• No results found

From Savannah to Structural Adjustment

This chapter reviews the Bank’s growth from a small, relatively conservative lender, which had difficulty finding a president, to the leading international development agency. As President throughout the 1950s, Eugene R. Black oversaw the slow growth of a hard-nosed banking organisation that lent to a handful of mostly medium income countries. It was a Bank focused on infrastructure project, in particular power and transportation. The 1960s was a decade of two halves for the Bank, the first half saw a notable expansion not just of the organisation but of its mission through the creation of the IDA in 1961. The presidency of George D. Woods from 1963-1968 saw further expansion in the Bank’s mission. Despite this expansion, the second half of the 1960s was a difficult time for the Bank both fiscally and politically as the problems of the US economy limited its budget and as US foreign policy turned inward and became more conservative, slowing the Bank’s expansion. Nevertheless, the expansionary vision of Woods set the tone for the presidency of one of the Bank’s most well known presidents, Robert Strange McNamara, as it was Woods who lobbied for McNamara’s selection.

McNamara’s tenure had two distinct phases: 1968-1973 and 1974-1981. During the first phase, the key development was the rapid growth in the Bank’s lending portfolio. The second phase was marked by McNamara and the Bank’s ‘discovery’ of poverty and a strategy to address it — integrated rural and later urban development programs.

McNamara’s tenure ended as neoliberalism became the intellectual force behind pax americana. In the Bank, neoliberalism made its first appearance with the introduction of structural adjustment lending. It was the Black and Woods’ presidencies that established much of the Bank’s organisational and operational structure, but it was the McNamara reign that transformed the Bank from a reflection of pax americana to an institution that was a key force in establishing and reproducing that hegemony.

The Inaugural Meeting of Bank and Fund at Savannah

The Inaugural Meeting of Board of Governors of the IMF and World Bank took place from 8 March 1946, in Savannah, Georgia. Keynes, again leading the British delegation, was determined to ensure the organisations were both internationalist and expansionary. However, as noted in the previous chapter, the atmosphere in Washington had changed and US political views had shifted again, this time towards a preference for coercive tactics in pursuit of its national interests. The US delegation opposed Keynes’ lobbying to appoint White as the first managing director of the Fund. The delegation, led by the relatively conservative Fred Vinson, Secretary of the Treasury, wanted the Bretton Woods twins subject to relatively close (i.e. US) government control. Vinson did not have a good relationship with White and, one month prior to Savannah, had been given a FBI report by President Truman naming White as a probable Soviet spy.1 To block White, the US delegation persuasively argued it was necessary for the Bank to be headed by an American in order to gain the confidence of Wall Street and that it would be unseemly for an American to be head of both the Bank and Fund, therefore a European should be head of the Fund.2 This led to informal agreement that the US selects the head of the Bank and the Europeans the Fund. This agreement continues to this day.

To ensure the internationalism of the institutions, Keynes — having agreed at Bretton Woods that they be located in the US — wanted to see them in New York near to the UN rather than in Washington, where they would be more directly subject to pressures from the US Administration.3 Vinson stepped in again and had the US President instruct

1 Van Dormael, Bretton Woods, p. 287. In his doctoral dissertation utilising recently opened US and Soviet archival sources, Bruce Craig concluded that White was not a formal spy but did “…hold some special status within the hierarchy of Soviet intelligence,” Bruce Craig, "Treasonable Doubt: The Harry Dexter White Case, 1948-1953," (A thesis submitted for the degree Doctor of Philosophy: American University, Washington D.C., 1999). His clear commitments to US hegemony in the decision making of the Bretton Woods institutions confirms the view of Craig that White did “…not seek to harm U.S.

interests but sought only to advance Soviet/American cooperation… and thereby bolster the cause of world peace.” This contrasts to the frequent simplistic presentations of White as a communist traitor Craig, "Treasonable Doubt," p. iii.

