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The- Evolving Role of the World Bank

The First Half CenturyAn Overtvew

K Sarwar Lateef

The orld BankWashmgon, DC

The World Bank Group

The World Bank Group is a family of multilateral development institutions owned by and accountable tomere -ar goverments. These governments exerise their ownership functi thugh Boards of Governors onwhich eadh menber country is represente individually. All the powers vested in the Board of Governors,with a few exceptions, have been delegated to Boards of Executive Directors, who are appointed or elected bymember governments. The President of the Bank Group is appointed by the Executive Directrs.

The World Bank Group today mcludes five international organizations:

The International Bank for Reconstmction and Development (IBRD), the original institution in the group,opened its doors forbusiness in 1946; Today, it is the largest source of market-bsed loans to developing coun-tries and is a major catalyst of similar financng fromother sources. It lends to governments or to public or pri-vate entities with govenment guarantees. It is funded mainly through borrowigs on the intemational capital

iarkets.

The International Funance Corporation (IFC) was established in 1956 to support private enterprise in thedevelopig world though the provision and mobilization of loan and equity financmg and through its advi-sory activities relating to, among other things, capital market development and privatization. IFC is also amajor catalyst of both local and foeign pnrvate ivestment Its lendig and equty ivestnt activities arebased on the pnnciple of taing market nsk along with private investos. Under the terms of its Artces ofAgreemt it cannot acpt govement guarante

The International Development Association (IDA) was created in 1960 to provide finance on concessionalerns to low-inmcome countres that lack creditworthiness for IBRD borrowing IDA is primariy funded firo

grants it receives from donors in periodic replenihme.

The Interational Centre for Settlement of Investment Disputes (ICSID) was added to the World Bank famaiyin 1966 to provide concliabon and arbitration services for disputes between foreign mvestors and host gov-ernments that arise directly out of an inestment.

The Multlateral Iwestment GuaranteeAgency (MIGA) was created in 1988 to provide noncommercial invest-ment risk inswance and tecmical services that help promote inves,tent flows. It also disseminates infora-lion on investment opportudits.

As is now common practice, the "World Bank" or simply the 'Bank" are used ibly to mean bothIBRD and IDA. The "World Bank Goup" res to IBRD, IDA, IFC, ICSID, and MIGA.

-1

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Foreword

The world has changed dramatically over the last five decades and so has the World Bank.

The Fiftieth Anniversary of the World Bank has provided us with an opportunity to reflect

on and learn from the Bank's experience and tO apply the lessons to the Bank's future

agenda.

This series of essays is devoted to improving understanding of the evolving role of the

'World Bank. Each essay analyzes the Bank's approach to the major development chaUenges

its borrowing countries have faced, starting with the reconstruction and development needs

of Europe and Japan in the 1940s and 1950s and ending with the transition of Central and

Eastern Europe and the former Soviet Union- One essay examines the evolution of the

Bank's relations with the world's capital markets as it mobilizes private savings for develop-

ment. An overview paper provides a picture of the fifty-year period as a whole.

The story that emerges is one of an evolving and learning institution that has built on its

successes and its mistakes. The Bank has responded with vigor and energy to the challenges

confronting its borrowers. In this process, it has made a significant contribution to the

impressive developmental gains recorded in these past fifty years. In responding to those

challenges, the Bank itself has changed, learning from its experiences, deepening its under-

standing of the development process, and recasting its analytical and financial support to

help its borrowers better

The Bank will continue to nurture its tradition of self-evaluation and learning These essays

will I hope, contribute to a better-informed debate on the Bank's future role. They comple-

ment the recently issued paper, The World Bank Group-Learning from the Past, Embracing

the Future, which sets out the future directions for the Bank Group-

Armeane MA Choksi

Vice President, Human Resources Development and Operations Policy, and

Chairman of the Bank Group Committee on the 50th Anniversary

The First Half CenturyAn Overview

K SarwarLateef

'With the hardships of the Greit Depression and war years still afresh memory, few people would have predicted in 1944 that thenext fifty years would witness the most rapid growth in living FewL people would bauestandards the world had ever known. Certainly not many of the pricted in 1944 that thedelegates from forty-four nations who gathered at a conference in ne fifty yean wouldBretton Woods, New Hampshire, were thinking of such a future, witnIess the most rapidThey were there to reform a global economic system that had .growt in living standadsfailed miserably during the Depression and, through a process of the world had ever knownintergovernmental cooperation, to lay the foundation for a newera of growth with stability. To oversee the birth of this new eco-nomic order, the conference estabLished the International Bank forReconstrction and Development (IBRD) and the InternationalMonetary Fund (IM. Parallel negotiations in Havana were coor-dinating the establishment of an International Trade Organizationto complement the Bretton Woods institutions. The trade organi-zation never came to fruition, though it survived in truncatedform as the General Agreement on Tariffs and Trade (the GATD.

This overview presents the highlights of a series of seven essays onthe evolving role of the World Bank and the economic and socialperformance of developing countries. It examines the challengesthe Bank has faced in its first half century and how they have

-1

The Evolving Role of the World Bank

reshaped the institution, * Average life expectancytransforming it from an increased by six months eachorganization established mainly year.to address postwar reconstruc-non needs into the world's * Infant mortality rates felllargest development agency, from 169 to 69 per 1,000 livefocusing on sustainable poverty births.reduction and growth.

Food production increasedEconomic and Social Gains 240 percent, much faster thansince 1944 population growth-

The past fifty years have * The proportion of peopleseen dramatic, unprecedented chronically undernourished fellgains for developing countries. from 36 percent to 20 percent.Some poor economies-HongKong, Singapore, and Taiwan * Adult literacy rose from(China)-have become richer 46 percent Cm 1970) tothan some former colonial 69 percent.powers, such as Portugal andSpain. Per capita income, * The share of households witha-fter growing by a plodding access to safe water more than0.5 percent a year in Asia and doubled, to 70 percent-

The past fifty years Latin America in 1913-50,have seen dramatic, shot up to 3.3 percent a year While poor data cloud theunprecedentedgains for *during 1950-73 and 3 percent trends in povert, evidencedeveloping countries in 1973-89.' Only in Africa has suggests that "there has been

progress come in fits and starts, considerable progress in reduc-with many setbacks. ing the incidence of poverty, a

more modest reduction in theSocial indicators have number of poor, and theimproved greatly in developing achievement of somewhatcountmes, particularly in the better living scandards forpast thirty years, while poverty those who have remained inhas declined (most dramatically povertY.I The most dramaticin East Asia). Between 1960 gains have come in East Asia.and 1990: Even as the region's population

2

The First Half Century: An Overview

grew by 425 million, the The reasons for the post-warnumber of absolute poor fell miracle are numerous andfrom an estimated 400 million varied-expanded inter- . Wthout the impressivein 1970 to between 170 and national flows of capital, overall economic180 million in 1990.] Progress goods, services and technology I. performance, hundredswas more modest but still development of efficient of millions more peopleimpressive in South Asia, institutions and human would have slipped intowhere the bulk of the world's resources; harnessing of ipoerty in the developingpoor live. Only in Sub-Saharan entrepreneurship, from smallAfrica did poverty continue to farmers to large industry,spread as the number of poor higher social speriding; betterincreased. What is clear, how- infrastructure; and moreever, is that without the investment. In some countriesimpressive overall economic in the 1990s these trends haveperformance, hundreds of mil- greatly accelerated, and devel-lions more people would have oping countries have become aslipped into poverty in the major source of growth in thedeveloping world. world economy. The World

rigure 1

People's lives have improved dramatically indeveloping countries

200

160

120 -

4040

1950- 1992 195D- 1992 1960 19911955 1955

Source: Wodd Bank Group and United Nations data

3

The Evolving Role of the World Bank

Bank was one of many some. Per capita incomeinstitutions trying to promote accelerated from 2.6 percent athese trends, but the lion's year in 1973-80 to 3.4 percentshare of credit goes to the in 1981-93 (for GDP weightedcountries themselves. by population).' Improved per-

formance in China and IndiaProgress has not been (each more populous thanunbroken or universal, Sub-Saharan Africa and Latinhowever. Since 1980, per America combined) and rapidcapita incomes have stagnated growth in East Aia generallyor declined in Latin America more than offset setbacks

- and Africa. Development, it elsewhere (see Table 1).became clear, was not a one-way streee For many countries But even with all the progressin those regions, the 1980s in the past fifty years, morewere a lost decade. But for than 1 billion people still livedeveloping countres as a on one dollar a day or less, andwhole, progress continued even many lack access to safe drink--during tht bleak period for ing water, schools, and health

Table 1 Population-weighted growth of devdoping countris' real GDPper capita, 1965-93

Progress bas not been (i n 196673 1974-0 1981-93

unbroken or universal,h5owever Developing countriet 3.5 2.6 3A

East Asia 5.4 4.0 6.9China 5.9 3.9 8.1

SouthAsia 0.9 1.6 239India 1.1 1.5 3.0

*Middle East andNorth Africa 33 2.8 -0.7

Sub-Saharan Africa 1.7 0.2 -1.2Larin America and

the Caribbean 4.3 25 0.0

a. Excluding Eastern Europe and the former Sovriet Union.Source: World Bank.

