, but I want to assure you that we will continue to
follow the economic policies agreed with the World Bank." He promised that he would maintain
a close interest in economic matters and in our relations. It took about 25 minutes or so from his
office to the guest house where we were staying. When we arrived there the TV was showing
our meeting and giving the news of his reassignment.

Q: What has happened to him?

KARAOSMANOGLU: He is playing golf. The Chinese are very civil in these matters. I mean,
he is given a villa to live in, maybe the villa he was already occupying, and his contacts with the
outside world are limited, but otherwise he is not badly off and, presumably, biding his time.

Q: Now, you continued to deal with China? This would have been in 1983?

KARAOSMANOGL U: Yes, in the spring of 1983.

I visited China sometimes twice, sometimes three times a year. The Tiananmen Square events
were a major development in our relations with China. Actually, I was in Beijing when the
Tiananmen Square events started. I was caught in my car in the middle of a big procession. The
University of Beijing students were moving towards the Tiananmen Square. We were stuck for
around 25 minutes simply sitting and looking. There were a surprising number of non-Chinese in
the procession. I could recognize that they were not mainland Chinese because of their attire.

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                30


The police were behaving in the most civilized fashion. They were trying to keep order. They
had their arms linked forming a corridor for the protesters. People seemed to march in a good
mood, so much so that I returned to Washington and expressed my surprise about this event to
my wife. I told her, "Look, remember our demonstrations? This is a communist country and
people are behaving very different from what you would expect." We both used to be firebrands
participating in demonstrations in the streets and being tear-gassed. However, I was there to
attend the Annual Meeting of the Asian Development Bank, and it was because of this event that
the Chinese authorities acted with much restraint. The protests continued, of course.

I remember I had to bring a project to the Board one morning when I heard the news that a
confrontation with the army was in the offing. I tried to call the resident mission but I could not
get through. At the pre-Board meeting I told Barber Conable that I was uncertain about
proceeding in view of the tense situation. Then I managed to get through to the resident mission
only to learn that they did not have any specific news, but the mission confirmed that the
situation was tense and uncertain. At that point, I decided to withdraw the project as there could
well be difficulties interfering with the implementation.

Q: Did you talk to the Chinese Executive Director before you decided to drop the project?

KARAOSMANOGLU: No, I had talked to the ED earlier but not with any idea of dropping the
project. But events were moving so fast I came from the telephone directly to the Board and
made my announcement. It was then that I talked to the Chinese ED. He showed complete
understanding. He trusted me and believed that I was acting in the best interest of China. He told
me, "We leave it entirely to your judgment when it is the appropriate time to bring the project to
the Board, but please don't forget that we have our IDA allocation. We don't want to lose any
IDA money."

Even while we did not lend to China, we had extremely good relations with the Chinese. They
were trusting us. For instance, they invited me to co-chair a meeting of the State Reform
Commission of China with the Deputy Governor of the Central Bank, who later became the
chairman of the National State Reform Commission. This was a three or four day event with
very animated discussions. There were people from all over China. They had big fights about
whether it was more important to start with the enterprise reform or the price reform first or
financial reforms. Everybody had their own views.

There were some other foreigners who had been invited and my co-chairman between one of the
sessions observed, "Look, you are always inviting the Chinese to talk. I want to listen to what the
foreigners have to say."

I replied, "I am sorry, when you are sitting in the chair, you invite the foreigners. When I am
sitting in the chair, I will invite the Chinese because I want to know what the Chinese have to
say."

At the conclusion of that seminar, I wrote a seven or eight page paper about the strategy which
one might follow. I suggested that there was no scientific basis to determine the correct
sequencing of reforms, but that it was important to decide which reforms were politically

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 31


feasible start with. I recommended to start with those reforms which will have the largest number
of supporters and the least number of detractors. I also advised them to be prepared to follow up,
because each reform will bring reactions, and each reaction will demand further action and
refinement. I told them that in Europe they first serve the soup, then the entree and then some
dessert, but in China they proceed in reverse order, yet both seem to be satisfied with their
respective menus.

This paper went all the way up in the Government and even to the Politbureau. As a result, I was
invited by Prime Minister Li Peng for a meeting. This was an interesting meeting for one thing.
We went there, three of us. Next to me was Javed Burki, who was the director of the department,
and next to him was Attila Sonmez, who was the resident representative in China. I had been a
planner in my earlier career. Javed had been a planner in his earlier career in Pakistan. And Attila
had been my deputy when I was in the Planning Organization. So there we were, three former
planners representing the World Bank. Of course, Li Peng didn't know that. With Zhao Ziyang
my relationship had been very warm and personal; with Li Peng it always remained correct but
distant. He saw me every time I went to China, but our relations were not as easy as with Zhao
Ziyang because I think he felt that I had been close to Zhao Ziyang and also because he had
questions about the Bank's role in terms of the political aspects of the development of the
economy.

Q: When was this?

KARAOSMANOGLU: This was in the beginning of 1992. At that time we had started lending
again. I had recommended that we start with housing reforms, because that was the easiest way
to gain supporters for reform and to cut the umbilical cord between the enterprises and housing
services. They would transfer the ownership of the houses from the enterprises to either a private
enterprise or another unrelated public enterprise. The original enterprise could maintain a share
in the capital of this new enterprise. The rents had to be increased to cover the cost of housing,
but by the amount the rents were increased the wages of the workers were also increased to
enable them to pay those rents. We introduced these reforms through a pilot project. Of course, a
pilot project in China probably involves 10 million or 15 million people. The Government was
very keen to proceed with this project and they invited me back to meet with the Prime Minister.

On this occasion Li Peng referred back to my earlier paper: "Mr. Vice President, thank you very
much for your paper. We discussed it at every level of the Government. I agree with you entirely,
except we have a difference. You don't believe in planning. I believe in planning."

That was when I told him, "Mr. Prime Minister, you can say everything you want, but this is one
thing you cannot say. I was a planner, Mr. Burki was a planner, Mr. Sonmez was a planner, so
we all started our careers as planners. It is not planning that we are against. It is the type of
planning you have we have questions about."

He said in tum, "What do you mean you have questions? I believe in planning which would keep
the macroeconomic situation under control."



                                      Atti/a Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 32


I told him, "If you believe that it should be only the macroeconomic situation to be put under
control, then that is the right approach to planning, but your Planning Commission does not think
that way. They intend to control in a detailed way what needs to be done, where, how, when,
how much."

After that encounter, my relations with Li Peng became much warmer and there was more of a
give-and-take in our discussions.

Q: Now, I believe there was quite an extended hiatus in our lending to China following the
Tiananmen Square event. How did you overcome this problem?

KARAOSMANOGLU: We continued doing our work. Everybody was acting like the loan
officer for China. Barber Conable gave me very clear instructions of not doing anything without
his direct involvement I was not to put anything into our lending program, let alone on the
Board agenda. Yet, I believed firmly that it was important to keep in touch and for China to keep
a window open to the rest of the world. I took the same position, incidentally, with regard to Iran
and Vietnam. I did not believe that it was sensible to seal off these countries from the rest of the
world because as long as there is some contact change will occur. So I didn't think it was very
useful or appropriate for the West to close entirely the window to China.

In fact, I was getting messages from the reformists in China who were urging us to be more
flexible. They said, "Look, we went ourselves to Tiananmen Square. We let our staff to go there.
We let our children go there. But the demonstrations got out of hand at one point, and then the
situation was out of control. The police and army had no experience with crowd control
techniques and some unfortunate things happened. We are standing firm in support of
democracy, but it is getting increasingly difficult to defend our position in terms of our relations
with the Bank." These were the kind of messages I was getting from some people who really
believed in more democracy and opening up. In fact, Zhao Ziyang--I am now speculating a little
bit--1 think he probably winked to the people at Tiananmen Square, too, and encouraged them to
carry on with their demonstrations.

I have been told by some real insiders about a rift between Deng Xiaoping and others on one side
and Zhao Ziyang on the other when Zhao Ziyang was visiting North Korea. There was an
editorial in the China Daily which claimed that Zhao Ziyang had asked for a stop of all
demonstrations because the demonstrations were against the system and against the regime.
Supposedly, Zhao Ziyang disassociated himself from the editorial after his return from North
Korea.

This illustrates the general atmosphere. Not surprisingly we had some difficulty with our
lending. We tried to find projects to start with which were basic human needs related and
brought them to the Board. The Chinese appreciated that and thought the Bank behaved properly,
although they resented the fact that the Bank was under the influence of one country. They said
that many times in public but this did not affect the relationship with the management.

Q: I understand that it was mainly Conable himself who negotiated with the U.S. and other
members what could be done and how much could be lent to China. Is that correct?

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                33



KARAOSMANOGLU: Yes. There were a few times, however, when we were almost ready to
go ahead but at the last minute the agreement that we could proceed was taken back. So it was
not smooth sailing. I could sense that Conable was at times becoming rather irritated and tense
although I was not pushing to make large loans and merely trying, as I said, to make sure that we
kept a window open. I thought the Bank had a role to play because all those kids who had
demonstrated had benefitted from World Bank projects, I mean our loans in support of
education, especially university education, and research. After all it was the fact that China had
opened up economically which had led to incidents like Tiananmen. And even at the time of
Tiananmen Square, while there were unfortunate casualties, China was more concerned about
human rights than, for example, at the time of the Cultural Revolution.

Q: We were wondering whether you would want to talk about some of the other countries in
your region. Perhaps we could talk about Indonesia, specifically about the controversial
transmigration issue?                  ·

KARAOSMANOGLU: When I took over the region, the transmigration issue had already
somewhat abated. The Bank had cut back its support of transmigration projects. So I was
involved in what you may call the second stage transmigration projects. This involved curing the
ills of the previous transmigration projects and making sure that further projects were prepared
better in terms of mapping of the areas, the natural resources, the relationships between
transmigrants and the local people, and, in addition, consult with the people to take into account
their desires and needs. I tried to convince the Indonesians to address the transmigration issue
differently. First, I suggested that transmigration should not be seen as a means to achieve
national integration and homogeneity; yet, the Minister in charge of the transmigration program
was fond of emphasizing this aspect of the program. Second, I emphasized the need to prepare
better for the transfer of people to avoid the pitfalls which affected earlier settlement schemes
and to try to do something to correct the mistakes which had been made earlier. Thirdly, I
insisted, and the Indonesians agreed, that they should be open about failures and successes of the
transmigration program. I suggested that they invite people to the sites, show them both
successful and failed schemes in order to demonstrate how they were dealing with the problems
which had been encountered.

I visited some of the transmigration sites to gain a first-hand impression. Two things struck me in
particular during those visits. In Java, when we visited the villages, we had a very hard time to
get people to tell us what they want, what they would like to see. They would never speak up in
front of Government representatives. Since we always visited in the company of Government
officials who acted as our interpreters, we could not find out what they really thought. But on
other islands the situation was very different. People didn't mince their words, they talked about
their plight, they talked about their needs, about what more should be done and how it could be
done. Both men and women would speak out. On several of these visits, I asked the settlers if the
Bank were to help with a project to bring them back to Java, would they be willing to go back. I
never met anybody who wanted to go back. So, with all the problems attributed to the
transmigration projects most of the people I talked to seemed to think that they were definitely
living a better life than they would be had they remained in Java.


                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 34


Q: Now, when you moved to the East Asia Region the transmigration program had already
become the focus of environmental criticism. How did you deal with that?

KARAOSMANOGLU: Well, as I mentioned, I tried to persuade the Indonesians to be much
more open about what they were doing. They eventually accepted my advice and by 1985 or
1986 they were inviting outsiders and showing them both successful projects and the areas where
the program had failed and why it failed. They invited politicians and some very prominent
people and the crescendo of criticism of the transmigration program gradually subsided.

Q: In some of your writings you cite Indonesia as a successful example of economic
development. Why do you think Indonesia was such a success?

