Don't Bank on the World Bank
Oppenheimer, Franz M.
Franz M. Oppenheimer DON'T BANK ON THE WORLD BANK Treacherous waters ahead for a once august institution. If you were born to walk the ground, Remain there; do not fool around. • But very soon...
...Well thought-out projects in less developed countries cannot be found for the asking...
...Indeed the Bank's charter provides: "Every security . . . issued by the Bank shall bear on its face a conspicuous statement to the effect that it is not an obligation of any government...
...The pace of lending However incompetent Barber Conable has proved to be, the problems he encountered were not of his making...
...to assure comparable compliance with "policy and institutional reform," an area ex-posed to every political change of wind, is well nigh impossible...
...The booklet was prefaced by a letter from Conable to the staff, the fatuousness and mendacity of which should remove any sympathy that one might have had for him...
...It was a method akin to that of body counts in warfare: the certainty it promised and its effects were nefarious...
...G iven that history, the bloated size of the World Bank's bureaucracy and of its lending, and the international debt crisis, even a Eugene Black would have found the job of running the World Bank in 1986 frightening...
...And so he did," commented one seasoned observer, "he screwed the Bank...
...It is characteristic of Barber Conable's innocence that, when a senior staff member complained that Conable had interfered to save an intended victim from the axe at the behest of an executive director, Conable, replied: "But he is one of his constituents...
...Indeed when a loan is made for modernizing a specific port, for instance, it is easier to press for an independent port authority than it would be to do so in the context of a "sectional adjustment" loan for the "transportation sector...
...Under him the Bank was a bank that stuck to its Charter mandate that "loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development," and that in "making . . . a loan, the Bank shall pay due regard to the prospects that the borrower . . . will be in position to meet its obligations under the loan...
...When looking at these figures a portfolio manager might well also bear in mind that no country has pledged its full faith and credit to the payment of the Bank's securities...
...Thus it happened that today the Bank has become a part of the international debt problem, and is poorly positioned to become a part of its solution...
...And as such it should pay more attention to macroeconomic problems that could not be solved by the time-consuming process of financing specific, and often relatively small, projects...
...The Bank's project loans were never made in a macroeconomic vacuum...
...T here is in fact much to scream 1 about...
...And while most of them were able, intelligent, and as helpful as they could be in their Kafkaesque labyrinth, one of them—a subaltern who arguably was the one with the initial authority to do something—treated me as if I were a Moonie missionary calling on the Pope for the purpose of converting him...
...After all the unsavories had hit the fan, the operations of the Bank had come to a virtual stop and the morale of the staff, even of those promoted, had collapsed...
...Commitments must be met, and still more bonds must be sold to enable the Bank to meet them...
...And so on...
...Moreover, they virtually blocked the possibility of negotiating institutional and macroeconomic reforms as a part of loan negotiations for specific projects, by keeping project loans and "structural adjustment loans" in separate compartments and by preserving attempts to influence long-term policy for negotiations of the latter loans...
...Today the World Bank has become a part of the international debt problem, and is poorly positioned to become a part of its solution...
...Order was introduced by establishing five-year lending programs for all client countries of the Bank...
...President of World Bank criticized over shake-up" (Financial Times, July 7...
...By contrast, under McNamara's five-year plans government negotiators needed only to procrastinate: they knew that their country's annual lending quota had to be met by the end of the fiscal year, and that, at least in McNamara's reign, if the quota was not met McNamara would know what to do with the hapless loan officer who had been too slow with the spigot...
...These people were scattered over several buildings, and every one of them claimed some responsibility concerning the problem I raised and every one of them denied having authority to do something about it...
...Instead, the first result of his rushing in where he should have feared to tread was the "Report to the President From the Steering Committee Onthe Reorganization of the World Bank," entitled "Reorganizing the Bank: An Opportunity for Renewal," a report the recommendations of which were put into effect with indecent haste...