4

Th)e FiTrst Half Century: An Overvkw

clinics. Environmental degrmda- was established in 1966 totion thretens the sustainabilityr prorvide conciliation andof development in many areas. arbitration services to foreignGender bias and urban bias investors and host countries,remain serious problems. Much and the Multilateral Investent has been achieved. Much Guarantee Agency (MIGA) wasremains to be done. founded in 1988 to provide

noncoxmmrcial investment riskThe Rolee of the Bank insumance to foreign inet Th WaldBnkumb

inens.TbWorlBank hAd Iof the WM~iCion that theThe world has changed tremen- become the World Bank Group t: x diae of depres-dously over the past fifty.years, (see Box on page ii). But sion and global u.nr cousddand so has the Bank--in its throughour thids period Ofavtethohmembership, ognizarional change the Bank's two structure, the size Of its principal roles remained theoperations and' it development same: to mobilize financial

ag Id. rom 38 member in resources from private savings1946 to 177 members today, and public sources and on-lendthe Bank has expanded to near- them for development and touniversa[ membership. New help client countries address

afiitswere established to the "what" and-the "how" ofcomplement the Banks work development. The Bank asand to address its niew responds selectively to share-priorities. In 1956 the holder requests for regional

IntenatinalFmance and global development initia-Corporation was formed to tives (see Figur 2).promote the private sector inmember countrics, and in 1960 The linancia Rolethe lnterational DevelopmentAssociation (IDA) was estab- The World Bank was born oflihed to address the needs of the conviction-strongly heldthe poorest maember countries, by those asembled at BrettonAs foreign direct investment Woods--that the twin disaser

flows increasd in size and ofdpesinadgobad Warimportance, the International could be avertd throughCenitre for Settlement of international cooperation forInvestment Disputes (ICSID) mutual benefit, open trade, and

5

The Evolving Role of the World Bank

full participation in the world intermediaries established toeconomy by all nations. The facilitate these flows.

i confercnce delegates knew asw well that open trade and full THE ROLE OF T1HE INTrNATIONAL

participation required healthy, BANK POR REcoNsTRucrION ANDfunctioning economies, DEVELOPMENC Named formallrecovered from the ravages of the International Bank forwar and capable of providing a Reconstruction anddecent standard of living for Development (IBRD), theall. It was clear then (as it is institution soon came to betoday) that domestic savings known simply as the Worldand investment could not do Bank. Yet it is not a bank in

The World Bank was I the job alone. For most cf the any conventional sense. Theestablished to facilitate world's developing economies, IBRD accepts no deposits; hasforeign financial flows- foreign financial flows-both only governments as share-both privete and officiaL .private and official-would holders; lend-, to members

also be required. The World with limited access to capitaIlBank was one of the financial markets, rather than to its

Fig= 2

World Bank Group membershipNumber of countres (in June 1994)

180IBRD: 177

1 40 ~IDA: 155

1 00 _ *

IFC 16180MIGG----: 1140

1946 1952 1958 1964 1970 1976 1982 1988 1994

IIBRD IDA IFC MIGA

6

The First Half Century: An Overview

richest, most creditworthy intermediation. It borrows inmembers; and limits its lending capital markets at fixed rates(by charter) to the value of its (for maturities of thirty years The IBRD was structuredequity and callable capital-a and more) only a few hun- to rely on private100 percent adequacy ratio dredths of one percent higher resources to fund itsagainst a normal banking ratio than those paid by its largest operahiou and toof 8 percent. government shareholders forome

their own borrowings. It passes I f pn

The IBRI) was structured to this finance on to its members investment'rely on private resources to with a spread of 0.50 percentfund its operations, and to or less, from which it covers"promote private foreign administrative expenses andinvestment.3 Indeed, the IBRD generates a profit. Such longhas many of the characteristics maturities and low interestof a private sector institution. It rates are available nowhere elseis organized as a stock corpora- to the IBRD's developing coun- Ition, with voting rights propor- try mremnbers-not even to thetional to equity investment. It most creditworthy. Such termsfinances itself in private capital represent a savings to develop-markets, through medium- and ing countries of at least $3 bil-long-term bond issues on lion a year (on loans outstand-commercial terms,5 applying ir.g of more than $100 billion).conservative financial policies The IBRD has achieved all thisthat have eamed and preserved at a total cost to its sharehold-a triple-A bond rating.' It insists ers of $10.7 billion in paid-inon disciplined lending, charges capital.market-based rates of interest,and demands promnpt payments THE RoLE OF THE INTERNATIONAL

of interest and principal. It has DEvELOPMTENr ASSOCIATnON. Theconsistently earned a profit Bank's concessional arm, the(over $1 billion in fiscal 1994), International Developmentwhich its shareholders reinvest Association (IDA), is also aor direct to causes appropriate financial intermediary. It is-to its mission. funded by grants from richer

member countries, which it on- .The IBRD has been remarkably lends to the poorest and leasteffective in its financial creditworthy members. IDA

7

The Evolving Role of the World Bank

funds are replenished every and hard lending areas andthree years. The tenth and most eases a country's transitionrecent IDA replenishment of from one to the other as coun-$18 billion covers the period try circumstances change. Thebeginning July 1993. At this arrangement also ensures thatlevel of funding (some $6.5 bil- IDA-financed projects are sub-

over-arching objective of lion annually), IDA accounts ject to the same rigorous stan-IDA for about 12 percent of all dards as IBRD-financed pro-

concessional assistance world- jects. The criteria for the alloca-wide. These replenishments are tion of IDA funds are agreedsupplemented by IDA reflows afresh in each replenishment.(repayments) and transfers to Current criteria focus on theIDA from IBRD's profits. IDA strength of a country's effortsloans are interest free (they are to reduce poverty in an envi-caled credits) but carry a ser- ronmentally sustinable mannervice charge of 0.75 percent a and on its per capita income.year. Until the mid-1980s these There are guidelines on theloans were repayable over fifty amount of IDA resources thatyears with a ten-year grace peri- are made available to Sub-od before payments had to Saharan Africa (45-50 percent)start Recently, the maturity and to blend countries-i.e.period was lowered to forty, countries that are IDA-eligibleyears for the poorest countries but also borrow from IBRD-and thirty-five years for others. (3D-35 percent).

IDAs membership and sub- The IDA replenishment processscriptions (and hence its voting also provides a fornu for therights) differ from the IBRD's. IDA donor countnes to agreeBut instead of creating a new on the general uses of thebureaucracy, the Bank's share- resources provided. The con-holders decided that the Bank sensus that poverty reducton iswould carry out IDA's work, the over-arching objective ofreceiving a management fee in IDA has been translated into ancompensation. There is no sep- increased operational focus onarate IDA staff, an arrangement poverty reduction. In thethat promotes the best possible 1990s, IDA has increased lend-coordination between the soft ing for basic human resource

8

The First Half Century: An Overview

development and social flows in others. IBRD and IDAservices, while emphasizing the lending has been relativelyimportance of country polidies stable in real terms over thein encouraging broad-based past several years, with totalgrowth that increases the commitments currently runningproductivity and incomes of at about $21 billion.the poor.