KARAOSMANOGLU: Because there was a real and genuine decline in poverty in Indonesia.
Following the debt crisis associated with the State oil company, Pertamina, they had managed
the economy very carefully. They consulted with us very effectively. We produced for them
many "non" papers, the existence of which was only known to the one or two people who wrote
them in the field and to not more than one or two people in the Government who had to make the
decisions. There were instances when I knew more about what was going on or what was going
to happen in Indonesia than even some very important members of the Government. But we did
not make it public, and the Indonesians trusted us.

The only problem I saw with this relationship was that I felt we should do more to help the
Indonesians to develop their own capacity to deal with their problems. I asked every one of our
representatives to work on that problem, Russ [Russell J.] Cheetham, D.C. Rao, Attila Somnez
and now Nick [Nicholas] Hope, but somehow they found it hard to do something about it. But I
felt that our group had been in Indonesia for so many years, since the late '60s, based on the trust
and the familiarity we enjoyed. But this could change. There could be a different president or a
different regime and the Indonesians might not want to have such a close relationship with the
Bank. In that event, it was important that there were people in Indonesia who could do the same
type of analysis and would come on the basis of facts to more or less the same conclusions as we
would. For this reason I thought it was important to develop local capacity. However, the
Indonesians liked to have the resident mission because it could provide analysis and advice
quietly and discretely. Matters discussed with the Bank would not get into the papers. When
things leaked, when our reports on Indonesia leaked, for example, it was either leaked by one of
the embassies or by the Indonesians themselves because they wanted to do it. It never leaked
from the· Bank. This was at the bottom of the effectiveness of our policy dialogue.

I introduced two things personally, over some resistance by my colleagues. The first was to
introduce the Indonesians to the idea of adjustment lending. My colleagues warned me that the
Indonesians would never accept it, that they would always want to pursue their reforms
according to their own judgment. I went to Indonesia and talked to Ali Wardana and Professor
Widjoyo [Nitisastro]. I told them, "Look, the things you are doing now are the things which are
the components of an adjustment program, and you are doing this on your own. Therefore, I
suggest you continue what you are doing, but let us know what you are doing ahead of time and
give us an opportunity to advise you how to make your reforms more comprehensive and more
effective. We would do this in the form of the so-called 'non' papers. I will take it upon myself

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                35


to make sure that Indonesia will get compensation for the impact of your actions through
adjustment lending. I will stick my neck out and recommend that we make 'one tranche'
adjustment loans to you for this purpose." I warned them, of course, that there was no guarantee
that I would be able to pull this off but I suggested that we should at least give it a try. The
Indonesians agreed, to the surprise of even old-timers like Russ Cheetham.

The Board, however, was very uncomfortable with this arrangement. Neither the Part I nor the
Part II countries liked it. The Part I countries wanted to exert greater influence over the content
and pace of reforms and did not want to lend money for reforms which had anyway taken place,
while the Part II countries thought that we might insist that everybody implement all reforms
before any money is given to them. The difficulty I had was that I could not really mention how
deeply we were involved in the design of the reforms. So all I could say whenever we took a
"one-tranche" operation to the Board was, "Look at the conditionalities they have met. If I had
presented you a year ago a program with these conditionalities, would you have accepted to give
an adjustment loan to Indonesia? If so then the first tranche would be released in response to
these actions taken." Of course, there was little they could say because the Indonesian program
was richer than the programs undertaken by most other recipients of adjustment lending. As a
result, every adjustment loan to Indonesia was accepted as an exception, and we tracked in
parallel the implementation of the Indonesian reform program.

The second occasion when I personally intervened in our Indonesia program was when the
Indonesians prepared one of their five-year plans. I suggested to the Indonesian planners, "Look,
why don't you help President Suharto to also achieve a position of having done something to
alleviate poverty? Why don't you focus your next plan on improving the distribution of income
and reduce some of the prevailing poverty?" And the Indonesians agreed to that.

That was at the time when I was chairing the Poverty Task Force in the Bank. Professor Widjoyo
reassured me, "We are in support of this idea even if it does not end up getting the Bank's
support, or an immediate support in the country." So the plan was prepared on that basis.

Later we carried out an income distribution study in Indonesia. I had to ask that study to be
checked and tested at least three times before I released it because it showed the most
unbelievable results in terms of decline in the number of poor, not in relative terms to total
population but in actual terms. This was a result of increased employment which was based on
opening up of the industry to small and medium-size enterprises, relying more on private
initiative, and thus increasing the number of family members that worked. Wages in actual and
in real terms did not increase all that much, but the number of wage earners increased, the
number of employed increased, and family income went up. As a result, there was a very
significant reduction of poverty in Indonesia. That is why I consider Indonesia one of the success
cases among developing countries.

Q: I guess the Indonesians had been all along fairly careful to manage the terms of trade
between agriculture and the rest of the economy, unlike so many other countries.

KARAOSMANOGLU: Yes, that is true. Indonesia became self-sufficient and started to have
surpluses of rice. That was one of Indonesia's national objectives, which I did not contest

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995    Final Edited
                                                                                                36


initially. But when the country ended up with surpluses, although these surpluses could be used
up very quickly with increasing population, I felt that we had to intervene. We wanted to break
the monopoly of BULOG, the public agency which dealt with the purchase and the marketing of
rice. That proved to be one of the most difficult negotiations; it was even more difficult than our
efforts to break up the monopoly for insecticides which belonged to the President's son. We
believed that the benefits of our lending should not go to one single importer but be freely
available to competing importers of these commodities. The Minister of Finance was very
uncomfortable with the idea of breaking the insecticide monopoly. But later he came to me
surprised and told me, "I used your arguments in my discussion with the President, and he
agreed. I have to tell you, though, that I did not believe he would because the only factory that
produces insecticides is owned by his son." So that was one of our partial victories.

Q: In your comments about the problems you faced in your Vice Presidency you also mentioned
Vietnam. Can you talk a little bit about the Bank's involvement or lack of it in Vietnam?

KARAOSMANOGLU: It was the most heartbreaking experience every year to receive the
Vietnamese delegation during the Annual Meeting. They would say, "We are so poor. Our
policies are right. We are trying to do everything right. Why don't you help us? Is it because of
our political situation?"

And I would assure them, "Look, it cannot be your political situation. We are certainly lending
money to Ethiopia, we are lending money to South Yemen, we are lending money to other
socialist countries like Hungary or China."

"But none of these countries," they would reply, "won a victory over the U.S."

It was a situation where they showed some understanding with our predicament but where we
were very uncomfortable. So I suggested to Barber Conable that we could provide some
assistance to Vietnam under the umbrella of the United Nations, preparing projects, organizing
seminars, some analytical work. So we started quietly to increase our involvement in Vietnam.

The most important action was a conference which we organized following a previous example.
At one point, when the Chinese and Indians and Koreans did not talk to each other, we organized
a get-together in Bangkok at the Deputy Prime Minister level. We invited the Deputy Prime
Minister from Korea, the head of the State Reform Commission from China, Manrnohan Singh
and Montek Ahluwalia from India, and, of course, the Minister of Finance and Deputy Prime
Minister of Thailand. I brought them together to talk about opening up their respective
economies and to share their experience. I wanted the Thais and the Koreans to talk to the
Chinese and the Indians about their experience, the Indians and the Chinese to share their views,
and, in particular, the Chinese and the Koreans to talk to each other. It was a great success.
We had much interaction. There were formal sessions which I chaired, but then there were
informal exchanges over breakfast, lunch or otherwise because we were all staying in the same
hotel. For instance, the Chinese would ask the Koreans, "How much does your CIA [central
intelligence agency] influence your economic policy making?" And the Koreans and Chinese
would share their concerns on this and similarly sensitive topics.


                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                37


  So I organized a similar conference for the benefit of the Vietnamese in Kuala Lumpur. The
  United Nations agreed to cover their travel expenses. We invited the Indonesians, Koreans,
  Vietnamese and Malaysians. The Vietnamese were represented by Vo Van Kiet, the present
  Prime Minister who was then Deputy Prime Minister. The Governor of Vietnam's Central Bank
  and the head of the Planning Commission also came. A large and important delegation.
  Nonetheless, the Vietnamese were all business and wanted to maintain a low profile. But, of
  course, the Prime Minister of Malaysia insisted on opening the meeting. He gave a big speech
  and we all had to go and call on him together with lots of media coverage. At that conference, we
. again discussed how to open up and liberalize the economy, and how to control the
  macroeconomic balances.

 Following our meeting, the Vietnamese were invited by the Indonesians to visit Indonesia and
 study their economy. The Malaysians offered them technical assistance, money, and some
 business deals. The Koreans did the same thing. When the U.S. was finally prepared no longer to
 object to our lending to Vietnam, we were ready to proceed with a number of projects in
 Vietnam.

 Our lending to Vietnam, as our lending to China following the Tiananmen Square events, was
 closely watched by the Board. We were getting conflicting signals. So, at one point the G-7
 members, other than the U.S., were encouraging us to go ahead with lending to Vietnam.
 However, when we were ready to bring a project to the Board, there was a meeting of the G-7
 with Conable and they all told him that they would vote against the project. We had to be very
 careful. We insisted that before we could start lending the Vietnamese had to pay their debts to
 the IMF. For this purpose they needed a bridging loan from somebody else. This would then
 enable Vietnam to normalize relations with the IMF. Once that had happened, we would start
 lending. This is the way it happened.

 But the Vietnamese were really grateful for the meeting which I organized and which allowed
 them to inform themselves and to learn from the others. I must say that I was surprised by the
 attitude of the Vietnamese delegation. It was not a monolithic group. Vo Van Kiet was the leader
 of the delegation, but several people in the delegation were quite comfortably challenging him
 and questioning him. For example, when he said, "We have to do this or that," his colleagues
 would ask, "What about trying something else? What about the merits of central planning?" So
 we witnessed a very open discussion among the Vietnamese. I found this very reassuring. I could
 see that there was a country that would follow rational and pragmatic economic policies and
 would not be dominated by ideological concerns.

 Q: When did Vietnam become a member of the Bank?

 KARAOSMANOGLU: Well, they had been a member all along, but we were not lending to
 them. We had lent to Vietnam only once during the McNamara years. And then the U.S. made
 such a stink of it that we couldn't do it again.

 Q: At this point you might want to say something about relations with the Asian Development
 Bank, since that was part of your responsibilities. Perhaps you would also comment on the
 Bank's relations with Japan which has always played such an important role in East Asia.

                                      Attila Karaosmanoglu
                   November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                         38



          KARAOSMANOGLU: Yes. When I came to the East Asia scene, I found that I was
          responsible for the Bank's relations with the ADB. Shahid Husain before me had insisted that he
          should have the sole responsibility for dealing with the ADB since the ADB was located in the
          Philippines. When I took over, David Hopper, who was in charge of South Asia said, "Attila,
          don't you think we should share this responsibility since I will have in the context of my
          countries much to do with the ADB?" I agreed immediately, and we arranged that one year I
          would attend the Asian Development Bank annual meeting, with a director from his Vice
          Presidency, and the other year he would attend with a director from my Vice Presidency. So I
          shared responsibility for the Bank's relations with the ADB.

          During the ADB's annual meetings we would have bilateral discussions with the ADB on issues
          of common interest, but I always found these discussions very superficial. Invariably, they would
          try to pump us to tell them what we were doing, why we were doing it, how we were doing it,
          while they were telling us as little as possible about their own plans. There was quite a bit of
          unease in both institutions about stealing projects from each other. Our people accused them of
          unfair behavior, and their staff complained about the behavior of our staff. I challenged my staff
          many times to give me concrete examples: "Look, when I go there, I don't want to be
          embarrassed. You just me specific examples so that I can tell them, •In such and such case, in
          such and such country, you did this, which you should not have done either in terms of
          stealing our project or in terms of accepting conditions which undermined our own objectives."'
          And none of my directors or division chiefs at any time came forward and gave me a concrete
          and specific example. On one or two occasions they would tell me, "Well, this was a project we
          basically prepared and they took it from us." But that was neither here nor there.