...And he could include covenants assuring a reasonable tariff structure in the loan agreement...
...But very soon his friends began To doubt if he were quite the man...
...The Financial Times reported in the same story that there had been rumors, denied by the Bank, that World Bank bonds were about to be downgraded by U.S...
...The limitation of the Charter—that loans must be made for the financing of such specific projects as a hydro-electric plant, the establishment of an agricultural bank, or the building of a railroad—served as a check on prodigal lending...
...And once neutral outsiders with a low profile have diagnosed such a problem,they can often solve it by bringing all parties around a table and helping to find a compromise, such as giving port employees the option to remain civil servants, or if they prefer a new status, guaranteeing certain benefits...
...According to the story, Peru had fallen more than six months in arrears on payments of $69 million of principal and interest, bringing its total debt to the Bank to $1.03 billion...
...Die Welt, May 29...
...It followed that the foremost duty of the banks was to "re-channel" Arab money...
...After weeks of rumors and uncertainty, the Conable Plan was communicated to the staff last May in a booklet containing a shortened andjazzed-up version of the steering committee's report...
...Under these heady headings loans are made, in the words of the Bank's Annual Report for fiscal 1985, "to help developing countries carry out the difficult process of policy and institutional reform...
...Robert McNamara chafed at these constraints within days after his arrival...
...Conable, the media, as usual, ignore history...
...This news item should not have been reported so casually...
...Financing for such grandiose, and essentially political, purposes can easily be abused...
...The report exhibits the telltale tic of the uneducated: the touching belief that the problems of the day are unprecedented...
...The next best thing would have been to spend at least a year to educate himself before advancing any major changes...
...Chaotic Conditions after Changes in Personnel...
...Now, in response to that initiative, the headlines screamed: "The blunders and ineptitude that have deepened the crisis faced by the World Bank" (the Guardian, May 18, 1987...
...D efenders of the McNamara lend- ing policies assert that they are necessary because even the best planned specific project is no good when the whole economy is collapsing...
...Obstacles to even such a relatively small institutional reform can only be discovered and removed when attention is focused on the specific project...
...He insisted, for example, that virtually every country, even those with the most limited capacities for absorbing loans, have assigned to it a full-time staff member who spent his days in Washington reading the country's newspapers—or newspaper...
...Last May, however, his tune was different...
...The Bank must respond to a "changing world," "problems faced by developing countries have become more complex, diverse and intense...
...When I once...
...And since the explosion of the price of oil was accompanied by a steep rise in the price of all commodities, even the non-oil producing underdeveloped countries suddenly increased their revenues...
...Paradoxically, Robert McNamara, the creator of the Bank's bureaucracy, was made an "external member" of the Steering Committee...
...Reorganization of the World Bank...
...Obviously, nothing can be done overnight to the balance sheet...
...After the first oil crisis in 1972 his computer-happy Bank predicted that within a very few years all the money of the free world would be owned by the oil producers...
...Back Bencher paralyzes World Bank...
...Since a default to the Bank, the experts believed, would destroy a country's credit, the country would give payments to the Bank absolute priority...
...Second, the report recognized the related necessities of delegating responsibility for decisions and of reducing the number of clearances required for them...
...Like the speeches of Gary Hart, the report abounds in calls for new ideas, intellectual and moral leadership, initiative, efficiency, and technical excellence...
...Three other countries, whose names the Bank has not disclosed, have also been in default for more than 75 days...
...In Disorder and Doubt" (Le Monde, June 24...
...Even if a new Bank-financed electric power project can export energy and earn foreign exchange, the loan will go sour if the country's other foreign exchange earnings dwindle, or if there are no more domestic buyers for energy because of an economic depression...
...McNamara's influence went beyond the World Bank...
...rating agencies...
...The selection—called the "massage parlor" system by one observer—was not entrusted to a disinterested and impartial group of wise men...
...Yet none of that was given much attention in the newspapers...