-To help ensure that loan fundsMOBuzG OssOuRaCs FROM are put to proper use, the Bankmzurnn SOURS. Through fiscal lays down conditions with its1994 the Bank had lent over loans. Though these conditions$330 billion for some 6,000 are widely perceived as effortsoperations, of which IBRD to correct government failure,accounted for some $250 bil- they are as often designed tolon and IDA the rest The correct market failures andlargest growth in lending took imperfections. Because marketsplace in the 1970s and the first do not address income distribu-half of the 1980s. Since then tion or ensure that the poorIBRD lending has leveled off, receive basic services, the Bankreflecting poor policy environ- also sees an important role forments in some cases and improved governance. It seeksincreased availability of private to strengthen both markes and

_ gure- rn the 1990s, IDA has

IBRD and IDA loan commitments, FY 1960-94 increaed knding forBillions of US dolars -

* ,~~~~~~~~~bsc human 7;aouer;e -

20 development and social

1 5 --- --- - _ . ~~~~~SeMVIC"15 - ~~~IBRD t

10

5

O'.~~~~~~~~~~~D

1962 1966 1970 1974 1978 1982 1986 1990 1994

9

The Evolving Role of the World Bank

govemments in the areas that fragmentary concepts of projectare most appropriate for each. appraisal (to make sure the

schemes it financed would beThe Bank addresses market profitable enough to generateimperfections in global capital returns to repay the loan);markets and in domestic competitive procurementmarkets of developing procedures (to ensure the low-countries. Through its interme- est project costs); the monitor-diation function the Bank ing of the end-use of funds (tomakes funds available to ensure that the money was notcountries on terms to which diverted); loan supervision (tomost countries would see that the project progressedotherwise never have access, as envisaged and to make mid-thereby addressing global course corrections if necessary);market imperfections. The and, beginning in the 1970s,imperfections affecting evaluation after a project wasdeveloping country markets are completed (to see how well itas different as the countries worked and to learn lessons forthemselves. Impediments future lending). All theseThe Bank mnakes &nds include everything from elements improved the quality

avaiable to countries on inadequate roads, telecommu- of lending, strengthened theterms to whicb most nications, crcdit agencies, chances of success, and built upcountries would otherwise electncity, and agriculural the expertise of borrowingnever have access extension services to under- institutions in developing

developed human resources. countries.

Before World War II credit- In addition to its own resourcesworthiness alone determined a the Bank helps catalyzecountrys access to market resources from other sources:lending. For enterprise loans, official bilateral and multi-banks did some rudimentary lateral mistituons, regionalproject appraisal, but they development banks, non-relied mainly on collateral and governmental aid agencies,credit standing to ensure official export credit agencies,repayment. The World Bank and the private sector. Roughly,devised a new lending pam- for every dollar the Bank putsdigm by welding together the in, it mobilizes an additional

10

The First Half Century: An Overuiew

dollar from such "cofinancing." policies, and institutionalThrough more active use of context that determines a coun-Bank guarantees, greater efforts try's economic performance.are being made to attract This dialogue is informed byprivate-sector cofinancing, regular and thorough analysis The Bank takes advantagewhich helps borrowers gain of economic and sectoral issues of its wealth of experienceaccess to syndicated commer- that is undertaken in close col- t.. . . . ..... . ~~~~~~~~to help its memberscial bank loans and internation- laboration with borrowers.al capital markets. These direct Frequently, it is the Bank's "m"'u theirpolwws,cofinancing efforts are supple- contribution to shaping its cJ an exPertsemented by aid-coordination borrowers' policies, rather thangroups for selected countries. the financing it provides, thatThe Bank currently chairs some has the stronger impact on theforty consultative groups aimed country's overall performanceat coordinating donor response over the long term. Bankto country needs. endorsement of borrower poli-

cies also catalyses other fiundingThe Advisory Role for that country and thus plays

an important role in supportingIn addition to lending and the country's developmentcofinancing, the Bank takes objectves. Examples of howaclvantage of its wealth of well this process works rangeexperience to help its members from Japan in the 1950s andimprove their policies, ideas, Korea in the 1960s to China,and expertise. Over time this Ghana, and Indonesia in therole has increased in impor- 1980s and Argentina, Mexico,tance relative to the financing and Poland in the 1990s.role. It takes four forms:

The Bank promotes the useTIhe Bank engages in inten- of best praaices in project

sive policy dialogue with all its preparation, technology choice,borrowers on policies that organizational structure, pro-influence the outcome of curement practices, monitor-investments it finances and on ing, and supervision. This helpsthe overall macroeconomic update and transfer the bestenvironment, incentve available expertise in a continu-structure, public expenditure ing stream to recipients.

11

The Evolving Role of the World Bank

*To upgrade skills and to A Regional and Global Rolecreate new institutions orstrengthen existing ones, the In addition to its principalBank has lent extensively for financial and advisory roles, thetechnical assistance, trainin& Bank has addressed specificand institution building. The problems of regional or world-Economic Development wide import. These endeavorsInstitute (EDI) of the Bank include the conquest of riverwas established in 1956 to blindness in West Africa, the-train developing country amassing and dissemination ofpersonnel, who then become information on agriculturaltrainers and institution technologies through thebuilders at home. EDI now Consultative Group forruns about 150 courses annu- International Agriculturalally for 4,400 partcipants. Research, and the funding of

environmental projects of glob-As a development practition- at importance through the

er the Bank has a rich body of Global Environment FacilitrAs new challenges to . experience about what works (see Box 1).

inablegrowth ad in development, which itcontinually refines through The Evolution of the Bankthe equcttabke dfstikin teheeic Publications, and

Of the bene*s of groztut -of tebnneio. gDrawing on its own As new challenges to sustin-emerged ouer the past fifty cross-country experience of able growth and the equitableyears, the Bank adjusted fifty years in development and distribution of the benefits ofits strategies the analytical skills of its stafE, growth emerged over the past

I seasoned by operational fifty years, the Bank adjusted itsexperience in the field, the strategies to respond to thoseBank produces a formidable challenges. The Bank began asresearch output. Its many a financier of post-war recon-publications have elucidated struction in Europe in thethe lessons of development- 1940s; shifted to conservativewhat works and what does lending for what were consid-not. Its World Development ered "bankable" projects in theReport is perhaps the most early 1950s; became a full-widely read annual economic blown development agency inreport. the 1960s, broadening its

12

The First Half Century: An Overuiew

Box 1 Beyond National Frontiers

While most of the Bank's work is specific to the countries to which it lends, some of its endeavors spancountries and cven continents.

Rivcr Blindness. One of the Banlks most succssful partnerships with other institutions and govern-ments has been in the conquest of river blindness (onchocrciasis) in est Afica. Tliis parasitic diseasecaused by the bite of blackflies that breed in rivers, causes severe rashes, ey lesions, and ultimatelyblindnes In the mid-1980s it was estimated that 8S million people (mostly in West Africa but also inthe Middle East and Latin America) were exposed to river blindness, of whom 17.7 milion were infect-ed and 340,000 blinded. In collaboration with other development agencies, the Bank helped to planand finance an eradication strategy. The program devised mechanisms for detecting breeding grounds ofblacfies and destroying them. Six types of pesticide were used in rottion to prevent resistance fromdeveloping in insects and to minimize pollution risks. The program has been so successful that rverblindness has virtually disappeared from West Africa.

Agricultural Research. The Green Revolution was made possible by new varieties of wheat and ricedeveloped at the Intemational Center for Mae and Wheat improvemcnt (CIMMYI) in Mexico andthe Intemnaional Rice Research Institute. To hdp sustan and spread the Green Revolution the worldover, the Bank took the lkad in organizing the Consulative Group for International AgriculturalRaearch, a multidonor group that supports sixteen international agricultural research centers inaddition to the two pioneering ones. Since 1971 the CGLAR has mobilizrd over $1 billion for researchand helped millions of furmers increase their yields. It has been the mest imporant single developer ofagricltural technologies in the tropics.