          At one point the President of the ADB complained about the Bank in my presence to one of our
          Presidents. I don't remember whether it was Clausen or Conable. I immediately challenged him. I
          said, "Mr. President, I have been trying to find specific examples. Please, give me the concrete
          examples because then I can take it up do with my staff. If you will tell me, I assure you I will
          correct it." He could not come up with any examples.

          At that time there was very little co-financing with the ADB. The ADB did not want to co-
          finance because they did not want to be the younger brother or the junior partner who would
          have no say. Then--this was after 1987--there was one instance where one of our agricultural
          division chiefs agreed to let the ADB handle an agricultural sector adjustment loan. I must say I
          almost flipped. I was ready to give them the leadership of co-financing for individual investment
          projects but I was not prepared to let them lead a policy operation before I was sure that they
          could do it. The ADB did not have much economic expertise and would normally rely on our
          economic work. Furthermore, when it came to policy conditionalities they were very weak.
          Therefore, this was one of the rare occasions when I rea11y scolded my division chief.

          Mr. [Kimimasa] Tarimizu--I always remember his name because it reminds me of a favorite
          It r d    rt h 1 t b           P 'd t f th ADB              1    t1       d   -  1t I     .
    RES   I
   WBG

    APR 0 4 2012                                        Attila Karaosmanoglu
                                     November 17, 1994, and January 10 and 18, 1995- Final Edited
Exception_.;.;..i_-:---
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                                                                                                        39


our relationship was fast evolving. At the staff level there were some problems, but there were
also many instances where we had good joint missions and where we worked effectively
together. When Tarimizu took over the ADB, the restrictions on co-financing were much
relaxed. We worked together closer than with any of the other regional banks. I always thought
that the ADB was the strongest of the various regional banks. For this reason I had no hesitation
to give them the leadership in some investment projects and in dealing with the small Pacific
Island countries. Some of my managers were uncomfortable with that decision because their staff
could no longer visit those nice islands.

Q: Perhaps we could turn to Japan at this point?

KARAOSMANOGLU: The Japanese were not very happy that I was put in charge of the East
Asia region rather than a J                  . That was 'te clear. It took some time to establish effective
relations with the ......,J ...........,....




Q: Did the Japanese play an active role on the issue of lending to China after the Tiananmen
Square event?

KARAOSMANOGLU: No. They wanted to help us restart. They were in favor of opening up,
but they said that there was no final decision.     wanted to see what the majority
wanted.



                                       Attila Karaosmanoglu
                   November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 40




                                                                           However, they had strong
     1
"""'" "on certain policy issues. They were very strongly against our idea of insisting on the
             of positive real interest rates in lending. They felt that their success in development
     been due to a large extent to the availability of subsidized credit provided under what they
called a two-stage lending policy. We came to a big crisis over this issue when we stopped to co-
finance an operation in the Philippines which was to involve a Japanese lending institution
providing credit to be on-lent on subsidized terms. We told them that this was against the basic
framework in which we were operating and refused to participate in the operation.

This is not to say that the Japanese were not generally very supportive. In the case of Indonesia,
for example, when I started with these one-tranche operations initially for $250 or $300 million,
Japan contributed $800 million of untied co-financing. In fact, Japan covered the local costs of
some of the projects in our portfolio. So, Japan contributed very significantly to the success of
Indonesia's development by providing in two instances, but the first instance this huge amount of
money and by making it possible to expedite the implementation of many vital projects.

Q: Japan's attitude on interest rates was presumably related to their view of the role of the
government in the economy and in economic development?

KARAOSMANOGLU: Of course. I don't know whether you have seen some of the speeches
which I have given in Japan. I gave one speech in 1990 or the beginning of 1991 and invited the
Japanese to share their experience with the rest of the world. Two things happened as a result of
it. One, they came very quickly and suggested they were ready to finance the East Asian Miracle
study, which we accepted. Second, they established a high level commission to give advice to the
government about the way in which Japanese development assistance should be carried out.
Exactly a year later, Japan adopted a program which reflected the recommendations of that high
level commission.

Q: Well, I suppose we have detained you for a long time. We would like to thank you for a
fascinating interview.

KARAOSMANOGLU: Thank you.




                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  41


Session 3
January 18, 1995
Washington, D.C.


Q. It is good to see you again.

KARAOSMANOGLU: Thank you.

Q: We would like to continue the discussion that we had last week. Could you talk about the
1987 reorganization: first, perhaps, about the process of that reorganization and then a little bit
about its results. How did this reorganization come about? .

KARAOSMANOGLU: Conable was quite keen, right from the beginning, to do something in
terms of reorganizing the institution. In fact, very shortly after he arrived at the Bank, he invited
me to tell him how I had managed to reduce the number of divisions and the middle level
management in my region. He also wanted to know why I had introduced these changes. I
explained that when I came to the East Asia Region there were four or five agricultural divisions
and the agricultural staff was spread too thinly to be effective. Furthermore, since agricultural
self-sufficiency had been achieved in many of the East Asian countries, large divisions
responsible for different aspects of agriculture or different parts of the region did not really make
much sense. Considerations of efficiency and budget (among others) called for some adjustment.
Conable seemed to be very much interested in that; right from the beginning he seemed to be
thinking in terms of down-sizing the Bank. And, of course, there was quite a bit of talk that a
reorganization was needed in the light of discussion of Clausen's last budget immediately before
Conable's arrival. That discussion had been really disturbing. I remember feeling that I would
have preferred not to witness that discussion. Board members were extremely rude to the
President, questioning his leadership and management only days before his departure.

The next thing that happened was that one of Conable's assistants, Isaac Sam, came to me and
told me that Conable and the President's Council had decided that I should be in charge of the
reorganization. I did not know whether Isaac Sam was coming to me on instructions from
Conable or if he was just leaking information about a matter under discussion. So I kept silent
and waited. But Sam came back two or three times telling me that a decision was imminent and
that I should be prepared to take on this issue.

I was interviewed on several occasions by the consultants who had been hired by Conable to
review the organization. I remember that I expressed the opinion in these interviews that while
organizational structures were important, the atmosphere that existed, the willingness of people
to work together, and clarity about the organizational objectives was much more important.
Therefore, even the best organizational structure was no assurance that things would work well.
Conversely, less than perfect structures could serve the organization well.

I don't know what happened, but the next thing I learned was that [Edward V.K.] Jaycox would
be the leader of the group preparing for the reorganization. Several colleagues from my region--
Amnon Golan, Caio Koch-Weser and Russ Cheetham--were prominently involved in the

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                42


reorganization exercise. They kept me informed subsequently of the progress of the review and
sought my views on what should be done. I remember joking with them and telling them that this
was a reorganization designed by people at the director level. As department.heads they were
feeling constrained in their authority to make decisions. As a result, we ended up with an
organizational structure which left most of the authority and responsibility in the hands of the
department directors. Management linkages and organizational conformity correspondingly
received no serious attention.

I strongly objected to a number of decisions in the resulting reorganization, which later became
quite clearly a source of problems. One of them, for instance, was the decision to separate
strategic planning organizationally. I pointed out that while there had to be people in an
institution who should think strategically, the creation of a separate organizational unit would
tum strategic planning into a bureaucratic exercise and prevent effective strategic thinking by the
people concerned with the Bank's operations. Despite my strong protestations, my advice was
not accepted.

Another issue was the organization of the Development Policy Group, which turned out to be
unworkable. Under a Senior Vice President, the chief economist was to be responsible only for
the preparation of the WDR. Attention to economic research--central concern of the Bank--was
totally lost in the shuffle. The focus of the complex was lost because of the combination of
disparate functions. It combined not only the former Development Policy Staff and the Central
Projects Staff, but also the budget department and such things as the CGIAR [Consultative
Group for international Agricultural Research]. I must say I felt a little let down when the
reorganization group under Russ Cheetham went ahead with the plans and ignored my concerns.

There was also the structure of the country departments and the spreading of technical staff over
sector divisions, regional technical departments and the PPR [Policy, Planning and Research]
complex. Where would you place what kind of staff? Where did the more generalist types
belong? And where the real specialists? Furthermore, it was one thing to design such a structure
on paper, but the results may be quite different once managers start grabbing the people they
think are most useful and agreeable to them.

In the course of the reorganization we all lost our jobs, which was quite interesting. Conable
called me and asked me whether I would like to be one of the vice-presidents reporting to David
Hopper, who was the Senior Vice President PPR. This would have put me in charge of the entire
research effort, avast collection of very different departments. I asked Conable to excuse me for
not accepting that offer. He asked me if I did not want to work under David Hopper. I told him
that I had no problem working with David Hopper, but that I did not believe that the new
structure could work effectively. I told Conable that the structure provided him with a Chief
Economist who might have the intellectual power to advise him but without the necessary
support in the form of a strong research staff. The ideas, the troops, the money and the strategic
vision all seemed to have ended up in different units and, I thought, would not easily come
together. Moreover, I had done a similar job with Chenery in the past and saw no reason to
repeat the same experience. Eventually, Conable decided that the position was split, one half
including the former DPS [Development Policy StaffJ departments reporting to the Chief


                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18,1995- Final Edited
                                                                                                 43


Economist, while the other halfwas organized under a separate Vice President focussing on the
former CPS (Central Projects Staff] functions.

After I turned down this first offer, Conable asked me to look after Administration and
Personnel. I told Conable that if he were to do that, I would give him my resignation the
following day because I did not feel that I was equipped to deal with those issues and necessarily
that this assignment would not be my comparative advantage in the institution. Then he
suggested that I should take charge of the Europe-Middle East-North Africa Region. However, I
did not want to accept that job. Turkey was at that time the largest borrower in the region and I
had worked both with the Prime Minister and the leader of the opposition--at one
point I had fired the person who was now the Prime Minister. I thought it would be awkward in
the circumstances to assume responsibility for the Bank's operations in Turkey; it would not be
fair to me, to Turkey or to the Bank. Needless to say, Conable was not very happy when I turned
him down once again. However, he seemed to understand when I later told him the reasons for
my reluctance to take the job. At that point I asked him why I could not continue working in the
Asia Region. But it turned out that Qureshi had promised Asia to somebody else.

In a conversation with Moeen Qureshi I explained to him why I could not accept the EMENA
assignment. He pointed out that Munir Benjenk had held this position seemingly without any
problem. But I explained that Benjenk had had no prior involvement with the Turkish
Government and was not identified with any political group or position. Anything I would decide
as vice-president would be regarded in Turkey as a political position. Then Qureshi asked me
whether I would be willing to work with him. He thought that I was a member of Ernie Stern's
team and would find it difficult to work with him. I told him that in my work I strictly followed
my conscience and what I considered right from the point of view of the institution.

At that point, he asked me, "What happens if we have a difference of opinion?"

To which I replied, "I will try to follow my judgment about what is good for the institution."

Then he said, "What happens if we still have different views?"

I suggested, "Then we'll sit down and discuss it. If we still cannot agree, I will accept your
verdict. You are the boss, you decide. Depending on whether it is a matter of such a great
concern for me that I cannot accept that, then I will think what to do. Certainly, if we argue about
some administrative matter, I will have no problem following your direction."

My memory is a bit blurred about what followed next. At one point, I mentioned to Conable or
Qureshi, "Look, we are trying to have a reorganization. Everybody's desires cannot dictate what
should be the outcome. I will express my preference to you, but I leave it to you to decide. The
only request I have: that if you want to put me anywhere other than Asia, please, tell me what
institutional interest guided your decision." I left it there, and they let me stay with Asia.

It turned out that it was Wilfried Thalwitz who they had in mind for the Asia position, but
Wilfried seemed to be more interested in any case to take over Europe-Middle East-North


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                44


Africa. So we were both happy about this switch. This is how my fate was settled in the
reorganization.