2Block, The Origins of International Economic Disorder, pp. 74-75, Mason and Asher, World Bank since Bretton Woods, pp. 39-40.

3 Block, The Origins of International Economic Disorder. The British position, on this issues, was supported by the French and Indian delegations Mason and Asher, World Bank since Bretton Woods, p. 37. For a general discussion of Keynes’s view of the Savannah meeting see R.F. Harrod, The Life of John Maynard Keynes (London: Macmillan, 1966), pp. 629-640.

the delegation that no compromise on location was acceptable.4 As Gardner highlights, this “…decision was an important victory for the idea of close [US] national control of the Bretton Woods institutions. It was to have a profound effect on their future development.”5 With a view to insulation from the US Administration, Keynes wanted the executive directors to be part-time positions paid at medium levels. The US insisted on full-time executive directors with high salaries by contemporary international standards. Thus, the US view of close control by national governments prevailed at all levels, indeed, the decisions at Savannah strengthened US government control.6

The First Meeting of Executive Directors of the IMF and World Bank took place in Washington on 7 May 1946 but there was no president. The US had difficulty in finding a suitable candidate prepared to assume the role.7 They needed a person with high level experience, contacts and standing — preferably in the banking sector as the Bank would be reliant on finance markets (Wall Street in particular). However, the US finance industry was suspicious of international schemes, given the experience of the Great Depression, and indeed suspicious of the IBRD proposal. Only on 4 June, was Mr.

Eugene Meyer (previously editor and publisher of The Washington Post) elected as the first President. The Bank formally opened for business on 25 June 1946.8

Early Bank Operations: 1946 -1949

There was relatively little lending activity from 1946 to the end of 1948 and that which did occur was primarily for postwar reconstruction projects. The Bank started to develop a business-oriented, technocratic model for lending. This model had its origins in the Bank’s Purposes but was reinforced by new appointments to the Bank (mostly bankers and technical experts) and its difficulty in raising capital. These factors and the priority given to infrastructure projects shaped the Bank’s ‘character’ for over a decade.

4 Gardner, Sterling-Dollar Diplomacy, p. 258. See also Mason and Asher, World Bank since Bretton Woods, p. 37, Van Dormael, Bretton Woods, pp. 294-295.

5 Gardner, Sterling-Dollar Diplomacy, p. 259.

6 Block, The Origins of International Economic Disorder, p. 74 and Mason and Asher, World Bank since Bretton Woods, pp. 38-40. The Americans successfully cultivated votes on this issue and in the end, Keynes’s vote was the only one opposing the high salary levels, Van Dormael, Bretton Woods, p. 301.

7 Catherine Caufield, Masters of Illusion: The World Bank and the Poverty of Nations (London:

Macmillan, 1998), p. 50.

8 Oliver, Early Plans, pp. 1-2.

Without having raised capital or committed any loan funds, Meyer resigned as President

— he spent only six months in the job. His resignation is generally attributed to frustrations with the Bank structure, which gave the Executive Directors a large degree of formal control and the President, responsibility without authority.9 The US Administration had difficulties finding a replacement; John J. McCloy was asked twice and was only convinced to take up the position after he gained a commitment that the Executive Directors would interfere less with day-to-day operations.10 This was an important development as it pushed the Bank towards a hierarchical structure with strong central control by a single individual — a model that continues to this very day.

This structure also reinforced US influence over the Bank with an American President, selected by the current US administration and the Bank being close to the US both physically and politically.