Environmcntal Activities. The Global Envirnment Facility CGEF), a partnership between the Bank, theUnited Nations Development Programme, and the United Nation Environment Programme, is fundedby industrial counties in three-year tranches. It provides grants and concessional loans for environmen-tal projects of global importace. The GEF focuses on four global problemsr the greenhouse effect,biodiversity, ozone depletion, and pollution of intnational waters. The Bank is the GEFs excutingagencyq The grants cover the difference between the cost of the global projects and other projec thatthe implementing country might have taken up in the absence of global concerns. A council with six-teen developing countries, fourteen industial countries, and two countries in economic transitionchooses projects to be financed. The GEF commited around $400 million for more than 100 projectsin the pilot phase 1991-94, and its coffers have now been replenished by $2 billion for the nextthree yearsm

13

The Evolving Role of the World Bank

sectoral coverage to the "soft" held sway, joined in the 1970ssectors and lending to poor by a growing awareztess of thecountries on concessional terms need for agricultural develop-through a soft-loan affiliate; ment and for a sharing of thefocused on improving living gains of development with theconditions for the poor in the poor. The often misguided1970s; shifted its attention to state-led investment boom ofpolicy reforms to improve the the 1960s and 1970s cameprospects for development in home to roost as the debt crisisthe 198 Os; and recognizing the of the 1980s. Attention shiftedrange and depth of its activities, from the volume of investmentand drawing on the lessons it to the quality of policies andhad learned from its pasr expe- the need for reforms. Thenence, it embraced in the impact on the poor both of the1990s a broad-based develop- failure to reform as well as of-ment strategy aimed at helping the reforms themselvescountries reduce poverty and refocused attention on issues ofincrease living standards, by povery. Coming in with thecombining attention to sound 1990s was a sharp increase ineconomic policiesi, human private capital flows, recoveryresources development, and of growth in Lainn America andenvironmental sustaicability. parts of Africa, and the emer-

gence of new political andThe Banl's evolution was influ- economic regimes in Eastern

The evolution in the enced by new challenges such Earope and the former SovietBanes thiking reflected as ti Indian food crisis of the Union.irs ozun ensperience -nd . 196&s and the debt crisis of thethat of others and the 198 Os and by changes in global Development thinldng the

economic trends. The 1950s world over was undergoingint rovedunderstanding of were a time of generally strong transformation. The evolution

growth and high commodity in the Banlks thinking reflectedsuccessful economic prices, and capital investment its own experience and that ofdevelopment (especially in infrastructure) others and the improved under-

was seen as the prime mover of standing over time of what con-development In the 1960s and tributes to successful economic1970s state-led development development The Bank, neverand import-substitution policies isolated from the currents of

14

The First Half Centrny: An Overview

the time, made the same mis- kets; from state-led industrial-takes as its borrowers and other ization to the fostering ofdevelopment agencies. Above dynamic private enterprise; andi The Bank's emphasisall, it was influenced strongly from the exploitation of natunal shifted from individualby its borrowers, both through resources to ensuring sustain- projects to the policies,their successes and their fail- able development (see Box 2). ar=ties and insttsures. The borrowers influenced that help projects succeedwhat the Bank did by making This evolution of the Bank isnew demands on it and by described below, in six phases.challenging it to respond, con- Each new phase heavilystantly expanding its horizons, overlapped the phase that

preceded it. The categorizationIn this continuous process of is intended to highlightlearning, the Bani's emphasis emphases rather than exclusiveshifted over time from individ- preoccupations. Though theual projects to the policies, Bank today is unrizablystrategies, and institutons that diff-erent from the Bank of thehelp projects succeed. The 1950s, there are important con-changes in perspective were cinukies that have providedboth large and small: from an strength to the institutionemnphasis on the volume of during this constant processinvestment to the productivity of change (see Figure 4).Of investment; from physicalcapital to human capital; from A Reconstruction Bank:infrastucture and industry to 1947-48developing poor rural areas;from a belief that the benefits Bretton Woods conferenceof economic growth would partiapans were concernedtrickle down to the poor to an foremost with post-warappreciation that reducing reconstruction, but they alsopoverty awso requires ext=a saw the need for long-termmeasures directed to the poor; development of poorer coun-from- a top-down to a bottm- tries 7 The Bans first loan, forup approach to projects that reconstrmction, was to Franceemphasize beneficiary partici- in 1947 for $250 milion,pation, client-orientation, and which in real terms remains thepreferences determined by mar- Banlks largest single loan

15

The Evolving Role of the World Bank

Box 2 How Sectoral Polices Evolved

As significant as the major shifts in the Bankes strategy over the past fifty years has been the evolution of its lendingpolicies in different sectors. Consider three examples.

Agricunre. Most Bank lending in the 1950s went to big irgaton schemes, in keeping with the prvailing emphaison infratructure. Some loans were made in the early 1960s for planation crops that looked commercially attractive.Then came [ndia's food crsis, which focused attention on the need to inprove foodgrain productivity and introducenew technologies. So the Bank began lnding for agicltural research and extnon, riral credit, madret develop-ment, and the production of high-yielding seeds and fertilze In the 1970s, as the Bank tured its cnergies toalleviating povcrty, activities emphasized itegrated rural development programs-the bulk of the poor livc in ruralareas-directing services and inputs to smaller fmers and agriculura processors, and finanig rural socialservices. Howeve, by the 1980s it was apparent tat faulty policies distorted incentives for firmer and seriouslyaffected production in many coutries. So the Bank shifted to sectoral adjustment loans that financed agriculturalpolicy reforms.

In the 1990s greater atention is bing paid t the environmcntl problems arising frm earer agicultra develop-ment-waterxogging, sanized sois, excessive use of pestics, warer shortages caused by subsidized supplies, andthe sodal problems arsig from the displacement of people by large dams. The Bank is also directing rural sericesand extension to women, who m many countries (especially in Afica) manage most crops. From its inception theBankls overarching aim has been to raise productvity and incomes, and that goal has nor changed But: Bank-supported agrculural projects in the 1990s differ radically from tiose in the 1960s, when dtere was little concrnfor policy frameworks, poverty alleviation, cnvironmentl proteion, gender bkis, or the privatizatioc of inputsand service.

Education. Reconizing the criical linkage between the development of hnuan resources and economicdedopment, the Bank began leding for educaton in l963 Ina that decad, the Banis support for educationfIKused on the construction and equipping of physial ficlties and on prodcing higlevd sIdils to meet manpowerrequiremens. Over the years, the caly emphasis on "bricks and morra and othcr education "hardwareh has givenway to increased supporr for tacher mining curiculum development, materials provision nd the lil, in an effortto enhance the learn achievement of students and geneally raise educaion qualiy. Support for broad-basedinstitutional decvlopment and policy reform in the sector incuding sratgics to targt gils and wom, the poorand disadvantaged populations, has increased over tmc. Moreover, basic education trebled between the late 1980sand the eady 1990s. Overall, the volume of lending for educaton has risen steadily over time, now standing at closeto $2 billion per year, or about 8 percent of total Bank lendingw as compared with $0.6 billion, or 4 percet, only adecade ago. The Bank is now the single largst source of external fundig for eduction

Transporr The Bank's earliest loans went to finance, the reconstuction of damaged networks in Europe and Japan.When that phase ended, it supported transport facilities that aided international and domestic trade, such as majorhighways, ports, and airports During the 1970s the Bank redirected transport Icnding to areas with a high incdenceof poverty. In rural areas projeccs were financed to buld roads to improve the supply of agrcultu inputs and themarketing of output and to facilitate the provision of social services. Ia urban areas, transport loans provided busservices to slum-dwellers. In the 1980s the Bank tuned its attention to road maintnance, which had been sorelynegleactd, and to improving managerial capacities in borrowing coemtrics. It also supported the lrlion andprTa2taIon of bus transport The Bank has come a long way since the 1950s and now stess improvingproductivity and stomer satsfaction rather than big new project

16

The First Half Century: An Overview

(worth $2.44 billion at current international capital markets.prices). Other loans followed to They also set Bank policies in athe Netherlands, Denmark, and number of areas, policies thatLuxembourg, totaling $247 apply to this darymillion. Under its articles theBank was expected to finance * IInterest rates: mmRDproductive projects. But it established the principle thatimmediately displayed the interest rates must be related toflexibility that was to mark its borrowing costs It also decided - For the Bk these intaoperations for the next fifty to apply the same rate for all loans helped establish itsyears, by giving loans to these loans granted at any given time, presenc on intenationalcountries for reconstrcion regardless of the borrower's capital markets and setrather than tying them to creditworthiness. This principle Bank policies in a numberspxcfic projects. underlined the nature of the of areas

-instittion: a financial coopera-For the Bank these initial loans tive that treated all its borrow-helped estblish its presence on ing members equally-

Figure4Lending by sectorPercentage of World Bank Lending

Agniculture

Basic infrastructure8

Industry & Finance

Human Resources

Other Infrastructure". | ~~~~~ | -~~~Unclassified Multise-ctor

1947-59 60-69 70-79 80-89 90-93

a. Basic hfrastuture indudes energy, telecommnunicatins. tansportaon, and power - -

Indyand fnance indudestorism and = 01heg. Ord u inzu tionwater and saniation, and environment Human Resources indudes education, public searity, social services, and population, health, and nutrition.

17

The Evolving Role of the World Bank

- *Supervision: As required by not only reconstruction butits Articles of Agreement, the structural adjustnent as well.

