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Foreign Affairs Asks the Experts
From April 1, 1968 to June 30, 1981, Robert McNamara served as President of the International Bank for Reconstruction and Development, more commonly known as the World Bank. Each of its five Presidents has left a distinct mark on the institution; none has had a greater personal impact on both the substance and style of its operations.
It is far too early to attempt any final judgment on the McNamara presidency. In the light of history, the ultimate test must be whether and to what degree the Bank, under his leadership, contributed constructively to the economic and social progress of the Third World, and thus to the well-being of the world as a whole. How will the projects and above all the new policy directions undertaken by the Bank in this period finally work out? We cannot possibly know at this stage, even in terms of tangible indicators, still less in terms of the intangibles of capacity and attitude that are likely in the long run to be decisive.
But it is not too early for a different kind of account and appraisal. What did McNamara set out to change, and how far did he succeed in achieving his objectives? How did he fare in coping with an already entrenched international bureaucracy, with a governing Board of 20 members representing over 100 member nations, and with the governments of the 45-odd countries that now receive loans from the Bank and of the 20-odd industrialized countries that supply the great bulk of the funds for these loans-in particular the most important of these, the United States? These are, perhaps, more limited questions. It may be, however, that an attempt to answer them will throw light not only on the past, but on the problems that now confront the Bank and its new President, A.W. Clausen.
Mr. McNamara came to the Bank in 1968 directly from seven years as U.S. Secretary of Defense. But even in those years his public testimony had frequently stressed the crucial importance of economic progress, and in one notable speech, in Montreal in 1966, he had piled up a host of examples to make the case that peace and stability in the world depended far less on armament levels than on raising the standards of life of the poorer two-thirds of the world. As his close associates knew, that speech came from a depth of personal feeling that may have been intensified by the experiences of his Pentagon years (notably, of course, the Vietnam War) but that had its roots much further back in his life and personal philosophy. To these associates, and in time to President Johnson, he let it be known that the economic development of the poorer nations was the task to which he wished to devote at least the next phase of his life; many times, then and later, he compared the post-emancipation century of neglect of American blacks-which he hoped was ending for good-to the centuries of neglect that had afflicted the economic welfare of the poorer nations.
Thus, he assumed the presidency of the World Bank with a driving sense of mission. During his first days he gorged himself on statistics of past Bank lending and was surprised to find how small and patchy the effort had been compared with the obvious need. There had been no recent loans to such critical areas as Indonesia or Egypt, nor to the great majority of the very poorest countries in Africa. At the end of the first week McNamara called together the President's Council (the most senior Bank officers) to ask some questions: why was the lending for this fiscal year going to be below a billion dollars? Why were so many needy member countries neglected by the Bank? The reasons given were numerous: Indonesia had only recently returned to the Bank's fold, Nasser's Egypt was unpopular with the U.S. Congress, most countries in Africa were too backward to prepare projects up to World Bank standards-and so on. But above all, it was argued, there were financial constraints that forced the Bank to concentrate its efforts on a few favored and regular customers. The funds for the Bank's regular loans had traditionally been obtained almost wholly in the American market of Wall Street, while the then-small "soft loan" window of the International Development Association (IDA) depended overwhelmingly on the American share, which had to be voted by a reluctant Congress. Neither Wall Street nor the Hill-so the consensus ran-was in any mood for providing more.
Mr. McNamara listened with some signs of impatience as the general gloom of the meeting was deepened by a sudden preternatural darkening of the sky outside. He closed the meeting abruptly, saying: "I am going to ask you all to give me very shortly a list of all the projects or programs that you would wish to see the Bank carry out if there were no financial constraints."
The President's Council filed out in a state of shock at a proposal which seemed to defy the laws of financial gravity. Outside it discovered that the darkness was not caused by a passing thunderstorm, but by a pall of smoke over the city. Large areas of Washington were being ravaged as the poorer two-thirds of its population erupted in outrage and largely self-inflicted violence over the assassination of Martin Luther King, Jr.
During the next three months the Bank staff turned itself inside out, bringing out of bottom drawers proposals that had been rejected for lack of funds, working out new proposals for countries that had previously been considered as having had their full share, and even proposing some standard projects for countries previously rated too backward to be able to cope with Bank-style development. When it was all added up, the proposals seemed to involve roughly a doubling of the Bank's average rate of lending in the past five years. And this was, indeed, the scale of expansion that McNamara presented formally to the annual meeting of the World Bank and International Monetary Fund in his first major policy speech, in September 1968.