...Like President Mitterrand of France, who decided on principle to hire 350,000 new civil servants as soon as he became President, McNamara decided to expand the Bank's staff before he could have understood what those new staff members were to do...
...If the Bank had lent at a slower pace in the seventies, it would have been in a better position to expand its lending in the eighties, when the private banks virtually ceased lending to the poorer countries...
...Moreover, the executive directors, who represent the Bank's member countries on the board, were permitted to participate in the witch hunt by protecting their own favorite nationals...
...but the portion of that amount subscribed by the five countries with the largest subscription and among those inspiring the most confidence—France, Germany, Japan, the United Kingdom, and the United States—amounts to only $31 billion, just about half of what the Bank owes...
...And a portfolio manager might wonder how long it would take the various legislatures, even those of responsible governments, to appropriate the money needed to meet a call...
...Probably it would have been best for him and the Bank if he had declined the job...
...nfortunately, verbiage and pious hopes were not all the report con-hopes The recommendations that produced the instantaneous havoc, reflected in the headlines from the international press quoted above, implied a reduction of staff...
...The Bankappeared in the headlines only when its new president, Barber B. Conable, sired a major reorganization calling for the dismissal of several hundred employees, just a few months after he was elected last year...
...Almost since the Bank's establishment forty-one years ago, international financial experts had accepted the axiom that the World Bank's bonds were safe investments, not so much because of the supposed security provided by the Bank's callable capital, but because of the comfortable assumption that no debtor country would dare default on payments to the Bank, no matter how desperate the debtor's situation...
...In every other respect the report fails...
...Institutional reforms were brought about in the framework of negotiating loans for specific projects...
...He wrote: "I am determined that it [the reorganization] be conducted in a fair and transparent manner," a sentence that was written, one hopes, before he had heard from his directors about their "constituents...
...When port employees, for instance, want to remain civil servants, and fear that they would lose that status as employees of an independent, autonomous agency, and consequently a government is afraid of introducing legislation for establishing such an agency for fear of opposition by the unions, a small Bank mission on the spot, concerned with that port only, can find out what the trouble is...
...But in appraising the blunders of Mr...
...Worst of all was the way those to be fired or demoted were selected...
...It does not recognize that reshuffling slots in an organization chart is a sterile exercise...
...If Conable had possessed some experience managing large international institutions, or any large institution, he would have known that he could not safely rush to solve the obvious problem of the bloated bureaucracy...
...The report contains some nuggets of good sense...
...Other bromides abound: "The future thus seems likely to hold both promise and threat for the Bank...
...With more money in their pockets, they found a plethora of schemes on which to spend it...
...This is hardly a roll-call to cheer a portfolio manager's heart...
...The loans have been disbursed or promised, and the bonds have been sold...
...However incompetent Barber Conable has proved to be, the problems he encountered were not of his making...
...But such modest achievements were not enough for McNamara and his followers, who, without confessing it, envisaged the bank as a sort of superworld government...
...sought to tackle a routine problem of skullduggery arising as part of the international bidding for a project financed by a World Bank loan, I found it necessary to talk to more than nine people, not counting the executive directors for the United States and for another country involved...
...His article, "The Banking Revolution," appeared in the March 1985 issue of TAS...
...Peru thus became the fifth and largest debtor country to be in default on its debt service to the Bank for more than 180 days...
...Its drafters rediscovered that the planning of specific projects and analysis of overall economic programs of a country should not be done in isolation from one another...
...The final grace note of this one page missive in praise of excellence and efficiency is the mistyping of the word "provide" as "provie," in the third of five paragraphs...
...Job Merry-go-round instead of Aid for Development" (Handelsblatt, July 15...
...The firings shattered that reasonable certainty...
...The idea that a bank could refuse to accept deposits from the nouveaux riches potentates occurred to no one...
...And so on...