- Bank made arrangements to Marshall Aid was accompaniedensure that the proceeds of its by policy conditions-theloans would be used for the recipients were supposed to cutpurposes for which they were their fiscal deficits, open upgranted. For the first loan to their economies to foreignFrance, the Bank established an investment and trade, create aoffice in Paris, to supervise the European Payments Union toproject. facilitate multilateral clearing,

and make their currencies* Negative pledge: The Bank convertible. Some Europeandecided not to seek specific countries found thesesecurity for its loans (other conditions unpalatable, butthan the government guarantee agreed to them because of theirrequired under its Articles of urgent need for dollars. TheAgreement) but rather to rely conditions, however, were noton the borrowing govern- seriously enforced, and mostmenes underuking not to recipients liberalized theirpledge its assets to secure inter- economies much later than thenatonal debt in a way that United States had envisaged. As

The Bank sh [ted gears- gives any extenal lender for the Bank, it shifted gearsand turned is attention - preference over another. and turned its attention to theto the long-term financing long-term financing needs ofneeds of Europe and It soon became dear, however, Europe and Japan as well asJapan as well as the that the Bank could meet only the developing countriesdeveloping counztries - a fraction of Europe's recon-

striction needs. Its efforts were A Conservative Lder:dwarfd by US. assistance 1948-S8under the Marshall Plan, whichdisbursed $13 billion from The Bank made its first loan to1948 onward. European coun- a developing country (to Chi)ties had huge balance of in 1948. Loans soon followedpayments deficits (mainly with to Mexico, Brazil, India, and

- the United States) as well as 'Yugoslavia The Bank was stillwar-time-controls on trade and a financial fledgling in thefinancial flows. So they needed 1940s and early 1950s aMd

18

The First Half Century: An Overview

needed to convince financial financial operation. In largemarkets that it could deliver. part, these requests forIt needed to highlight the assistance show a growingsoundness of its clients, as well appreciation of the need foras their projects. Many Bank establishing long-tcrm develop- floans in the early 1950s went ment programs.' focuse on basicto middle-income countries(including those of southern An important part of the infrastructure. As eEurope), and significant sums Bank's evolution in this phase success of its operationswent to Australia and Japan. was its relationship with -became apparent,Much of the lending focused Japan', which in the initial financial markets lent theon basic infrastructure. As the post-war years was under Bank increasing ssussuccess of its operations allied occupation andbecame apparent, financial depended heavily on U.S.markets lent the Bank increas- finance and goods. Japaning sums and finally in 1959 became a member in 1952,gave it top credit rating. and the Bank quickly took

over from the U.S. Export-Even in these early days the Import Bank as Japan's mainBank saw itself as promoting financier and economic advis-economic development The er. The World Bank justified its1950-51 Annual Report made lending to a country as indus-it clear that "the Bank does not trialized as Japan in part onconceive of itself merely as a the basis of Japan's potentialsource of funds for a few to become a financial andisolated projects, but is pre- trading power within Asia,pared to take an active v t4l which would act as an enginecontinuing interest in the of grow. th for the region. ThisoveraU development problems belief proved well grounded.of a member country.' And,even at that early stage the Japan was wary of foreignimportance of its advisory role advice and economic linkages,was becoming evident: however. It initially resisted"Increasingly, however, the Bank loan conditions, such asBank is called upon to provide international competitiveadvice or assistance without bidding for projects andreference to any immediate charging appropriate prices for

19

The Evolving Role of the World Bank

electricity. Japan resisted the commercial terms that IBRDBank's efforts to lend for offered, could not easily stepagriculture, believing that this into their place. An internalwas not an appropriate area for Bank assessment in 1956 hadforeign borrowing. Such differ- shown that countries like Indiaences were ironed out through and Pakistan were havinga constructive policy dialogue trouble servicing even the

The Bank had to evolve that helped shape Japan's limited debt they had accumu-in a new direction if it evolution, including its lated. The Bank had to evolvewere to respond to the cautious opening up to the in a new direction if it were toneeds of the poorer world. The Bank helped Japan respond to the needs of thedeveloping countries .launch its firsr bond issue in poorer developing countries.

the U.S. market in 1959. Japaninfluenced the Bank as well. It A Development Agency:wanted the Bank to fnance the 1958-68local costs of projects, not justtheir import content as had India's foreign exchange crisisbeen Bank practice. The Bank in 1958 marked a turningeventually agreed, setting the point for the Bank. The Unitedstage for large-scale financing States and other donors formedof local costs in poor countries an Aid India Consortium, within the coming decades. the Bank as coordinator, to

make annual aid pledges. IndiaBy the end of the 1950s it had persuaded the donors thatbecome clear that recovery in concessional finance could helpE Europe and Japan was the economies of developingproceeding apace. Since it was countries take off, just asnot the Bank's business to Marshall Aid had helped thesubstitute for private funds, economies of Europe andthose industrial countries Japan. The analogy tumed- outwould soon cease to be Bank to be overdrawn, but itclients, having demonstrated influenced the Bank's evolutiontheir capacity to borrow direct- as a development agency. Byly from world narkets. It was 1958 the financial markets

- also clear that developing were willing to go along withcountries, with their limited the much greater developmentabilities to borrow on the near- orientation in the Bank's

20

The First Half Century: An Overview

lending patterns. The creation in prosper, and building strong1960 of the International institutions. This lesson was notDevelopment Association as a absorbed immediately by othersoft-lending arm of the Bank countries or the Bank: during |helped this process. The Aid the 1960s and most of theConsortia for India and Pakistan 1970s increasing investmentwere precursors to the levels were still considered theConsultative Groups that the main force for development.9Bank now chairs for some fortycountries, to provide a forum This perception was buttressedfor coordination of donor by rapid economic growth inlending and p olicies in support the 1960s in Latin America,of the recipient country's fueled by state-led import-development strategy. substituting industrialization

strategies. The region account-A significant development in ed for more than a third of allthis phase was the Bank's grow- Bank lending in the 1960s,ing relationship with Korea and mainly for electricity and trans-Taiwan (China), which showed port. This expansion of infra-how rapidly poor economies structure aided rapid growth incould grow rich if they fol- many countries, particularlylowed the right strategy. Brazil. Some two-thirds of BanikPlanning and state-led growth resources in the 1960s werewere the fashion during this devoted to basic infrastructure In the 1960s Latinperiod, and the Bank supported and over one-fourth of Bank America accounted forfive-year plans in many coun- resources went to Latin more than a third of alltries. Korea and Taiwan (China) America. It became apparent in Bank lendingdemonstrated that the impor- later decades that some of thistant part of planning was not state-led growth was unsustain-capturing the commanding able, reflecting faulty economicheights of the economy for the policies. Some Latin Americanpublic sector but stressing edu- countries and Turkey expen-cation, paying attention to mral enced debt problems even indevelopment, adopting an out- the 1960s, leading to debt-ward-orientation in trade, cre- rescheduling agreements,ating conditions in which an early harbinger of thingsdynamic entrepreneurs could to come.

21

The Evolving Role of the World Bank

Thanks to IDA, lending also India accepted the need forincreased substantially to India new technology, prices thatand Pakistan. India suffered a reflected resource costs, andmajor food crisis in the public investment in ruralmid-1960s. It had neglected infrastructure. The Greenagriculture in the 1950s and Revolution spread to otherearly 1960s, financing countries, its dispersal encour-industrialization th-ough aged by financial and technicalpolicies that pulled resources support from the Bank."out of agriculture. In India's experience also demon-consequence, India became strated that industrializationdependent on food aid, was not an easy route toprimarily from the United prosperity and that to stave offStates, even in years of bumper hunger and deprivation,

- crops. When two successive attention to rural developmentdroughts hit India in 1965 and was critical-an insight that1966, food aid rose to helped shape the next phase of10 percent of global wheat the Bank's evolution.trade, making some expertsdespair of India's viability. But An Advocate for the Poor.even before the twin droughts 1968-80India had started experiment-ing with high-yielding Under the Presidency of

The Green Revolution varieties. Provoked by stop-go Robert McNamara (1968-81)spread to otber countries, United States food aid policies, the Bank was transformed inits dispersal encouraged by the Indian authorities began tt many ways. IBRD and IDAfirnncial and tecbnical give high-priority to reviving lending rose tenfold, fromsupport from the Bank 'India's agriculture. The Bank under $1 billion in 1968 to

and other donors played an over $12 billion in 1981 (atimportant role in helping to current prices), a nearlyfinance and shape the techno- fourfold increase in totallogical breakthrough in commitments in real terms.agriculture that followed (and As important as the increasecame to be known as the in lending was the increase in'Green Revolution"). New attention to poverty alleviationpolicies were needed along and human resourcewith additional finance, and development.