McCloy started work in March 1947 bringing with him Robert L. Garner as Vice-President and Eugene R. Black as US Executive Director. These appointments started another tradition in the Bank — a preference for senior management with commercial backgrounds. McCloy was a Wall Street lawyer who, as was common at the time, had had administration experience as Assistant Secretary of War (1941-1945). Garner had been a banker and vice president of the General Foods Corporation. Black had been a vice president of the Chase National Bank of New York.11 It is not surprising that the

“…faith of the new trio in private investment as a panacea for the economic ills of the world was almost boundless.”12 Thus none of the senior management of the Bank had development backgrounds, yet another tradition that continues to this day. Not surprisingly, when the Bank was being established, this situation was the norm. As early Bank staff member, Davidson Sommers (Legal Department, later a vice president) explains:

…when the Bank started, people in the West didn’t know much about the developing world except as colonies. They didn’t know much

9 Mason and Asher, World Bank since Bretton Woods, p. 47.

10 Ibid, pp. 49-50, and Davidson Sommers, "An Institution Emerges," Finance & Development, Vol. 21, No. 2 (1984), p. 31.

11 Mason and Asher, World Bank since Bretton Woods, pp. 49-50.

12 Ibid, p. 51.

about development lending, didn’t know much about development economics.13

Another factor that shaped the Bank’s operations was the initial difficulty it had in raising capital. The Great Depression led to a high degree of suspicion amongst Americans about international bonds. Investors, big and small alike, had become involved in international speculation in bond markets often with limited knowledge of the countries they were investing in. They discovered, at significant cost, that many of the bonds were not worth the paper they were printed on. Nevertheless, at the end of the Second World War, the US was the only country with surplus funds to purchase bonds.

In fact, many individual US states still had bans on the sale of foreign bonds and some actually “…imposed new bans specifically aimed at the World Bank.”14 The difficulty in raising capital contributed to the Bank’s early cautiousness in offering loans and its close scrutiny of proposals to ensure they were sound, and appeared to be so to Wall Street investors.

In April 1947, the first of the Bank’s early reconstruction loans was finalised. The loan to France was followed by three further reconstruction loans to Western European countries — the Netherlands, Denmark and Luxembourg. However, the IBRD was no-where near large enough to meet Europe’s need for finance. Thus, when the Lend-Lease arrangements ended, Britain could only meet its foreign exchange requirements for a matter of weeks. The Anglo-American Loan of December 1945 was meant to solve its transition problems but when the British made sterling convertible in July 1947, as per the loan conditions, its reserves were quickly exhausted.15 Even before the sterling crisis, George Marshall, Secretary of the State Department, made a speech at Harvard University acknowledging the scale of the transition problem, which resulted in a massive US balance of payments support program for Europe between 1948 and 1952.16 By late 1948, the Bank had committed just $497 million in loans, whereas the Marshall

13 Cited in Kapur, Lewis and Webb, World Bank, pp. 82-83. Indeed economists at the time were simply not interested in the subject of development.

14 Caufield, Masters of Illusion, p. 50.

15 Scammell, International Economy since 1945, p. 29.

16 Ibid, pp. 31-32. It is interesting to note that the Treasury and State Departments in a way reversed their war time roles, Treasury was pushing for full implementation of the Anglo-American Loan conditions, while State took a broader view of the political and social situation in Europe and a softer line towards Britain.

Plan disbursed over $12.7 billion in three years.17 But the Marshall Plan was not just

“magnificent philanthropy” it was also “…the price to the United States of building a ring of containment to Soviet territorial ambition.”18 Equally, it was the price of building an economic sphere that was sympathetic to US needs, it was in a number of ways the price of hegemony.

Although the IBRD continued to lend to developed countries, reconstruction lending essentially ended with the loan to Luxembourg in August 1947. McCloy understood that once the Marshall Plan was operational, IBRD reconstruction aid would be redundant.19 As William Ascher points out, the Plan may have ended much of the flow of funds to Europe but it did not change the Bank’s underlying rationale of facilitating, predominately US, private capital investment to the world.20 Indeed, the growing Cold War gave a new urgency to that mission. It was now a question of where to focus loan funds and the search for a new target took some time. With its only loan during 1948, a development loan to Chile, the Bank started out in its new market — developing countries.21 In January 1949, President Truman’s famous four points speech not only underlined the growing Cold War threat, but gave legitimacy to the Bank’s focus on developing countries through its hastily added final point, which Gilbert Rist argues

“…inaugurated the ‘development age.’”22 It is worth quoting from the speech because not only was it part of the inspiration for the formation of the IDA,23 but the similarities with what was to become the Bank’s development model are striking.