...Moreover, in a more modest context, there is far less political exposure, and hence less risk of knee-jerk resistance to the Bank's political proposals...
...THE AMERICAN SPECTATOR OCTOBER 1987 29...
...Hilaire Belloc O n August 7, 1987, the Financial Times carried an inconspicuous news item, "World Bank places Peru loan on non-accrual basis...
...The Bank's staff was still relatively small, approximately 1500 employees, and had a sense of mission...
...At least the bromides are comprehensible...
...Originally Conable proposed firing 600 international civil servants, a number subsequently reduced to 390 (so as to lessen the impact of termination benefits) by the Bank's board of executive directors...
...Excellence indeed...
...in turn the Bank owed its security holders on medium-and long-term borrowings about $66 billion...
...And third, the report advocated reducing the volume of interoffice memoranda and encouraged informal, oral communication...
...Nor, so McNamara's defenders say, can a specific project flourish if the social and institutional environment is stifling it...
...The reorganization has been produced by the team of the Bank, not by me," he said in an interview with Le Monde last July...
...If the country's negotiators were unwilling to accept such suggestions or conditions, they risked not getting the loan...
...By the time he left in 1981, McNamara had inflated the staff to just a little under 6,000...
...McNamara came to a vibrant institution that owed its vitality primarily to a great man, Eugene R. Black, who was the Bank's president for thirteen years, from 1949 to 1963...
...When will Con-able be replaced...
...the other countries are Nicaragua, Guyana, Syria, and Liberia...
...THE AMERICAN SPECTATOR OCTOBER 1987 27 and the Bank shall act prudently...
...This is more than can be said for the bulk of the report which, belying its belief in excellence, attempts to hide its poverty of ideas in indigestible prose beset by every conceivable violation of the elementary rules of English composition: "quality assurance mechanisms . . . line management integration in the regional structure . . . process approach to decision making .. . translating overall institutional policy decisions into specific operational guidelines . ." My favorite is thereference to the president as the "senior-most manager of the Bank...
...Such lending "focuses on major macroeconomic issues, as well as major sectoral issues (trade policy, resource mobilization, efficient use of resources, and institutional reform...
...The way to solve these problems was to make bigger loans faster, which could be done by what was in 1968 called "program lending" and today "structural adjustment" and "sectoral adjustment" lending...
...Instead, every chief, starting with the four newly created senior vice presidents, was to select his own sub-chief, and every sub-chief his own head Indians...
...The Bank must seek to recruit the best and the brightest from around the world, and before leaving their homes promising candidates must be reasonably certain that once in the Bank they will be able to stay there to the end of their careers, short of gross incompetence or misfeasance...
...The pragmatic lending under Eugene Black—a cement plant here, a pipeline there—seemed unacceptably messy to one of the original whiz kids who had brought systems management, the TFX, and body counts to the Pentagon...
...Such wholesale firing would have been enough to shake the foundations of any international public institution...
...1986, the following countries—each of which owed to the Bank, on principal actually disbursed to them, more than half a billion dollars—accounted for about 62 percent of the $103 billionin loans made by the Bank: Argentina, Brazil, Colombia, Egypt, India, Indonesia, the Ivory Coast, Mexico, Morocco, Nigeria, Peru, the Philippines, Romania, and Yugoslavia...
...The five-year lending programs undercut whatever beneficial influence the Bank may have on a country's economic policy...
...That something needed to be done is beyond debate...
...Therefore it is not surprising that Conable, new to finance, rushed to attack the one inherited problem of the Bank about which he thought he could do something: the bloated bureaucracy...
...In addition to the reports on projects, there had always been reports on the country's economy, which were discussed with governments particularly during the Bank's annual meetings, and the governments knew that unresponsiveness would result in fewer, if any, bank loans...
...Pessimism grows as World Bank leadership stumbles" (Financial Times, May 28...
...These arguments are specious...