But then, of course, the allocation of responsibilities and the manning of the divisions was a
major issue. It was a major effort to consider everybody's reassignment. There were a number of
cases where truly capable people were trying to leave the institution enticed by the handsome
golden handshake. In one or two cases I declined to accept the person's desire to leave, even
though the division chiefs or department directors may have supported it. In a few other cases, I
had to convince people that it was better to let some staff members go. Emotions were running
high. There was one person, for instance, whose retirement pension was equivalent to his salary
but who was determined to stay on. He would come to my office weeping, begging me to let him
stay. Meanwhile, there were others who could really do well in the institution but they were
doing their best to leave.

I managed to end up with a very strong team. There wasn't anybody whom I was forced to
include in my front office or among my directors. There were one or two division chief positions
which I might have staffed differently, but I had to agree to some compromise in the interest of
the institution. There was great concern with country focus in the reorganization. In fact, some of
the people who now are complaining about the results of the reorganization were the biggest
promoters of a country-focused organization, and, in particular, single-country departments. I
ended up having two very large single-country departments, one dealing with India, the other
with China. Then there was also Indonesia, although the Indonesia department included some of
the small Pacific Islands and Papua and New Guinea.

Q: What you say suggests that you still had some doubt about the need for the reorganization.
What was it that was not working and needed fixing? Why was Conable so set on this
reorganization?

KARAOSMANOGLU: Well, there is always merit in looking every now and then at the
organizational structure, in shaking up the institution a little bit to create a new dynamism and
energy. If it is done properly, every reorganization creates some disappointments but it can also
generate some new energy.· There were clearly problems when Conable took over the Bank.
Relations between the management and the Board were at a low ebb. The Bank's capital increase
was being held up until the Bank was taking action to increase its efficiency. So it looked as if
some reorganization was necessary. Moeen was very clearly interested in some reorganization;
he and Conable had apparently talked about that. In fact, I had an awkward experience at one
point when Ernie was away and I was acting for him as Senior Vice President. There was some
operational issue which came to Conable's attention. Conable, rather than asking me, turned to
Moeen to ask what to do. I felt that that was not proper and expressed my displeasure about
Moeen's interference. That may be one of the reasons why Qureshi later questioned my attitude
as a team player. Incidentally, I must say that he later apologized repeatedly and expressed the
view that I had probably given him better support than some of those he had considered his loyal
team members.

Q: Do you think that there was some specific reason that made the reorganization necessary at
that time, such as the General Capital Increase, for instance?

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995 Final Edited
                                                                                                 45



KARAOSMANOGLU: Yes. Also, it is quite interesting that among the staff there was the
impression that the reorganization was intended to push Ernie aside, because Ernie seemed to be
all-powerful as a Senior Vice President, Operations. There were many who suspected that
Conable had been given the advice that he should keep Ernie out if he wanted to do what he
wanted to do. These observers suspected that Conable expected that if Ernie was pushed aside he
would leave the institution. But, of course, he didn't.

Q: What do you think the results of the reorganization were in terms of the Bank's
responsiveness to its member states?

KARAOSMANOGLU:                It was more focused on individual countries in terms of its
organizational structure, there is no doubt about that. But there were drawbacks. The strength of
the technical staff in the institution weakened. There was a confident belief that as long as you
had the right manager in charge they would know what needed to be done. But the initial
experience was that this did not really work. A large number of people had been asked to leave
the institution, but soon after the reorganization they were hired back as consultants in large
numbers. What I tried to do, with some success, was to concentrate the staff with unique
expertise in the technical department. I also insisted that the sector division chiefs should act as
leaders in their sectors and work together across the region to provide some consistency and
professional strength. I also insisted that some flexibility and autonomy should be given to the
technical department in terms of its budget, especially its budget for travel expenses. It was
amusing, because we tackled this issue within about three months of the reorganization and this
was· criticized by the architects of the reorganization. The other regions carne to the same
conclusion only 18 months or two years later. It was obvious that the division chiefs in the
technical departments had to plead with their clients in order to obtain the travel resources
required by their staff. This tended to corrupt their planning and their advice. So I allocated a
certain amount of funds up front to the technical department and saved the time and hassle
associated with the bargaining and negotiating process which usually involved several country
departments.

There was another problem involved in the allocation of resources: the management of
budgetary contingencies. I insisted that the entire budget was distributed at the beginning of the
fiscal year and never kept any funds in reserve. I had found that if you keep funds for
contingencies everybody assumes that they have a right to those funds anyway. Everybody knew
what I did. Everybody also knew that when the work was slack in one department and brisk in
another, I would transfer resources, especially funds but also people occasionally, from one
department to another to respond to the changes in workload. The good thing was that I was
quite free to experiment. In any case, in this institution, maybe even today, everybody can do
what they decide is really important. Certainly the budget was never really a constraint, the fact
that everybody is complaining about budgetary constraints notwithstanding.

I usually set aside a certain amount of funds for training purposes. Training has for long been a
problem in this institution. There are some professional trainees in this institution; they go to
every training program. Meanwhile, there are others who never attend any training course. In my
life in this institution I attended two or three training courses. To plan more systematically, I

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  46


established a standing committee to look at training. Then I took budgetary resources from the
units in my region and allocated them as a matching amount against specific training proposals
coming out of the divisions. I believe that this was an arrangement which helped to promote
serious training. The existence of the standing group discouraged frivolous users of training
funds. I could observe in other parts of the Bank that training assignments were often used to get
rid of undesirable people. Such people might be sent to Harvard, Yale, Princeton, etc., for a year
without any intention to make use of their expertise on their return.

In Asia the reorganization resulted in the creation of a relatively large technical department
which the top management did not particularly like. But the large technical department made it
easier to deploy staff resources efficiently. In fact, to facilitate the efficient use of our staff I
established a market system inside the region; anybody who had a slack in their workload could
put their staff into the market and for their time they would receive credit in the amount of half
the prevailing consultant fees. Rather than keeping people idle, departments were prepared to
make them available to other units, and the other department or division could get staff at half
the price they would have to pay for a consultant. This did not work, however, for the simple
reason that everybody was willing to make their journeymen available, but when business was
brisk it was the qualified experienced mission leaders that were needed, and nobody was willing
to put their mission leader types. It was for this reason that I insisted on having a rather larger
technical department than most other regions.

Q: What about the Bank's superstructure? How did the reorganization impact on the decision-
making process? Did the process become less hierarchical? There was supposedly some
decentralization; country departments became more autonomous. But did not the office of the
Senior Vice-President retain a significant share of decision-making authority?

KARAOSMANOGLU: The size of the organization required a significant measure of
decentralization. This was noticeable even at the regional level. For instance, when I was a
program director I discussed the performance of the secretaries in all the divisions personally.
When I was Regional Vice President for East Asia I discussed the performance of all the
professional staff members and some of the lead secretaries in the region, but I could no longer
look at everybody. Then when I had the responsibility for all of Asia I had to step back further.
As a department director I would interview everybody before they were hired by the department.
When I became Vice President I would at least talk personally to all the newcomers to the
region, even though I was no longer involved the interview process. But as Vice President for the
whole Asia region I could only have tea with them in groups every three or four months. So as a
result of the reorganization, I did not have as close a relationship with my employees as I would
have liked. The only thing I could do was to insist that when anybody came to talk to me about
anyihing, the department directors, the division chiefs, they bring along with them the staff who
worked on the project or proposal under discussion. I felt strongly that staff should participate in
the process of decision-making to understand it and support what has been decided.

It was difficult to establish tight discipline over the regional work program. All the other regions
left the planning of economic and sector work to the departments without a coordinated program.
Previously, there had been an annual economic and sector work program. I discussed the matter
with my department directors and they preferred to operate on the basis of some agreed program.

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                                          47
                   ,.
                   ;--? Together with Oktay Yenal, my chief economist, I linked the implementation of the program
                       l
                   "~ with the performance evaluation of our economic task managers. Any proposal for promotions
                  ~ "
                  '~ had to be based on the quality of work performed, either individually or as a member of a group,
                    .\
                       ,) in the framework of our planned economic work.
                   .j

                  '~
                   l
                   ~~



         ('..!
   Cll
e~       E
         ('..!
                                                       In 1991, we made an effort of cutting the tum-around time for
EO-<-                   papers which was very successful. It showed the delays caused by the involvement of the Senior
v:X:     ..:r
~~
Cl'lC)
         c::::>
         0:::::     s::
                        Vice President's office. There were huge numbers of people in the front offices of the top
                        management.    All we heard was that all these people could not come to closure on issues
         ~
=~
                    0
         <:(       ·.c presented to them. They would often come together without an agenda, not having read the
                    0.

                   w~ papers prepared, complaining that they had not received the papers or that they had not been
                        consulted beforehand. As a result, both the meetings of the Operational Vice Presidents and the
                        Loan Committee meetings were endless, and with 20 or 30 people attending those meetings, a
                        big waste of time and energy. Those were the reasons which led to the changes in 1991.

                        Q: Would you care to talk a little bit about some of the operational challenges you faced in your
                        new position, particularly in the countries of South Asia which were now part of your
                        jurisdiction?

                        KARAOSMANOGLU: Perhaps I should talk a little bit about India.

                        My association with India goes back to 1961. I visited India in 1961, when I was head of the
                        Economic Planning Department in Turkey. Ever since, I maintained some contacts with India
                        and, hence, had a pretty good perspective of what India had been trying to do. During my 1961
                        visit, I had had the great opportunity and privilege of talking to many of the political and
                        intellectual leaders who had shaped India's economic development since independence. I had met
                        Prime Minister Nehru, Finance Minister T.T. Krishnamachari, Morarji Desai who later became
                        Prime Minister; I also met people like Pitamber Pant, Professor [P.C.] Mahalanobis and many
                        others involved in the economic planning process.

                        As I now started to work on India, I was concerned to establish a good dialogue with the
                        Government. People warned me that it would be difficult to deal with India, among other things
                        because the Indian press was always antagonistic towards the Bank and critical of the managers
                        of the India program in the Bank. So I called Bilsel Alisbah and told him that we should make a
                        serious effort to understand the press and to let them understand us. I must say we succeeded in
                        that really very well. In the beginning, they toned down their criticism; then they started to report
                        fully what the World Bank or the Bank's Vice President was saying; finally, they gave full credit
                        to what we were doing.                     '

                        At one point, a colleague of mine came back from a visit to India and told me, "Look, I have a
                        relative in one ofthe small villages somewhere in India. He doesn't speak any English and reads
                        only the local papers. When I last saw him he asked me about you. He said that he understood
                        that there was now a Turkish gentleman in charge of the India program in the World Bank who

                                                             Attila Karaosmanoglu
                                          November 17, 1994, and January 10 and 18, 1995 Final Edited
                                                                                                              48


,       was trying to help India." That, I thought was a remarkable indication of the change in the
Ji      attitude of the Indian press.

-~ We were preoccupied in India at that time principally with three issues: primary education, the
.. efficiency of the poverty alleviation effort, and the opening up of the economy, especially the
    i
   financial sector and increased foreign trade. From day one we tried to convince the Indians that
~        should let us       them with ·                 ·
    ~

                                               I pointed out that we were not anxious to be involved as
             as the Government could demonstrate that it could do the job properly and reach all the
             g women and children. I also assured the Indians that there was no ideological issue
          valved here; I pointed out that education was one of the sectors where China had benefitted
             from World Bank assistance. To no avail.

          then tried to explain to my Indian counterparts that while they allocated large amounts of
        resources to poverty alleviation, most of the Government's programs were not well targeted and
        not well managed. Many of the programs seemed to have lost their original raison d'etre. I tried
        to convince them that they needed to consolidate and properly target all resources devoted to
        poverty alleviation not just direct budgetary expenditures, but also the various subsidies in the
        form of price controls, preferential interest rates or credit allocations, utility tariffs and irrigation
        charges. I mainly saw people shake their heads, you know, up and down and sideways. So that
        didn't work too well, either.