Fourth, we must embark on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of the underdeveloped areas….

The United States is pre-eminent among nations in the development of industrial and scientific techniques. The material resources which we

17 Kapur, Lewis and Webb, World Bank, p. 71. Indeed the Bank’s total capitalisation was only $10 billion and paid in resources in hard currency only $20 million.

18 Scammell, International Economy since 1945, p. 31.

19 Kapur, Lewis and Webb, World Bank, p. 74.

20 William Ascher, "The World Bank and U.S. Control," in Margaret P. Karns and Karen A. Mingst (eds.), The United States and Multilateral Institutions (Boston: Unwin Hyman, 1990), p. 117.

21 Mason and Asher, World Bank since Bretton Woods, p. 53.

22 Gilbert Rist, The History of Development: From Western Origins to Global Faith Trans. Patrick Camiller (London and New York: Zed Books, 1997), p. 71, emphasis in original.

23 Peet, Unholy Trinity, p. 116.

can afford to use for assistance of other peoples is limited. But our imponderable resources in technical knowledge are constantly growing and are inexhaustible.

I believe that we should make available to peace-loving peoples the benefits of our store of technical knowledge…

And, in cooperation with other nations, we should foster capital investment in areas needing development.

The old imperialism – exploitation for foreign profit – has no place in our plans. What we envisage is a program of development based on the concepts of democratic fair trading.24

The Bank itself commenced research to determine what its “productive purposes” were and which types of key investments would not receive financing from private sources as stipulated in the Articles of Agreement. In contrast to the Bretton Woods agreements, which were largely composed by technical experts, the Bank’s purposes were developed by practitioners resulting in a more pragmatically informed approach. The Bank’s senior managers considered that light manufacturing and export industries in developing countries should be funded from private sources, so they were excluded from consideration. Further, McCloy, Garner and Black were ideologically opposed to investment in state-run enterprises, other than utilities. The consensus that dominated Bank lending for over a decade was reached fairly quickly, namely that public utilities, especially electricity, transport and communications were the key prerequisites for achieving economic growth via private investment.25 Despite being designed by practitioners, the impact of the ‘Keynesian, welfare, modernisation consensus’ remained visible, though the disappearance of the welfare component — the most controversial element for business internationalists was simply dropped.26 So, the consensus extended

24 Cited in Rist, The History of Development, p. 71, emphasis added.

25 Mason and Asher, World Bank since Bretton Woods, pp. 150-151. See also Mason and Asher, World Bank since Bretton Woods, pp. 458-461. The focus on financing of certain types of public utilities stimulated Bank theorising on the role of infrastructure in economic growth and the Bank became a leading proponent of infrastructure as essential precondition for development.

26 Keynes focus on aggregate output was transferred into development economics through the Harrod-Domar model, which later led critics to (probably incorrectly) suggest that Keynes was overly focused the fixed investment component of aggregate output, John Toye, Dilemmas of Development (Oxford:

to avoiding public investment in welfare-related areas such as sanitation, education, and health care as their contribution to economic growth was “…less measurable and direct than that of power plants.”27 In determining which public utilities to fund, Urquidi, an early Bank staffer, notes the “…Bank's ‘bottom line’ in judging a project was the ‘times earned column’ on a spreadsheet…”28 This is a clear example of the privileged status of newly available economic data and national accounting. However, it is equally important to note that the Bank’s public focus on individual projects could be misleading — it was just as interested in a lender’s overall creditworthiness and thus in its overall economic policy priorities and settings.29