...Even before the plan or reorganization became public, rumors flooded the Bank, and the cleverest—not necessarily the most competent—operators were the first to stroke the right people and to cover the right part of their anatomy...
...Global integration and the rapid advance of technology are moving the world forward in relatively unfamiliar and unpredictable ways...
...Under those programs every government knew in advance how many millions a year McNamara was going to give it...
...Apart from the ability and persuasiveness of the staff, that influence resulted from a country's uncertainty about how much it could borrow from the Bank in the future...
...As a result senior officers of silent merit and long experience were fired or demoted while lesser men escaped...
...Barber Conable blamed others...
...The private bankers needed little encouragement to lend at high interest rates...
...He could insist that future lines be built only on the basis of studies of the market and other aspects of cost effectiveness...
...They were principally made by Robert McNamara, who was president of the Bank from 1968 to 1981...
...Instead of preaching caution, McNamara preached expansion...
...and it was many months, at least, before the Bank's missions in member countries could select, evaluate, and submit to the Bank's management a specific project for financing...
...He told Hobart Rowen of the Washington Post that by sticking to the decisions that affect so many careers he had been challenged "to prove my manhood...
...A loan officer negotiating a railroad modernization loan, for instance, could strongly suggest that the railroad be recompensed by the government for its policy of allowing old people, children, members of parliament, or government officials to travel on free passes...
...such obstacles are likely to remain submerged when the focus is on the "transportation sector...
...In the judgment of bankers, moreover, those countries had become more credit-worthy...
...T he only way to put all these new 1 people to work was to change the Bank's loan policy...
...In short the project approach gave the Bank leverage...
...The World Bank without Compass" (Le Monde, July 25...
...It is difficult enough for the Bank to make a borrower comply with conditions assuring the proper construction of a cement plant...
...Indeed those programs, whose rate of disbursement was already programmed on the computers, undercut the considerable influence the Bank did have in the days of Eugene Black...
...The people I needed to talk to had such titles as "Chief, Procurement Unit," and "Procurement Adviser (Equipment)" in the "Office of the Vice President, Operations Policy (OPSVP)," "Director, Industry Department," in the "Office of the Vice President, Energy and Industry (EISVP)," officers of the "Country Programs Department" and of the "Projects Department" in the "Office of the Regional Vice President (EMNVP)," and "Legal Adviser, Procurement and Consultant Services" in the "Office of the Vice President and General Counsel (VPG...
...Those agencies might well ponder the asset side of the Bank's balance sheet: as of June 30, Franz M Oppenheimer, a frequent contributor, is a Washington lawyer...
...But neither his law practice in Batavia, New York, nor his honorable service as a congressman on the House Ways and Means Committee could have prepared him for running the World Bank...
...He characterized the reorganization as the product of a "joint effort" of the steering committee, the task forces, the staff association, and the Bank's shareholders, and as having been distinguished "by a continuing spirit of cooperation, enthusiasm and hard work...
...All this reinforced McNamara's faith in delivering the world from misery by lending money...
...The capital subject to call by the Bank when needed to meet these obligations amounts to $71 billion...
...The Bank, McNamara proclaimed, was to be less a bank than a "development institution...
...The very makeup of the Steering Committee and its three "Task Forces," comprising thirty-three people, including nine of the "Support Units Task Force," belies any faith in individual responsibility...
...Sixty-one billion dollars had been disbursed to the Bank's borrowers...
...Fortunately such broad program loans did not, and, though increasing at a significant rate, do not yet constitute more than a small part of World Bank lending, and the potential damage caused by them would be more manageable were it not for another one of McNamara's follies...
...28 THE AMERICAN SPECTATOR OCTOBER 1987 could be reduced, but it would ill behoove Barber Conable, elected by the grace of the United States Treasury, to defy the mandate of the Baker Plan for the solution of the debt crisis, which calls for more not less lending by the international public financing institutions...
Vol. 20 • October 1987 • No. 10