22

The First Half Century: An Overuiew

The Bank had from the most of their income. Lendingbeginning considered poverty for agriculture and ruralreduction to be an essential part development soared fromof development. What has $1.3 billion in the 1960s tochanged are its views about the $14.8 billion in the 1970s,best way to achieve that goal. more than doubling its share ofInitially, the Bank had relied on Bank lending to nearly 28 per- Tgeneral economic improve- cent Lending for humanment, to reach the poor resources development went ed its lending for ruralindirectly. But Bank studies in from $244 million in the 1960s areas, especially forthe 1970s revealed that to $2.9 billion in the 1970s agriculturehundreds of millions of people (from 2.3 to 5.4 percent ofin developing countries lived in Bank lending). For the firstpoverty, lacking such basic facil- time the Bank began to viewities as safe drinling water, rising population as a majorschools or health clinics. These development issue but stressedconditions stifled productivity that population could not beand kept earning capacity low; controlled without first payingsetting in motion a self- attention to health andperpetuating cyde of poverty education. The Bank alsotransmitted from one sharply expanded lending forgeneration to the next. Poverty urban development, water, andwas concentrated in rural areas sanitation. Meanwhile, theand could be traced to share of basic infrastructure fellinsufficient investnent in from 65 percent of Bank lend-agriculture and social sectors ing in the 1960s to 37 percentlike education and health. in the 1970s.During this period the Bankfocused on absolute poverty, The strong push on theaffecting 40 percent of people agricultural front had a highin developing countries, and payoff in South and Southeastswitched its emphasis to Asia. In the 1970s the Bankprojects designed to reach the helped India finance ruralpoor directly. The Bank greatly electrification for tubewells, theexpanded its lending for rural training and visit system inareas, especially for agriculture, agricultural extension, agricul- ;from which the poor derive tural research, rural credit,

23

The Evolving Role of the World Bank

rural roads, and facilities for A Policy Reormer: 1980-90storage and transportation.It helped demonstrate that By the end of the 1970s it wassmall farmers could grow becoming dear that the policyhigh-yielding varieties as and institutional environmentefficiently as large farmers, if in which projects weregiven appropriate support. implemented was a majorThis experience brought to determinant of thelight two important lessons performance of the Bane'sthat government and develop- growing project portfolio.ment agencies had overlooked Even in countries where faultyin the 1960s: that small farm- policies distorted incentivesers constitute a vast untapped and discouraged efficiency, thepotential for agricultural Bank continued to expanddevelopment and that lending for new projects,over-taxing agriculture to believing that these would atfinance industrialization is a least help improve conditionsmistake. The Bank support to for the poor and counteractIndia, Pakistn, Indonesia, some of the negatve effects of

The policy and nstit- three of the four most bad policies. Then a 1981

utioal i in populous countries in the Bank study, popularly called

wbicb pronecds were world today, helped in their the Berg Report, concluded

implemeted was a major transformation from large from a-review of internal and

determinat of the -importers of foodgrains in the external factors affectinglate 1960s to dynamic agri- Africa's performance that poli-

pero"nan of the ROWS s :hcultural producers in the cy-induced distortions were sogrowing Project porfiblio developing world today. severe in many countries that

Because the spread of the projects could not be expectedGreen Revolution and the to succeed no matter how wellrural infrastructure that designed)' Policy reform was aaccompanied it was largely prime need, and not just inconfined to irrigated tech- Africa.nologies, its impact in Africaand other rainfed agricultural THE DBT CRms The two oilregions was limited, but in the price shocks of the late 1970spopulous regions of Asia it had brought home that lessona profound impact on poverty. anew. The first price shock of

24-

The First Half Century: An- Overvew

1973 dealt a devastating blow Soon, the drop in oil demandto oil-importing countries. As hit oil exporters, who hadthese countries' trade imbal- borrowed large sums in -. Structural adjustment wasances grew, the Bretton Woods anticipation of an unending necessary in manyinstitutions were anxious to boom, and the debt crisis borrwoer countriesrelieve human distress by exploded in 1982. Problemsrecycling petrodollars, while were most severe in Latincommercial banks, flush with America, which accounted forfunds, were eager to direct 37 percent of developingthem toward countries in country debt in 1980.? Afficaneed. Between 1970 and 1980 was also hit hard. Mexico waspublic and publically guaran- the first country in the 198 Osteed debt to developing unable to service its debt, andcountries soared from others followed in a cascade.$46 billion to $410 billion. Inflows of private capital,Not enough attention was paid which had accounted for three- -

to the possibility that in fifths of the increase in official-financing trade deficits, ly held debt stock in the 1970s,international lenders were plummeted. The debt crisis wasunderwriting poor investments a calamity not only for borrow-and policies that could lead to ers, but also for the lendingdebt problems down the road. banks. The threat of anBy the time of the second oil interional banldng collapseshock in 1980, the lesson had loomed, reminiscent to many oftaken hold. At the World the beginning of the GreaiBank-IMF meeting that year, Depression.President McNamara arguedthat the problem could not be The need of the hour was fortackled simply by recycling emergency balance of paymentspetrodollars. Structunral adjust- support from the IMF and thement was necessary in many World Bank and debt resched-borrower countries. In any uling by commercial banlcs andcase, rising interest rates and bilateral donors. It was evidentflling commodity prices soon that the IMT alone could notmade such recycling provide suffcient resources andprohibitively expensive for that debtors needed long-termborrowers. finance and structural

25--

The Evolving Role of the World Bank

adjustment policies that would of it was brought about by amake their economies more failure of borrowers to investefficient and outward looking. their loans wisely; indeed,So the Bank adapted the low- many loans went to finance theconditionality program loans expansion of inefficient public

Bank support for reform it had made to a few key enterprises and to insulatein Latin America focused countries in the 1960s and consumers from high energyon the underlying causes 1970s to current conditions- prices. That is why Bankof the debt crisis and started making structural support for reform in Latin

adjustment loans tied to policy America focused on thereform These loans were underlying causes of the debtintended to be fast-disbursing, crisis, while helping memberto meet the immediate cash countries restructure theirneeds of borrowers while external debtpaving the way for longer-termreform. Support for structural In Iatin America countries hadand sectoral adjustment lending firm control of the design andbecame a major feature of implementation of their reformBank lending in the 1980s, programs. The Bank's contribu-although it accounted for less don consisted mosdy ofthan one-fifth of Bank lending analysis, advice, and financingon average between 1980 and to ease the pain of adjustment.1994. Lending for human The fundamental themes ofresources and the environment reform have been reducing thealso began to accelerate in this size of the state and its inter-period, reflecting other needs ventions in the economy,and concerns. restructuring public finances,

liberalizing prices and controls,The importance of external reducing the bias againstdebt as a cause of the Latin exporting, and increasing theAmerican crisis has been reliancu on the private sector.