By 1949, Bank assessment of loans had turned into a program that involved the Bank essentially managing the development of loans proposals and providing technical assistance to that end. Here is the Keynesian, modernisation model’s emphasis on (Western) ‘experts.’ The Bank’s assessments covered development, assessment and supervision of projects and the planning and management of economies utilising data on monetary, fiscal and balance of payments positions to determine policy. The model of the ‘fly-in, fly-out’ Western expert became the norm. The economist, Albert Hirschman, described how, to assist planning in Columbia, the Bank expected him to formulate within a few weeks:

…some ambitious economic development plan that would spell out investment, domestic savings, growth and foreign aid targets for the Columbian economy over the next few years. All of this was alleged to be quite simple for experts mastering the new programming techniques: apparently there now existed adequate knowledge, even without close study of local surroundings, of the likely range of savings and capital-output ratios, and those estimates, joined to the country’s latest national income and balance of payments accounts, would yield all the figures needed…30

Blackwell Publishers, 1993), p. 50. Nevertheless, many subsequent Keynesians were focused on physical capital formation.

27 Mason and Asher, World Bank since Bretton Woods, p. 151.

28 Urquidi, "Reconstruction Vs Development," p. 48.

29 Kapur, Lewis and Webb, World Bank, p. 125.

30 Cited in Bruce Rich, Mortgaging the Earth: The World Bank, Environmental Impoverishment, and the Crisis of Development (Boston: Beacon Press, 1994), p. 74.

This level of confidence in both the newly available economic data and the methods of econometric analysis are quite remarkable. Although data on government revenue and expenditure and on national trade had been collected for a long time and attempts to estimate national income were made in the 1860s, it was not until the Second World War that the first attempts were made in the West to produce reliable national accounts.31 The quality of data collection in many developing countries was questionable to say the least and the decisions about the composition of national accounts impacted on economists’ understanding of the situation in these countries. In particular, the decision not to include household production in national accounts discounted its importance in the economy and its role in balancing activity during economic downturns.32 It particularly skews comparisons against economies with significant peasant or subsistence economies. The new programming models in which the Bank expressed so much faith were also in their early stages of construction and tended to (and still do) stress parsimony.33 This faith in numbers remains a feature of the Bank’s lending and analytical activities.

Along with providing experts, the Bank assisted developing countries to build local autonomous planning agencies.34 Staff in such agencies were trained by the Bank and had close intellectual relationships with Bank staff. They were often central to organising and managing Bank-funded projects but more importantly, promoted Bank favoured macro- and micro-economic policies and influenced components of domestic historic blocs.

31 Alec Cairncross, "The Development of Economic Statistics as an Influence on Theory and Policy," in Duncan Ironmonger, J.O.N. Perkins and Tran Van Hoa (eds.), National Income and Economic Progress:

Essays in Honour of Colin Clark (London: Macmillan Press, 1988), pp. 17-19. Keynes oversaw the first attempts in Britain at producing national accounts, Duncan Ironmonger, "Statistical Perspectives and Economic Stability," in Duncan Ironmonger, J.O.N. Perkins and Tran Van Hoa (eds.), National Income and Economic Progress: Essays in Honour of Colin Clark (London: Macmillan Press, 1988), p. 39.

32 Ibid, pp. 41-42. Further, national accounts do not include illegal activities or leisure as productive activities yet they do include the military, the police and private security services. The dominance of neoclassical economics led to the “…classical distinction between production and non-production activities [being] displaced by the notion that all socially necessary activities, other than personal consumption, resulted in a product.” Anwar M Shaikh and E. Ahmet Tonak, Measuring the Wealth of Nations: The Political Economy of National Accounts (Cambridge: Cambridge University Press, 1994), pp. 2-3.

33 Marcel Boumans, How Economists Model the World into Numbers (London and New York: Routledge, 2005), p. 180. Boumans concluded that economists, “…after a century of mathematical modelling, now prefer very simple mechanisms with the faith that they will be calibrated in the future.”

34 Rich, Mortgaging the Earth, p. 75. On Bank missions and national development agencies in Columbia see Caufield, Masters of Illusion, pp. 58-61.