        Another problem I tried to address was the huge waste of water resources and energy. Here I had
        difficulty convincing my own staff of the need of a more active stance. I suggested that we invite
        to Washington all the State Ministers for energy and all the heads of the State Electricity Boards
        and the heads of the central power companies and discuss with them their problems and their
        investment needs. We eventually managed to have a seminar somewhere to look into these
        issues, but it was not what I really thought it should be.

        Finally, I tried to persuade my Indian friends that they should open up the Indian economy. I
        remember at one point I had this big argument with Bimal Jalan in Paris. I started talking about
        the importance that India's economy could well afford some opening to outside competition
        because it was well diversified in certain sectors and there were areas of great efficiency. This
        was in the course of one of the meetings of the India consortium. At lunch, Bimal suddenly
        flared up, "Attila, why do you have to use every occasion when we sit together to read us the riot
        act?" Of course, I was taken aback because Bimal is one of my really old friends going back to
        my first days in the Bank when he was a staff member as well. At the time when we were having
        this quarrel, he was the Secretary of Finance, the topmost civil servant responsible for economic
        and fiscal policies. I told him that I would defer to his judgment, but that this was how I saw
        India's potential. However, Bimal believed that India lacked the foreign exchange resources to
        liberalize. He was concerned that if India were to open up, exports would not respond because
        India did not have anything to export. He thought the supply response to any liberalization would
        be very weak and the country's situation would be much worse as a result of the liberalization.

                                              Attila Karaosmanoglu
                           November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                49



Then Bimal left and a fellow by the name of [S. P.] Shukla became Secretary; S.
Venkitaramanan was still the Governor of the Central Bank. I did not know Shukla very well, but
he seemed to be a very reasonable fellow who would listen to you and who seemed to understand
what you were saying. In 1991, when the Indian crisis set in, I told the Governor and Shukla that
they should try to bring together policy makers representing the various parts of the Indian
political spectrum who had access to the leadership of all the political parties. They should use
such a forum to analyze the nature of the economic crisis and then try to reach a consensus on
the most important policy measures to be taken. They could then prepare a budget with some
confidence that whatever government came in would be prepared to back it. In return, I promised
that I would stick my neck out and during the Annual Meeting invite a special meeting of the
consortium with special proposals for help to India. At the same time I was sending messages
directly or through higher-ups to the Bank of England, to the Japanese, to advise the banks not to
withdraw from India immediately in order to give them time to prepare some response to the
existing situation.

There were some really difficult issues, although some of them appeared almost funny. For
instance, the Indians would not let their gold to be shipped out of India to the International Bank
of Settlements in order to get credit against their gold as collateral. All gold had to be kept in
India by law. Eventually, there were possibilities of shipping some of the silver as well as some
of the gold seized from smugglers which solved that particular problem.

I did organize a special consortium meeting for India. When I held the meeting, the Fund got a
little worried that it was not doing anything, so Mr. [Michel] Camdessus held a meeting as well,
and I was invited to present India's case to his people as well. Then a new government came to
power in India, and to everybody's surprise the Government presented a budget to Parliament
seven or eight days later and a comprehensive white paper on economic policy a week or two
after that. The way the Indians had gone about the process was by bringing together
policymakers of all different stripes and colors. The leader        them was Manmohan .............
who                  became Finance Minister.




                                                      So that turned out to be the most successful
aspect in my Indian story.

Q: Perhaps we should tum to Bangladesh at this point. Would you like to talk about your
experience with Bangladesh?

KARAOSMANOGLU: Bangladesh. I was never sure whether we put either too much or too
few resources to assist Bangladesh. I worried about this question and we discussed it quite often.
There were serious issues, both in terms of the effectiveness of our dialogue with the
Government and in terms of the implementation of our projects. The responsible Bangladeshi
officials were always eloquent speakers and good analysts. They would make a good impression
when they talked, but everything was left at that level.

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               50



I remember at one point, shortly before a visit I paid to the country, President [Hussain M.]
Ershad gave a speech about the problem of corruption. This was still before this issue became
part of the Bank's agenda, although I always felt that I could talk about corruption and other
issues even if they were not on the official agenda of the Bank because I could do it as a well-
travelled friend of the country who was looking at economic and political problems from the
perspective of my government experience. So since Ershad had expressed his concern about the
pervasive problem of corruption, I told him, "Mr. President, I understand you are very much
concerned with corruption. So are we. We may be able to assist, since dealing with corruption is
not necessarily a matter of prosecuting a few corrupt people but a question of reforming the
entire legal system and eliminating the reasons which entice people to be corrupt." I promised
him that we would be ready to support his efforts in any way he thought helpful and committed
myself to mobilize the necessary resources and people. He seemed very interested and
appreciative of my offer, but nothing ever came of this even though corruption was ever more
rampant in Bangladesh and affecting even some of the projects we were financing.

There was, for instance, the celebrated case of electric meters which we were financing to put a
stop to the theft of electricity. However, there was a factory producing electric meters in the
country owned by someone close to the President who effectively managed to block the import
of the electric meters we were financing. As a result our project was stalled and the theft of
electricity continued.

During my time, Bangladesh suffered very serious floods, and at one point the Bank had to
intervene to eliminate some well-intentioned but misguided efforts. Jacques Attali, who was then
still the sherpa of President [Francois M.] Mitterand, advised him in preparation of the G-7
meeting which France was hosting that year that he should raise the issue of the floods in
Bangladesh to demonstrate that France was not only interested in its own backyard. So France
proposed a plan to deal with the floods in Bangladesh.

Q: I understand Mrs. Mitterand was also a moving force since she had visited Bangladesh and
seen the evidence of devastation.

KARAOSMANOGLU: Not at this time. Now, of course, the British, not to be left behind,
suggested that there should be a meeting to discuss the problem and offered Lancaster House as
the venue for the meeting, a historical mansion where most recently Zimbabwe had negotiated its
independence. And then we discovered that there were in fact seven proposals to deal with
Bangladesh's floods. The French, American Army Corps of Engineers, the Japanese, the
Chinese, the Dutch all had proposals to deal with the floods. The French proposal called for the
construction of massive structures. Those structures, however, were not only costly they were
also liable to be attacked by those whose land was flooded as a result of building those
structures. Somebody's drainage is invariably somebody else's flood. So the issue was how to
define and design a program which would be based on learning to live with the floods rather than
on absolute protection against floods, since floods were inevitable. During the rainy season in
Bangladesh, two days' flow down the major rivers is equal to the total water reserves in
California. So it is not realistic to attempt to protect the entire country from those floods; you
have to learn how to live with them. And, of course, while there are floods during the rainy

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 51


season, there is also extreme drought in the dry season. So dealing with the water issue was at the
center of Bangladesh's development.

I should mention that the UNDP [United Nations Development Program] was also very much
involved and wanted to play a leading role in the program. But since everybody else seemed to
want us to take the lead, I organized a special meeting at Lancaster House in London. I should
say that my colleagues worked miracles, and we were able to establish a framework that gave
everybody a chance to advance their proposals and play a part in a thorough, objective review.
One of our old crusty staff members, a no-nonsense technical man, Bill [William T.] Smith, did a
wonderful job in running this scheme.

I should tell you a little episode here. It was the second day of the meeting. They said the British
Prime Minister, Mrs. [Margaret H.] Thatcher, would come to address the meeting. There was a
big fuss, and they showed me where I should be when she was coming, where I should stand,
how we should shake hands, etc. Timothy Lankaster, a former Bank staff member and also a
former ED and friend who was then the Permanent Secretary of ODA [Overseas Development
Administration] was there with us. So we went downstairs to receive the Prime Minister.

I stood where I was supposed to stand and shook Mrs. Thatcher's hand. Her immediate reaction
was, "Where is the map?"

I asked, "What map?"

She then replied, "Are we not going to have a photograph together in front of the map?"

So it was clear .that she looked at the whole exercise as a photo opportunity rather than anything
else. The map which we had used in the morning was no longer there, but there was a smaller
map, and then I insisted that the head of the Bangladeshi delegation sit with her to have their
photograph taken together. So that covered much of the interest of the British Government in this
matter.

Mr. Attali came to the meeting from Paris. He sent me a message saying that he would be
coming on the President's plane and since the plane was waiting at the airport he needed to talk
before everybody else. I said, "I am very sorry. You will talk when your tum comes." He was
very unhappy about that, but I had no choice since there were others who had asked to change
the order of speaking to accommodate their own time constraints.

Q: You had mentioned earlier that you were never sure whether the Bank was devoting too
much or too little resources to Bangladesh. How did this figure in your meeting?

KARAOSMANOGLU: I did not mean the monetary funds IDA was providing. IDA
allocations are determined on the basis ofthe size of the country, the per capita Income and other
poverty indicators. According to those criteria Bangladesh would always have an allocation
larger than what it was able to absorb. So invariably Bangladesh lost out because of its poor
record of implementation.


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995 Final Edited
                                                                                                52


Q: Now here you had a good opportunity to see developments in South Asia after you had dealt
in great depth with East Asia. Did you compare the two halves of your region? Why do you think
the two parts of Asia are so different and function so differently economically?

KARAOSMANOGLU: It is really very difficult to explain. In all probability it is due to
historical reasons. The attitude of their bureaucracies, different cultural values, a different
attitude towards the law, they all have an impact on what is happening much more than the.
available resources. Look at Nigeria and Indonesia, for example. In 1970, Nigeria and Indonesia
had the roughly same income level, the same energy resources. In fact, Nigeria had better access
to markets than Indonesia. And, yet, look where Indonesia is today and where Nigeria is. The
difference clearly is not only a matter of natural resources. In East Asia, I had big problems with
the Philippines. When I look back I am still surprised at the problems we had to deal with in that
country. Why is that country so different?

Q: You think the key would be historical differences?

KARAOSMANOGLU: Yes. Yes. I remember in the Philippines we were trying to put in place
an adjustment program. I managed to convince President [Ferdinand E.] Marcos to do away with
the sugar and coconut monopolies and to open up the economy. At the time I told some of my
colleagues, "Look here is a leader who has agreed to cut the branch he is sitting on. He will fall,
but he obviously has great confidence in his ability of staying on top. As long as he thinks he can
take the heat, I will insist that the reforms go forward because that is the only way for the
economy to move forward." But, of course, when the monopolies were dismantled, his cronies
started to leave him very quickly, and this probably had quite a bit to do with the change of the
regime and the return of democratic government in the Philippines. We didn't fight for this
change, but we tried to convince the President that the reforms were good for the country, and
somehow Marcos believed that he could swing it, but when he started he lost ground very
quickly.

Q: In one of your papers, you discussed the difference between South Asia and East Asia. You
talked about the role of government and the public sector in Japan, for instance, and contrasted
that with the emphasis by the Bank in the '80s on promoting free markets and private sector
institutions. Is it possible that a principal difference between South and East Asia is in fact the
role of government? You can attribute the difference to history and culture, but is not the form of
government an important manifestation ofthese factors?

KARAOSMANOGLU: Of course. When I took over the two Asias together, I was struck by
the lack of interest in South Asia of the industrialized world and the intellectual world. I always
felt more concerned with diminishing intellectual interest in countries rather than diminishing
monetary interest in countries, because diminishing intellectual interest usually has more serious
consequences, including diminishing flows of financial resources. But everybody thought Asia
was fine because the East Asian countries were doing fine. Nobody thought of India,
Bangladesh, Nepal or Sri Lanka as part of Asia. So I started talking about two Asias from the
beginning. Definitely, the role of government, as part of the history and culture of the two parts
of Asia, is an important differentiating factor.