I exaggeratedc" Much of the These reforms are now begin-debt was induced by high ning to pay ofE as evidenced byinterest rates and sharp the decline in the ratios of pub-exchange rate fluctuations that lic expenditures to GDP, a shiftwere the outcome of policies in in the composition of publicindustrial countries. And much spending toward the social

26

The First Half Centwry: An Overview

sectors, the success of privatiza- trols have been replaced bytion programs, and the sharp market-driven prices; govern-drop in external tariff levels. ments are getting out of theThe resumption of large business of setting exchangevolumes of private capital flows rates, interest rates, and pro-to Latin America, such as ducer prices. Nontraditionalforeign direct investment and exports are beginning toportfolio flows, signifies the appear. So, too, are active stockgradual return of confidence exchanges. Incentives for agri- Iand the end of the debt crisis. culture have improved, and

there is some evidence that theUnlike the case in Latin rural poor have benefiteck ThisAmerica, in Sub-Saharan Africa progress, however, is confinedthe debt crisis occurred primar- to only half of the twenty-sixily in low-income countries largest economies, with parcu -with weak institutions, low larly impressive results inhuman resource development, Ghana and more recently inand an underdeveloped private Uganda. With the devaluationsector.' Structural adjustment of the CFA franc, prospects forloans and credits were again the the CFA zone countries havemarn mechanism for meeting improved considerably, how-balance of payments needs and ever. But other countries, whichsupporting economic reforms. have suffered from natural andAs in Latin America the debt man-made disasters or the smallcrisis was symptomatic of a size of their economies, havelarger crisis in economic man- been lirgely left out. The num- The resumption of largeagement. But the record of ber of Africans in poverty rose UolUmts of private capitalimplementation of adjustment in the 198Os, more often - fows to Latin Americapolicies has been mixed. because of the failure to adjust signfies the gradual returnAlthough the response of pri- but sometimes because adjust- of confidence and the endvate investment has been slow, ment policies in early programs of the debt crisiscountries that have consistently did not pay sufficient attentionimplemented sound policies to the impact on the poor.have witnessed a positive turn-around in GDP, agriculture, A STRONG PERFORMANCE N ASA.exports, and industry. In many Despite the debt crisis thecountries, domestic price con- 1980s brought as much good

27

The Evolvhng Role of the World Bank

news as bad for developing comprehensive tax, trade, andcountmes. India, Indonesia, financial reforms-IndoncsiaKorea, Malaysia, Pakistan and continued to reduce poverty inThailand were among those both relative and absolute

The most sensational counties that had needed terms. This was possibleperformanrce of all in the special assistance from the IMF because of the govermment's1980s came fmom China and the Banlc to overcome the emphasis on improving the

second oil shock and its after- agricultural sector on whichmath. Yet they not only recov- the livelihood of most people,ered but grew rapidly. The especially the poor, depended.enormous difference in the It was also due to Indonesia'sperformance of Asia, which emphasis in the mid-1980saccounts for two-thirds of the on a labor-intensive, outwardpopulation of the developing oriented industrializationworld, and Africa and Latin strategy, and on the large

- America showed that a investments in humancountry's internal policies resources made throughout themattered much more than decade. Between 1978 andexternal conditions. Superior 1987, primary school enroll-performance in Asia, partcu- ment among the poorest 40larly in East Asia, was due to percent rose from 78 percent

- several factors. 5 Important to 90 percent, and loweramong them were better secondary enrollment rosemacroeconomic management, from 42 to 65 percent',a mutually supportive relation-ship between the state and the The most sensational perfor-private sector, better sectoral mance of all in the 1980s camepolicies, more outward-loolkng from China. In little more thanpolicies, greater institutional a decade, it transformed itselfcapacity to deal with change, from a centrally plannedand greater diversification of economy to a dynamic, mar-expors. ket-oriented one, whose bur-

geomng exports gave it a mas-Even during a difficult time of sive trade surplus with theadjustment to external United States by the earlyshocks-including reductions 1990s. When China started itsin public expenditure and twansition it had litle idea of

28

The First Half Century: An Ouerview

how to go about it and was than others in reducingeager to absorb lessons from poverty. World Dewelopment Iabroad. It used the World Bank Report 1991 revisited the mainas its main sounding board for lessons of development, notingchanges in policy and organiza- in particular that success cametional strctures, and a highly to countries where there was aproductive poliqc dialogue healthy relationship betweenensued. The Bank trained the government and themany Chinese personnel at the private sector and whereEDI and translated its econom- governments provided aic policy research into Chinese. regulatory and incentiveIts role was fEar more important framework that was outwardin the realm of ideas than in oriented and conducive tofinance. China adapted Bank private savings and investmenr-advice to its own ends and suc- 'World Development Reportceeded in pushing GDP growth 1992 focused on an area ofinto double digits. It proved increasing concern to thethat rapid growth need not be World Bank in the 1980s, thelimited to small countries like deteriorating state of theSingapore-good policies work global environment, andeverywhere. explored the link among

poverty reduction, growth,That many Asian countries and the environment. (The keyfared so well in the same lessons drawn from thisexternal context that plunged process of introspection areLatin Amertca and Africa into summarized in Box 3.) The hat many Aszancrisis led to introspection with- Bank took away from this countries fared so well inin the Bank in the late 1980s. process a renewed commit- the same ecterna contextThree successive World ment to the goal of poverty that pflnged LatinDevelopment Reports from reduccon and improved living Amerira andAfrica into1990 to 1992 addressed differ- standards and a recognition of cnszs led to introspectionent aspects of this internal the need for a sharpened focus wh the Bank in the[earning. World Development C2 human resources develop-Report 1990 focused on ment and on growth that ispoverty, exploring why some environmentally sustainablecountries, mostly in Asia, had and driven by a healthy privatebeen so much more successul sector.

29

.

The Evolving Role of the World Bank

Box 3 Learning from the Past This renewed commitment

Several lessons smnd our from the development r reflected a further evolution inence of the past fifty years: the Bank's approach to poverty

Poverty reductioa 's best pursued through a dual assault reduction. The Bank of theon the conditions that perpetuate poverz. One way is to 1990s is addressing poverty in apursue rapid economic growth through strategies that more holistic manner (see Boxmake use of the most abundant asset of the poor-labor. 3) and through a more strate-This calls for policies that harness market incentives, giC, country-focused approachsocial and political institutions, infrastructure, and tech-nology to this end. The second is to invest in people, byproviding basic social services to the poor. Prinary health analysis in the form of in-depthcare, familry pnning, nutrition, and primary education and increasingly participatoryare particularly important. These two strategies are mutu- . poverty assessments. Twentyally reinforcing. One without the other is insufficient, -ears after the first pushA prime requirment for rapid economic growth is a sta- towards povertr reduction,ble macLroeconomic frameworL Beyond a point, budget there is more data on povertydeficits, exessve governmcnt borrowing, and monetry and better ways of identifyingexpansion are quiddy followed by inflation, chronic over-valuation of the currency, and loss of export compeitive- the poor, targetig them, andness. monitorng the impact of Bank

policies and projects. TheIntegration with global markets for goods, services,finance and technology yields major gains. Openness to macro-micro linkages i thetrade, investment, and ideas is essential in encouraging Bank's current approach enabledomestic producers to reduce costs by adopting new teh- a better integration of povertrnologies and improving existng ones. issues within country assistance

Private entcrprise and govemments both have viml roles strategies. The increasedto play in devdopment, and success lies in building on emphasis on participation andtheir complemeatarities instead of trying to choose environmental maagementbetween than. Compemtive markets are the bestm way yetfound to efficiently produce the goods and scrvices con-sumers want. Such markets require a dynamiic privatec- aid rchness of the agenda astor motivated by adequate incentives and an environmenr well as to its quality.conducive to savings, investment, and labor-intensivegrowth. But markets do not work in a vacuum-they Toward a Holistic Approach:require legal and regulatory fameworks tat governmens * The 1990sneed to provide effidentl. At other tasks, markets may beinadequate or fail altogether That is why governments It. many respects, as the Bankmust ensure adequate investmcnts in infrstructure, pro-vide essential services to the poor, and create safety nets entered the 1990s theto prevent others from slipping into poverty, challenges facing its borrowers

remained the same as they had

30

The First Half Century: An Overniew

ever been. More than a billion For development to be sustainable, the environmentalpeople lived in acute poverty- basis of production must be protected. Fortunately, manyRapid population growth and polides that encourage growth also protect the environ-economic expansion were ment. These include removing subsidies that encourage

excessive use of fossil fuels, irrigation, electricit pesti-contributing to presures on de cides, and logging; clarifying tights to manage forests,

fisheries, and land; and providing sanitation and drinlingcountres the institutlonal water to poor areas. Appropriate pricing and propertyinfrastructure was an rights are not enough in some cases, where strong institu-impediment rather than a tions and dear rules are needed to guard against degrada-mechanism for addressing . tiol. Local pardtcipation can be of major assistance.these problems adequately* At Rapid development requires good governance.the same timc, the context in Experience has shown that how power is exercised forwhich the lBank operates was xconomic and social development is exemely important.

Efficent legal and administrative structures, clear rulesbecoming more complex, more - . for economic actors and enforcement of contracts, speedchallenging, and changing and transparency in decision-malking, and high stnndardsrapidly. of financidal and political accountability are needed.