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               53


I cannot tell you that East Asia necessarily was less corrupt than South Asia. In a sense, the
relationship in East Asia between government and big business was incestuous; it was too close
for comfort. As a citizen of an East Asian country I would feel very uncomfortable with such a
close relationship. But somehow that relationship was used to benefit the lower income groups
by increasing employment--not necessarily wages--and thereby family incomes and the general
welfare of the people. In contrast, in India and Bangladesh there was much concern, literature
and research about social justice, but very little was actually being done. The emphasis was
always more on preventing things from happening rather than encouraging action.

I don't think we should go into the East Asia miracle issue now, but both in Japan and even more
so in Korea it was the government that determined the direction in which industry should move.
Once I was in a seminar in China with one of the former Deputy Prime Ministers of Korea, and
he related how the President, not Park [Chung-hee], the fellow who came after Park.

Q: Chung [Chun Doo-hwan]?

KARAOSMANOGLU: Chung. Well, it was either Park or Chung, I am not so sure now, who
invited the head of the Hyundai Corporation and told him, "From now on, you will do ships." At
that time everybody thought going into shipbuilding was wrong because of the large shipbuilding
capacity. However, within a short time the Koreans were the largest and most competitive ship
builders.

He told the same story in Malaysia, and the Malaysians--eyes were blinking with great glee and
happiness. I could not say anything on that occasion because we had to leave the meeting and go
to call on the Prime Minister. But in China I did take him on and asked, "Look, now that you
tell this to our Chinese friends and colleagues here, you also have to tell us how the President
decided that it should be shipbuilding? Did he have an auspicious dream the previous evening?
Or did you do some research? If you did some research how did you come to the conclusion that
shipbuilding was the appropriate activity? You have to tell us so that all understand how to pick
the winners." I added, "There is one other possibility, namely that it was Hyundai who really
wanted to build ships, but needed to get the instruction from the President to obtain all the
government assistance that this entailed. In other words, the President was giving them
instructions which they wanted to receive anyway."

Of course he smiled and said, "Oh, no, no. We conducted some studies which pointed in that
direction."

Now this approach worked because the Koreans took the market as a test for everything they did,
both the domestic market and the international market. This allowed them to determine the prices
for their product and if they found that the prices were not adequate, they would quickly drop the
initiative. The government would simply inform the businessman, "We can now no longer
finance and support your activity because you are not competitive, but we will help you to do
something worthwhile in some other area." So there were actually many more losers that were
picked and dropped than winners that survived. But that does not come out in most of the stories
about Korea.


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  54


Q: You left the Asia region in 1991. Could you talk a little bit about the circumstances which
led to your next assignment?

KARAOSMANOGLU: This occurred at the time when Mr. [Lewis T.] Preston took over as
president ofthe Bank. He did not take over at the usual time, the end of the financial year; rather,
he came on September I. Sometime in August I got a message saying that he wanted to talk to
me. Eventually, he asked me to come to New York to see him. I did not know that he was in fact
interviewing me because he wanted me to hold one of the Managing Director positions he was
going to create; I thought he just wanted to have some information about the Bank. We spent an
interesting two and a half hours in discussion. He asked me about personnel issues, the
management of the Bank, the size of the Asia region, whether I thought it was too large. I told
him that I thought it was manageable but it could be more closely controlled if it were to be split
again. He asked me about the 1987 reorganization, about issues of efficiency, the image of the
Bank, the morale of Bank staff. And then he asked me towards the end, "If you were the
president of the Bank, what would you focus on?" I told him that above everything else, I would
try to maintain close contact with the political leadership in the Part I countries. I mentioned that
at the operational level we had contacts with the leadership in all the developing countries. I told
him that when I go to a country I never ask for an audience with the President, but it was almost
always given. The countries themselves ask for it, so that seeing the Prime Minister or seeing the
Minister was not a problem at all. Mr. Preston replied that he knew most of the leaders. But I
suggested that while he may know them now they would change and it was important to keep in
touch and establish a routine now so that he could call the Prime Ministers or Presidents on
important issues. If both the Executive Directors and the Ministers of Finance know that if it
comes to it, you will not hesitate to call the Prime Minister or the President, that you have access
to their leaders, then they will pay a different kind of attention to your concerns. I told him that
I had felt that this had been missing both in the Clausen and the Conable era. As a result, we
suffered from a number of ridiculous restrictions and conditionalities and were unable to present
our position and what was in the best interest of the institution or the countries we were supposed
to serve.

Q: So when did he offer you the position?

KARAOSMANOGLU: Let me tell you. He came on the first of September, and on the second
of September he wanted me to have lunch with him and he informed me that he wanted to
introduce a change in the organizational structure. He wanted to introduce a management
structure which he had developed and implemented in J. P. Morgan. This meant the creation of
three managing director positions. He still had some concern about the scope of responsibilities
for each, which would be very large, but he wanted to have a seamless management structure. He
emphasized that he did not want the managing directors to be a layer between him and the vice
presidents. He regarded the managing directors as his alter egos who would act on his behalf and
he would back their decisions as his own.

He said, "For me to change any decision one of them would make would require hell to freeze.""
And then he said, "I want you to be one of these three Managing Directors."

I said, "Thank you, it's worth trying."

                                     Atti/a Karaosmanog/u
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                 55



Q: How in your view did this new structure work? Was it really an improvement over the
previous form of management?                                          ·

KARAOSMANOGLU: Well, first, of course, there was quite a bit of resentment on the part of
some of the EDs about the change of the structure and the fact that Preston had not consulted
them in the matter before he made the decision, especially on the people he appointed to those
positions. The Northern Europeans were not all that satisfied that it was Sven Sandstrom who
should be representing them. Neither the developed countries nor the developing countries
thought a Turk would be the best representative of their interests. The developing countries
regarded Turkey no longer as a developing country; Turkey had tied its fortunes to Europe. They
said that. And for the Europeans Turkey was still outside of Europe and part of the Third World.
There was quite a bit of fuss about who should chair the Board meetings. In fact, there was a
meeting on that because the dean of the Board at that time wanted to chair Board meetings in the
absence ofthe President.

Q: This was [N. Franklin] Potter?

KARAOSMANOGLU: Yes. But then there was agreement that the Managing Directors would
chair Board meetings when the President was not there. The reorganization in 1991, in terms of
its impact on the Bank's structure, it was not much less important than the '87 reorganization, but
it was implemented quickly and very smoothly. Although I don't remember the exact number,
there were some 270 or 280 people in the front offices of three Senior Vice Presidents. We sent
all of them to the relevant Vice Presidencies in the hope that they would not keep them in their
front offices but put them to work in the trenches. To emphasize the point, we decided to have
only two assistants in the President's office, one principally assigned to the President but helping
the Managing Directors, and then one assigned to the Managing Directors. We each had one
secretary. As a result, the tum-around time for any decision was cut very drastically.

I must tell you by way of example how we worked together. At the outset we had to determine
the allocation of responsibilities among the three of us. We did this in one sitting. What we tried
to do was that each Managing Director would have two regional oversight responsibilities, a
policy responsibility, a finance responsibility, and then we allocated the remaining functions as
well in a balanced fashion. There was no back-and-forth, no bickering of any kind. Within one
hour the whole thing was settled with Preston chairing our meeting.

At the beginning Preston showed more interest to come to these meetings. But when he
discovered that we were talking to each other very effectively, that we were comfortable with
each other and that there were no differences of opinion that we could not sort out among
ourselves, he--I don't know whether I should call it lost interest--did not continue coming as
much. He had some unfortunate personal problems. He lost his son, his wife suffered through a
very serious health problem, finally he himself suffered from ill health in a major way. So the
new system, which had been designed to work as an extension ·of an active President, had to
function without the active participation of the President much of the time, and each of us, on a
rotating basis, acted for him during his absences. He never changed any of the decisions we
made, but there were clearly some issues which would have benefitted from the presence of the

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18,1995- Final Edited
                                                                                                  56


President as a member of the top management. For instance, we did not feel that we should have
the regular meetings with all the Vice Presidents without the President. This would have been the
opportunity for him to interact with a larger group of managers. Instead we held these meetings,
even though without Preston they did not serve any real purpose. They were not the kind of
gathering where people openly discuss issues. People would report what they had done without
any effective discussion taking place.

Q: I guess that is also a question of the size of the meeting.

KARAOSMANOGLU: That is true, but there is also the difference in the interest of all the
participants. Having split the responsibilities for oversight among the three of us, for instance, it
made no sense for me to meet with my six or seven Vice Presidents at the same time because
they would not feel interested in the same issues necessarily. So what happened was that each of
us instituted weekly meetings with each Vice President for an exchange of views and
information and also to get a briefing from them about what was happening in their respective
Vice Presidencies. As a result, people started to feel that they did not have leadership and focus
on certain issues. This was a continuing and increasing concern, especially as the criticism of the
Bank increased in the press and the media.

Q: So you did not see this arrangement as a system that led to better coordination?

KARAOSMANOGLU: Better coordination within the President's office, yes.

Q: Did you have regular meetings with the other Managing Directors?

KARAOSMANOGLU: Every day at 5:30 we met for about an hour and a half or two hours,
sometimes longer. Every single day. These were informal meetings and no minutes were kept of
our discussions, although if something had to be done, the assistants who were present at the
meetings would take notes and then we would either ourselves follow up or ask them to initiate
action.

The amount of reading we had to do became enormous, and I told Mr. Preston that the system
was not likely to survive without the assignment of additional staff. It turned out that all three of
us did not mind reading huge amounts of material, quickly, mostly on the day it arrived. We did
not hesitate to bring the other Managing Directors into key issues. We might get together on
those issues sometimes once, twice, or even three times, not because we disagreed with each
other but because we felt we had to think about it a little bit more.

Q: So the coordination among the Managing Directors worked very well. Now, moving down
the hierarchy, did this also involve the Vice Presidents?

KARAOSMANOGLU: No, it did not work as well because we dealt with the Vice Presidents
one by one. We would tell them everything they needed to know, but then the Vice President
would forget to inform his staff. In many instances, the Vice President would not inform his
directors, and when I reminded them, they would tell me that they had to go on a trip and forgot
to pass the information along.

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995 Final Edited
                                                                                                57



Q: I suppose the managing director system was better at dealing with administrative and
managerial matters but less so when it comes to forward looking and providing leadership?

KARAOSMANOGLU: No. No. The leadership issue was a separate issue. It was always up to
the President to provide leadership and to give the necessary messages himself. The fact that the
President could not devote himself full time to this task was not the fault of the management
structure. The three different Managing Directors each in their own style communicating with
their Vice Presidents could not fill this void.

Of course, the system will not work at all unless the three people involved are working well
together, have no hang-ups vis-a-vis each, and have the right motivation and intellectual
capacity. If among them there are questions and reservations, personal agendas of some kind,
reluctance to share views and insights, then the system will not work. In our case it worked very
well.

I had known Ernie for about 35 years. When I was head of the Economic Planning Department in
Turkey, he was the youngest economist in the AID [U.S. Agency for International Development]
office in Ankara, so our acquaintance goes back to 1959. In the Bank we worked well together in
different places. We didn't fight because I did not mind to report to him when he was Senior Vice
President and I was Vice President. I could go up to him and say, "Look, Ernie, these are the
things which are on my plate, and this is what I am going to do. I don't want you to tell me now
whether you agree or disagree, but I will do this in such and such time. If you have any
disagreement, let me know in good time, or keep your peace." And that always worked. He never
felt that I was springing some surprise on him, and I never felt that he would question something
that I did later on.

Ernie knew Sven a little more than I did because of Sven's one year assignment as the President's
gatekeeper before Preston came. I knew him less, but soon discovered that he was a really very
straightforward, decent and capable guy. Of course, each of us had slightly different interests and
emphasis on certain things. In sum my assessment of how we worked together is that the three of
us got along as well as anybody could hope for given the level of responsibility, pressure, and
tension involved in the assignment.

Q: Did this also translate into an effective relationship with the Board? You mentioned that
there was initially a fair amount of tension because of disagreement about the management
structure and, in a wider sense, about disagreement with Preston and his style.

KARAOSMANOGLU: We worked effectively with the Board in general, yes. But there were
issues with individual Board members.   ·

I remember the German Executive Director wrote me a memo once--when I was dealing with
administration and personnel and when Bilsel Alisbah was the Vice President in charge--about
the state of space for people working in the cashiers department, that not everybody had a
window and that there were big bookcases squeezed into their offices. He claimed that this
would not be acceptable in Europe and had the memo signed by a number of his colleagues. I

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                               58


passed his memo along to the Acting Vice President, and when he phoned me sometime later
about the matter, I said, "Look, we asked the people in charge to pay attention to this problem."
In fact, the people involved sent him a memo, with a copy to me, but he never felt satisfied
because he felt "I as an Executive Director sent a memo and you did not respond to it yourself."
That was an example of the kind of difficulty we might still have with the Board.

And then there were instances where some members of the Board would make a little fuss about
certain things. As you know, I don't tell people off very easily, but there were instances when
even I had to tell them what they were suggesting really made no sense. I feel strongly about
issues such as poverty alleviation, women's employment, and the elimination of anti-employment
biases. Now some Board members kept on insisting that we needed to promote labor-intensive
technologies. I would tell them there was no labor-intensive technology that could be adopted
and would enable a government to compete in the world market; however, there were plenty of
obstacles to greater employment which could be eliminated. The point was that we should
promote labor-intensive activities not labor-intensive technologies because the aim had to be
competitive with the rest of the world. When I would tell them this, they would feel offended
because it sounded like I was lecturing to the Board. They were also unhappy at one point that
none of us was attending committee or subcommittee meetings of the Board. So we divided the
committees among ourselves and attended their meetings.

It is true that the relationship between the management and the Board initially was very tense.
The Board did not understand Mr. Preston and what he wanted to do; in tum, Mr. Preston did not
have much respect for the Board. You must have heard about some of the incidents.

Q: Well, presumably Mr. Preston did have a bit of a learning curve to pass along. There was a
difference in his style initially as compared to the way he would behave later on.

KARAOSMANOGLU: Well, this may be true but there were certain unchanging features. For
instance he had this bad back; therefore, he would get up during Board meetings to move around
and put his back against the wall and he would stand there. When he first did it everybody was
taken aback because the EDs did not know what it meant. At one point Mr. Potter was making a
big fuss, and Preston felt he had had enough of it and was leaving the Board room. As he went
out, he tapped Potter on the shoulder and told him, "Let's talk outside." It was as if calling him
for a duel outside.

Q: How, in your view, did Preston's idea of making the work of the Bank more· focused and
more selective work in practice?

KARAOSMANOGLU: Not, not very well. There is really a large amount of delegation of
responsibility and authority in the Bank. Staff who have certain pet ideas or pet projects have
always been able to pursue them. For this reason it is not the President's office but the division
chiefs, department directors, or Vice Presidents who must ensure that things are focused and
selective. But they never do it. Several times I would meet with my Regional Vice Presidents and
tell them to take a close look at their work programs. There were many projects in those
programs which they had not agreed to, and yet staff were still keeping them and spending
enormous amounts of resources on them. Staff always felt that we could resolve any outstanding

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                      59


      problems better than anybody else. So I kept telling them that it was not a matter of being better
      at doing certain things, but a matter of our comparative advantage. If there were things which the
      World Health Organization could do, we should not come up and say we can do it better;
      therefore, let's take it away from the World Health Organization. Ifwe can do it better, let's help
      them. Let's help them to formulate the program, and then let them do it because they will have
      the necessary subject expertise anyhow.

      But it is not only the staff which is to blame. The governments, the ministries and the EDs all
      have their pet ideas and projects, too. They all want the Bank to be very selective, but very
      selective doing what they want to be done rather than anything else.

      Now, this is aggravated by another development which I have been resisting for a long time, but
      without effect: that is the issue of the trust funds which governments give to the Bank for certain
      purposes. They give $40,000, $50,000, $100,000, even $1 million to do a special thing. What
      happens is that the tail starts wagging the dog as a result of it; our program becomes the function
·~    ofthe availability of these funds.
\~\

f:"   I remember, for instance, a Japanese coming to me telling me proudly, "Now I have been
      appointed as division chief in the Ministry of Foreign Affairs," or in one of the aid agencies, I
      don't remember which one now, "if your              come to me for technical assistance
      the                I will do            to
                                                                                                 Now,
      many people take this as a golden opportunity. For some staff members it is an opportunity to
      visit Japan or Europe; especially for somebody who is going back and forth to Africa without
      having much time, to go to Japan is a very appealing idea and to promote a mangrove project
      somewhere or other seems like a small price to pay. Some people just want the Bank to try out
      certain things, and this works against selectivity.

      Participation is a big issue in many people's mind. The Scandinavian countries or the Dutch will
      give you all the money you want to bring participation into our lending, but then they don't know
      what they really want nor do we know what to do. Yet a consultant trust fund is readily
      established. All three of us have been trying to bring some discipline into this business, but I
      cannot say that it is fully under control. There are instances where some ministries and
      governments have complained that they had been offering a trust fund but that Bank staff had not
      accepted their ofTer. Nobody ever considers that every trust fund really ties up quite a bit of our
      own funds.

      For instance, the EDI [Economic Development Institute] was one of the activities which I was
      overseeing. Amnon Golan, its director, was forever complaining of not having enough money.
      To be sure everybody was giving him money to have programs in Russia or China or Eastern
      Europe, but he could not run programs in Latin America or the Middle East. So I made a deal
      with him. I said, "Okay. We'll increase your budget this year, but you will not increase the total
      amount of consultant funds and funds used outside the budget."

      But pretty soon he was back and told me, "Well, I'm being given several million dollars for more
      work in East Europe and Russia. I think I should accept it."

                                            Attila Karaosmanoglu
                        November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                              60



             I replied, "Okay, you accept; I'll cut your budget out." But, of course, we could not do that
             because if we did it all the G-7 countries would be after us and complain.



~'~
~ ·~ Everybody wants to be selective, everybody wants to be efficient, but then everybody has
c::::.   'N' important reasons to work against those good intentions.
~ .g Q: I wonder if we could tum to some of the issues that cut across your involvement in various
   8 assignments. The first of these has to do with the environment, which has become over the years
          ~ quite a hot topic. Why did you think the Bank was slow in recognizing environmental problems,
             if you think it was slow?

             KARAOSMANOGLU: When I first carne to the Bank two things really puzzled me. One was
             the state of economic analysis. I thought it was not up to the standards I expected it to be. When I
             criticized a report for lacking sensitivity analysis, my boss in the economics department asked
             me with genuine sincerity what a sensitivity analysis was. That was surprising. The second
             insight I gained on my first economic mission to Africa. In my report I wrote that ecological
             balances were being distorted by Bank projects, and my boss was surprised that I was concerned
             with ecological balances. So there were two issues in which the Bank was not up to the mark.

             This is not to say that the Bank never paid any attention to those issues; when there was a big
             project, the Bank obviously wanted to know who was living in the project area and what would
             happen to the people when the project was completed. If the Bank was supporting an irrigation
             project, for instance, the Bank would encourage the establishment of user cooperatives or user
             associations. But these issues were not systematically thought out, well designed, and well
             prepared in advance. Of course, nobody else was seriously concerned about these problems.

             When I first went to Egypt, the Aswan darn was being built, so I asked my Egyptian counterparts
             about possible changes in the fauna of the southeast Mediterranean which could result from the
             construction of the dam. I suggested to them that they should start promoting fish farming and
             try to find out the type of species which would thrive and develop in that area. This was a great
             surprise to them, and my colleagues and my supervisors were not really supportive either. They
             did not understand what I was talking about. They were all intelligent people, but it wasn't part of
             their regular mandate.

             Q: The interest of the international community in environmental aspects has advanced
             dramatically in the last 20 years. Do you think the Bank is now really on top of the
             environmental issue? And is it keeping up with what is happening in this field?

             KARAOSMANOGLU: I think the Bank is doing more today in the environmental field than
             any other group. We may not be doing as well on a single project as we should, but on the whole
             there is a much more intensive effort that is being made than in any other institution that I know
             of. So in that sense I think the Bank has responded very fully to environmental issues. When I

                                                  Attila Karaosmanoglu
                               November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                61


dealt with Asia, we very quickly responded to the challenge and increased the number of
environmentalists in the region. We started this idea of a capital cities projects in Asia, to make
the capital cities livable again. I only saw support and willingness to go address those issues,
both among the staff and also among the management. I think the Bank at this point is doing as
much as anybody could reasonably expect to protect the environment. Again, there may be
instances of individual projects which leave room for improvement, but that is true about
everything the Bank does.

Q: Perhaps we can turn briefly to the issue of alleviating poverty. Where is the Bank now?
There was a sense in the early '80s that there was a lessening of focus on poverty alleviation in
the Bank, certainly as compared to the '70s under McNamara. Has that been effectively
reversed?

KARAOSMANOGLU: It was not a decline in the interest in poverty alleviation. It was the
jargon, the language, the presentation which changed. There were times when there were more
specific and more concentrated efforts on activities which appeared to deal with poverty. Many
of my colleagues and I myself felt very uncomfortable with the head count in the McNamara
days. How many people would be taken out of poverty with each project? That did not add up to
anything, and that was not really very meaningful, but McNamara insisted and the Board loved
it. Being very creative, staff came up with all kinds of numbers to measure poverty alleviation.
Outside it looked as a very important emphasis on poverty, but it was not necessarily a very
effective effort.

When I led the poverty task force, we wanted to establish a core program focused on poverty.
We wanted to have projects which were identified as largely poverty-alleviating projects. We
tried to do it in a systematic way and to bring in the other aspects which affect poverty apart
from income, such as human resource development, education, nutrition. But the Board at that
time didn't like the idea of a core program of poverty. This did not mean that we did not have a
core program of poverty, it just did not move as a separately identified program. Papers were not
put together to show that we pursuing this objective, but as far as I was concerned I was doing
everything that I would do if there had been an explicit core poverty program.

Instead, of course, we had the areas of priority focus. In the Asia region somebody came up with
the idea that the part of a railway which runs through Mongolia should be counted as a poverty
project.

I asked, "Come now. How do you count a railway project as a poverty project?"

"Oh, but it is going through the poorest parts of Mongolia, and of course it will open market
connections to the producers of Mongolia. Therefore they will be better off. Therefore it is a
poverty project." This was the reply.

I still did not count it as a poverty project because I did not want to get caught up in labeling
games. In an atmosphere where there is general concern about poverty, the temptation is to label
everything accordingly. An education project in a poor area becomes a poverty-alleviation
project, a rural development project becomes a poverty-alleviation project, etc. When everybody

                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995 - Final Edited
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is concerned about human resource development, all education projects and projects related to
nutrition or health become human resource development projects. But the contents of the
baggage do not change all that much in the process.

Q: Would you say the same about the transition in the emphasis by the Bank in the '80s towards
the development of the private sector?

KARAOSMANOGLU: No. No. That was more fundamental. But the energy program is
another example. As a result of the energy crisis, the member countries' position vis-a-vis energy
projects had changed dramatically. Projects to develop energy resources, oil exploration projects,
power projects, power distribution projects were all in great demand. When the energy crisis was
over, our energy program died.

Q: That would have been in the late '80s?

KARAOSMANOGLU: No. In the early, middle '80s. It did not apply to power projects. Power
projects started to die later.

The prominence of the private sector, of course, raised also many policy issues. Now, all our
lending operations have to be in conformity with the functioning of a market-based system and
hence supportive of a healthy private sector. When we decided that the financial markets were
not functioning properly, lending operations could only be supported in conjunction with a
reorganization of the financial sectors relying on positive real interest rates. This meant that all
those projects dried up. Yet, there may be instances where a power project or an oil project
makes sense even ifthe markets are distorted. But we have ruled that out completely. I used to
lose sleep over some of these issues.