Pariicipation is essential for economic development.There has been rapid integra- Participation in projecc design and execution by benefica-iion in the global economy, ries can improve outcomes. Projects that give beneficiarywith the growth in trade OUt- communities a sense of ownership and a stack in their

outcome elicit grass-roots support that protects projectspacinopmg row nthrin C e from erosion by vested interests- Decentralization of

Developing countries are power from capitals to local communities yields positiveleading this trend: they account - results.iror die fastest component of thetmpnvmstmig in women is of vital importance to the econo-growth in trade. Private capital my, to households, and to diildren. The education of girlsflows to these countries have has a long-term impact on the productivity of womcn inmore than recovered from the the work place and on fertility and ifant and child mor-precipitous decline following . ity4 Economic returns to education are often higher forthe debt crisis and are now at women than for men.record levels. These flows are If reforms are to succeed and take root, they must beprojected to reach $113 billion 'owned" by politicians and tchnocrats, who mustfor 1993, over three-fifths believe in their efficacy and direct their design.consisting of foreign direct Experience shows that reforms work where the Bank sup-

investments ($56 billion) ad . ports local tcchnocrrcies that are committed to theinvestments (>56 billion) and . reforms and are able to tailor the new policies to localportfolio equity investments conditions. The borrower's commitment is the single($13 billion). This is three times most important factor explaining success in Bank projectthe level at the end of the outcome.

31

The Evolving Role of t/e World Bank

1980s'and reflects the increas- mostly in Africa, that haveing integration of global finan- lagged behind. For themcial markets. Implementation poverty is increasing, and theyof the Uruguay Round agree- risk being excluded from fullments will keep these trends participation in global marketson an upward path. and the benefits that brings. In

the middle are the countriesThere have been equally that require further policy anddramatic political develop- institutional reforms and aments, with the spread of more supportive internauonaldemocraqrc the expansion of environment to join the rankspolitical participation, and the of the first group. Then, theresurge in nongovermnental are the nations of Easternorganizations. The most Europe and the former Sovietdramatic change, of course, Union. They have abundanthas been the collapse of the human capital but facef former Soviet Union, which obsolete and deterioratinghas contributed to the physical capital and have seenglobalization of the Bank's massive declines in output.membership. These countries are moving

There have been equally from command to marketdramatic political The complexion and composi- economies in a fluid political

tion of the groups of countries and insttutional context Ifdevelopmets with the that make up the Bank successful in their reforms,s-yd of democry, th7e.,, se Group s cients have changed they can look forward toexpansion of poltcal as well There are now four. restored growth that would be

participation, and the ManY countries are prospering a massive stimulus to thesurge in nongovernmenal in the new global environ- global economy. There are

organizatons ment, and these include the early signs of hope (notably inmost populous countries in the Poland and the Czechdeveloping world (China and Republic), but the journey forIndia), other countries in East many may be long andAsia, and Latin America. These difficult.'7

countries will progressivelyrely less on official develop- To address this new context,ment finance. At the other the Bank outlined its develop-extreme are many countries, ment agenda in a recent paper,

32

The First Half Centry: An Overview

The World Bank Group: * A vice presidency for EuropeLearning from the Past, and Centmal Asia, to assist newEmbracing the Future. The member countries of theBank's fundamental objectives, former Soviet Union andas set out by its founders fifty Central and Eastern Europe inyears ago, remain valid today. their transition to market-'Within these broad objectives, based economies.the World Bank is attemptingto position itself to help its In addition, important changesborrowers meet the chalienges are occurring in the Bankof the twenty-first century. Group's institutional culture.New vice presidencies have There is now greater concernbeen created to strengthen for quality in the performanceinternal capacity to meet of the project portfolio, moreemerging new challenges: support for innovation and

cost consciousness, and more The Bank's fundamental* A vice presidency for transparency and openness in objectives, as set out by itsHuman Resources and external dialogue. founders fifty years ago.Operations Policy, to support a remaiin valid todaymajor emphasis on poverty Fns DEVEPLoMENr CHAGESreduction and human resource The Bank Group has reneweddevelopmenL its comnntment to help bor-

rowers reduce poverty and* A vice presidency for the improve living standards byEnvironment and Sustaminable promoting sustainable growthDevelopment, to bring a clear- and investng in people. Theer focus on sustainability issues paper Learning from the Past,in all aspects of the Bank's Embracing the Future identifieswork. five major development chal-

lenges facing the Bank Group's* A vice presidency for clients and on which the BankFinance and Private Sector will focus in the coming years:Development, to enhance sup-port for growth and private * Pursuing economic reformssector development and finan- to enhance growth and reducecial sector reform. poverty

33

The Evolving Role of the World Bank

* Investing in people * Client-orientation-respond-ing to the needs of clients and

* Protecting the environment facilitating their partcipationin the design and implementa-

* Stimulating the private sector tion of Bank-supportedprograms.

* Reorienting government. p The agenda is large, andResults-orientation-looking the Bank Group must be

The five challenges are all beyond lending volume to agile and responsiveclosely linked and reflect the maximizing developmentBank's more holistic approach impact and improving serviceto development in its sixth quality and efficiency.phase of evolution toward atruly global development * Cost-effectiveness-ensuringagencyq that scarce resources are spent

wisely.Six GUIDING PiRcrLs Theagenda is large, and the Bank v Fnancial integrity-main-Group must be agile and taining the Bank's highresponsive while avoiding the standing in financial marketsdanger of stretching itself too to ensure that it can providethin. Six guiding principles finance on the best possiblehave been adopted: terms to members.

L Selectivity-identifying The Unfinished Agendaactions that will help most inimproving a client's potential The rapid changes in the globaland the Bank's impact. environment are bound to

influence the Bank's future just* Partnership-seeking as they have done in the past.alliances with other develop- Many successful countries inment agencies (governments, Asia may soon stop borrowinginternational agencies, non- from the Bank, just asgoverrnental organizations, European members did in theprivate sector investors) to iYS5s. The regional develop-maxinize the effectiveness of ment banks, the Europeandev opment assistance. Union, and Japan are

34

The First Half Century: An Overview

increasingly influential and remain a relevant institutionfinancially important players over time. Fifty years ofon the development scene. I evolution have alreadyMany borrowers are develop- achieved a great deal, buting their own analytical skills much unfinished businessand using the resources of remains. And history showsother agencies, official and that new challenges relentless-unofficial. ly follow old. History also

shows that the Bank hasThis increased competition successfully changed with theoffers new opportunities for times to serve its membersthe Bank to become even more better. It is doing so again toresponsive to the needs of its help them eradicate povertyclients, demonstrating the and ensure sustainableflexibility that has helped it derelopment

35

The Evolving Role of the World Bank

Notes

1. Angus Maddison (1991). World Economic Growth: The lessons of long-rmnexperience. (Background paper for the WDR 1991).

2. World Development Report 1990, p. 40; World Bank 1990.

3. In this series, Vinod Thomas and Peter Stephens, East Asian EconomicMiracle, World Bank 1994.

4. A growth rate for all developing countries can be calculated by weighting,individual country growth rates by each counnty's income or population.Weighting by income does not distinguish between a dollar accruing to amore populous and poorer counry and one accruing to a less populous andricher country. Population-weighted indices muasure the change in income ofa typical individual, treating the income growth of each person equally. For adiscussion of this issue, see Global Economic Proets and the DelvdopinCounes, World Ba, 1994, page 6.

S. In this series, Kenneth G. Lay- MobilizngPriate Savings forDeveopment:-IBRD and the Capital Markets, World Bank 1994.

&. Kennrth G. Lay, ibid.

7. In this series, Caroline Doggarr, From Reconstrucon to Development:Euope andJapan, World Bank 1994.

8. Caroline Dogprt, ibid.

9. Vmod Thomas and Peter Stephens, ibid.

10. In this series, Uma LeIe and Bahu Bumb, The World Bank's Response to SothAsia's Food Crisis: the GCse of India, World Bank, 1994.

11. Wodd Bank, Acceerted Deelopment in Sub-SahbamAfiica, 1981.

12. In this series, Sebastian Edwards, Lati America and the Debt Crisis, WorldBank, 1994.

13. Paper presented by S. Shahid Husain to the nstitet of Latin AmericanStudies, University CoUege, London, February 1991.

14. In this series, Ishrat Husain, The ChalLnge ofAfnica, World Bank 1994.

15. Vinod Thomas and Peter Stephens, ibid.

16. Vinod Thomas and Peter Stephens, ibid.

17. For a discussion of the Bankes program in xhis groupof countries, see in thisseries Keemal Dervis, Marcdo Selowsky, and Christne Wallich, The ¶Dansitionm Cental and Eastern Europe and the Farmer Soviet Uhnion, The WorldBank, 1994.

36

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