For instance, water charges. You know there is disease, drought, lack of drinking water--I mean
healthy drinking water. Should you insist on the water authority becoming financially self-
sufficient? Should you insist that the water rates be raised to such and such level before you start
the project? Or do you start the project and then hope that the government will see the light and
set the right prices to ensure the sustainability of the water authority? In many instances Bank
staff suggested not to go into a project because the financial condition of the project institution
was poor and the prospect for rate increases dim. But this is one approach. The reason why the
Bank is charged with having forgotten poverty in the late '80s and the beginning of the '90s is
that it tightened its policies with regard to all forms of subsidies. In agricultural credit, financial
sector development, energy lending, we have gone from one extreme to the other and now we are
seen as not paying any attention to the poor. Of course, you cannot continue to subsidize the poor
in a way which prevents the poor themselves from overcoming their economic problems. But if
you remove the entire support system relatively suddenly, it will appear as though you have
forgotten the poor.

Q: One of the conversions that the Bank has passed through in the last ten years has been the
emphasis on planning. With McNamara the belief in the centrality of planning had reached a
high point. Once he left there was necessarily some change, but more generally there has been a
shifting away from the emphasis on planning and to the belief in the free play of the market

                                      Attila Karaosmanoglu
                   November 17, 1994, and January 10 and 18, 1995- Final Edited
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mechanism and getting the prices right: How did you yourself make this transition? You started
out as a planner. You believed firmly in the importance of government planning, perhaps not the
directive form of planning, but still a strong role for the government in setting priorities and
allocating resources. When did you begin to abandon some of these beliefs?

KARAOSMANOGLU: Well, I was aware all along that government planning had positive as
well as negative aspects. In countries without an established entrepreneurial tradition the
government's involvement in the economy through planning was an important way to bring
about some investments consistent with the macroeconomic realities and the available resources.
It helped in creating some employment and the development of some know-how in management
and administration. In other words, I think the value of planning should always be seen in the
context of the time, the state of development as well as the way it intervened in the economic
processes. There is no doubt that governments extended their control beyond reasonable limits
into activities which they could. not effectively control. Despite the complaints about the failure
of development, it is a fact that in most developing countries a younger generation of people has
taken over with better education, sharper business acumen, greater administrative and managerial
experience. As a result the need for government intervention has changed. The world economy
has become much more integrated and open. Sealing yourself off in the manner which the old
style of planning required is no longer meaningful or feasible. The economies have become
much too complex to be captured by the relatively crude planning instruments. Small
governments, but effective in performing the basic regulatory functions and the rule of law, are
much more important in these circumstances than governments which can show spectacular
projects, such as big factories or power plants. In short, the evolution of our thinking is reflective
of the changing underlying reality.

Q: And do you see yourself as having followed this evolutionary process?

KARAOSMANOGLU: Yes. My generation was brought up in the Keynesian, Marxist tradition
of thinking. But the young people now in the government bureaucracies or in business in most
countries have been trained in an entirely different school of thought. To be able to talk to them
and understand them, you have to adjust.

Q: We have touched already on the various Presidents you have worked with. Perhaps we can
ask you now to compare their performance and their impact on the Bank. The Presidents you
have worked closely with were McNamara, Clausen, Conable and Preston. Could you give us
your views about some of their strengths and weaknesses?

KARAOSMANOGLU: It is difficult to compare them with each other. They are very different
personalities. The Bank is a presidential institution which means that every president is free to
bring his personal approach, thinking and values to the management and administration of the
institution. They all regarded the Bank a major challenge. McNamara, who is considered very
decisive, did not tinker with the Bank's structure until his second five year term. When he came
to the Bank he brought a couple of people to start programming and budgeting. Towards the end
of his first five years he started thinking about country policy papers. In other words the changes
he introduced were not immediate because he felt he really wanted to understand fully how the
institution functioned before he made changes.

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                  November 17, 1994, and January 10 and 18, 1995- Final Edited
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McNamara had a great reputation to remember everything and to know everything in detail. I
think this was slightly exaggerated. Maybe he himself would be prepared to admit that. I have
seen him forget many things--sometimes conveniently but sometimes because he just could not
remember. He had the great ability of looking at a page of numbers and spotting discontinuities
in the numbers. He always looked for discontinuities, and, of course, discontinuities usually
indicate a problem. Either people were not careful and put a number without thinking, or they
changed a definition, or something else had gone wrong. Looking for discontinuities is
ultimately just one way to carry out random checks. A late friend of mine, who was a general,
told me once about his method of quality control. When he was reviewing any army unit he
would decide in the morning to look closely at every fifth soldier to see whether they were well-
clothed, had their equipment, or were standing straight. Everybody thought that this fellow could
spot everything when he reviewed his troops.

McNamara was knew everything about quality control techniques. He was very keen on
numbers, sometimes more than justified. He was a real believer in numbers, sometimes with less
intellectual doubt than I would have liked to see in a President of the Bank. His major strength
was that he gave the Bank a sense of purpose. People now don't remember the complaints about
MeN amara, how he was· destroying this institution, how he was compromising the quality of
projects, how he was forcing the Bank to do more projects regardless. What was happening in
the Bank under McNamara was compared with the Bank during Black's presidency. He was then
the leader who had set the standards for many of the older people in the Bank, standards of
project appraisal, of lending decisions, of doing business. These old-timers pooh-poohed
McNamara's ideas about poverty, and they were very unhappy about the speed at which he
wanted the projects to be produced. I insisted once, I remember, towards the end of his tenure in
the Bank that McNamara should give an account of what the Bank had achieved under his
leadership. But he always shied away from looking at the actual results of our activities. If you
look at his speeches you will discover that he was always looking forward. He told me at the
time, "I will do it when I retire." But he didn't do it even after he retired. At that point he was still
talking about how much more net income the Bank could have and what additional activities the
Bank could be taking up in the pursuit of its mission.

Here are some of the things McNamara was doing. He was very comfortable in calling up heads
of state or heads of government to try to persuade them to take certain actions. He was very alert
to political developments. He believed that the communist countries could not afford not to pay
their debts. Therefore he was not all uncomfortable with the proposition of lending to Romania.
Similarly, he had no qualms of providing assistance to Syria because he felt that if the Syrians
misbehaved, then their sources of funding from Saudi Arabia and Kuwait would be cut off. He
gave me much support when I was still working on Egypt and tried to negotiate the settlement of
the U.S. debt issue. He supported me because we were sticking our neck out at a time when
nobody thought Egypt would pay its debts. He would sometimes call me at 7:30 or before eight
in the morning and ask me whether I read the report on such and such country, which was only in
white cover yet; when I told him that I had not read the report, he would ask whether he was the
only one in the Bank who read these reports. This happened when I was with Hollis Chenery.

Q: Now, what about his successor, Tom Clausen?

                                       Attila Karaosmanoglu
                   November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                                                  65



KARAOSMANOGLU: Clausen clearly felt intimidated by the Bank and, as a result, relied on
Ernie very heavily and left much of the immediate management to him. Mind you McNamara
too had relied much on Ernie. Barber Conable also had to accept Ernie as the most capable, the
most intelligent person he had ever met, even though he didn't like him and the way he was in
control ofthe Bank.

Clausen would occasionally call me to ask me a question about a country or a project in my
region. He would usually start by saying that an old friend had called him about this project and
wanted to know what to tell his friend in reply. But he would make very certain that I understood
that he was not asking for a special decision or action. So he really did not interfere at all in our
operations. He saw his role as a facilitator and protector. And in this sense, he was a good
umbrella protecting us from external pressures. It was because of the resistance to any outside
interference that people hated him; they could not manipulate him.

Q: You mean the outsiders, some ofthe members hated him?

KARAOSMANOGLU: Yes. With the Americans and with others also he could be quite blunt,
tough and unresponsive when the managers in the Bank had convinced him that certain projects
did not make sense and were not in the interest of the institution or in the interest of the
developing countries.

Q: This attitude eventually was his undoing as far as the U.S. Government was concerned?

KARAOSMANOGLU: Yes. Yes.

Q: The fact that he ran into trouble with the Board, of course, must have involved other
shareholders as well?

KARAOSMANOGLU: No. It was principally his relationship with the U.S. Treasury. He had
very unhappy relations, very.

Q: I suppose one thing that was quite clear was that he was not a man who was very wise in the
ways of Washington. In that sense he presented quite a contrast to McNamara and to his
successor Conable. He just didn't know how things worked around Washington, and he did not
know people well enough to make his point effectively.

KARAOSMANOGLU: Well, I am not sure one can go that far. After all, he had been the head
of the biggest bank at that time in the U.S., maybe even in the world. This meant that he had
quite a bit to do with the U.S. Government, and he must have known his way around
Washington, even though his Bank was not in New York but on the West Coast. It was probably
more the unfamiliar subjects and the style of debate which he was not accustomed to. He was
always telling us how much he was impressed with the Bank and the details of its information.
When he was making a first visit to China, just before he was taking over, he wanted some
briefing about China. He also asked the Bank of America to brief him. The Bank sent a huge
black book, and he was totally overwhelmed by the amount and the quality of information he

                                      Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
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received from us compared to what the Bank of America gave him, which he thought for many
years had been the best source of information. So it was not only not knowing the ways of
Washington, which I think he was reasonably acquainted with--l'm sure he must have been
dealing with the U.S. Congress and the U.S. Treasury--but dealing it with the type of information
that the Bank was producing and using it effectively in his negotiations which eventually proved
his Achilles' heel.

Q: But he also ran into problems with the Europeans and with some of the other shareholders,
didn't he?

KARAOSMANOGLU: Yes. He spent most of his time trying to have the Bank's capital
increased, which the U.S. was resisting. The U.S. had a much stronger say on those matters in
those days, and his attempts to mobilize European support didn't work all that well. In the end,
he had this problem with the budget which was almost voted down. The major shareholders
made it quite clear that they wouldn't vote for a budget like that. But the same type of things
were later said to Conable as well. People openly criticized Conable for lack of leadership, for
not knowing what he was doing, for jumping from one subject to the other, for adopting a flavor-
of-the-month approach, for adding all kinds of new initiatives even though these were really a
part of the Bank's basic mission and not new and separate issues. So Conable too was very much
criticized on that issue of leadership as well.

Q: But compared to Clausen, he was of course more effective politically.

KARAOSMANOGLU: Yes. He was more effective politically. And he was very quick on his
feet. I remember when we traveled together, in press conferences, when a question was asked of
Conable which he could not answer, he would rely on some prompting. I usually .had a pad in
front of me and I would write in capital letters one or two words. He would take it from there and
make a whole story out of that.

Q: Was that true of Clausen also? I thought he always had problems articulating what needed to
be conveyed?

KARAOSMANOGLU: No. No. He not all that good on that score. And for some reason he
kept using metaphors which others could not possibly understand. For instance, there was a
meeting with the Romanians once and he was trying to convince them to liberalize imports and
open up their economy, which the Minister was resisting. So he turned to the Minister and told
him, "Mr. Minister, we are not going to take you to the edge of the cliff and hit you over the head
with a 2x4, but we want you to open up the barn gates and we want to see some chicken tracks."
The Romanians, especially their interpreter, were understandably dumbfounded. And then they
started talking about for about ten minutes among themselves trying to figure out what they had
been told. Afterwards, when we carne out of Clausen's office, they asked, still asked me what a
2x4 was.

Q: Well, I suppose our time is up. We would like to thank you very much for these three
interviews. It has been very stimulating to talk to you.


                                     Attila Karaosmanoglu
                  November 17, 1994, and January 10 and 18, 1995- Final Edited
                                                                               67

KARAOSMANOGLU: Thank you very much. It has been a pleasure.

[End Tape 3, Side B]
[End of interview]




                                   Attila Karaosmanoglu
                November 17, 1994, and January 10 and 18, 1995- Final Edited