By that time he had already gone some distance toward providing two of the basic requirements, expanded funding and a larger and more diversified staff. At the outset, the gravest doubt concerned whether a major jump in the Bank's borrowing might damage its precious AAA rating on Wall Street. No less an authority than the Bank's Treasurer (an American) was so convinced that this was attempting the impossible that he offered his resignation, which was immediately accepted.
But McNamara was confident that the Bank's demands on the world capital markets could easily be met, if not from Wall Street, then from the German economic miracle in Frankfurt, or from the oil-rich economy of Kuwait and its neighbors, or from the burgeoning market in Tokyo, and always, from all corners of the world, through the Banks in Zurich. And by the time of his September 1968 speech, McNamara was able to announce that in the previous 90 days the Bank had raised more funds by borrowing than in the whole of any single calendar year in its history. The trend continued through his first term, with total annual borrowings more than doubling, from $735 million in fiscal 1968 to $1,723 million in fiscal 1973. In the 1969-73 period, less than one-sixth of the Bank's borrowing was from Wall Street.1
Along with this increase in the Bank's borrowing activity came a large increase in staff, beginning with the budget approved by the Executive Directors in June 1968. Here too there were serious initial objections, with one much-respected Executive Director voting against the budget on the grounds that the scale of expansion was unrealistic. (A year later he apologized handsomely.) But as important as the increase in size alone (from 767 professional staff members in fiscal 1968 to 1,654 in fiscal 1973) was the change in its composition. When McNamara took over, the relatively small staff was about one-half Anglo-American, with less than five percent of its members coming from the Third World. The new recruitment effort was designed to provide a staff far more representative of the Bank's total membership. By 1972 the staff was composed of over 100 nationalities, and the trend continued as the staff grew to its present level of about 2,500.
But these, of course, were only the necessary tools for the wider perspective that McNamara brought to the Bank's operations-a perspective he summed up in his September 1968 speech to the Governors by the keynote statement: "I have always regarded the World Bank as something more than a Bank, as a Development Agency."
The problem as he saw it was to create in the Bank a critical mass of power, both financial and technical, sufficient to accelerate the rate of development in the poorer countries to a high but sustainable level. McNamara was fully aware that about four-fifths of the resources for development must be provided by the developing country itself, and of the remaining fifth only a small proportion could come from the World Bank. But he was determined to use that small contribution to make the maximum impact on the development strategy of the country. And since he was determined that the Bank would operate in nearly every developing country, its overall influence could be immense, certainly far greater than any other development agency.
Inevitably, and at once, there were questions from both Right and Left, from inside the Bank and from its clients, about the propriety of the Bank exercising such power, with what appeared to be increased risk both of financial loss and of the Bank getting caught up in political crossfires. The conventional wisdom was that even the World Bank was still essentially a Bank, and should be prudent, not pioneering. So the new President's keynote sentence was not well received by the many conventional bankers present. But it was a rare gleam of hope for the representatives of the developing countries. And McNamara's own answer-again reflecting a deeply held personal philosophy-was given in the same speech in biblical terms: "The parable of the talents is a parable about power-about financial power-and it illuminates the great truth that all power is given us to be used, not to be wrapped in a napkin against risk."
That inaugural speech was the manifesto for his first five-year term as President. In it he clearly foreshadowed not only a doubling of the Bank's lending, but major changes in policy emphasis:
-most of the increased funds were to be (and were) allocated to breaking the main constraints on development rather than limited to then-conventional infrastructure projects. Those constraints he identified as population increase, malnutrition and illiteracy;
-accordingly, the enlarged lending program included much larger investment in agriculture and education, and greatly increased attention to the problem of controlling population growth;
-greatly increased emphasis on the poorest developing countries, especially those in Africa.
In essence, these new policies thrust the Bank into a new activist role, stressing social as well as purely economic factors and tacitly abandoning the old theory that the Bank simply responded to requests for loans. Instead the new style called for a continuous dialogue between the borrower and the bank; its prototype was Indonesia, which McNamara visited in June 1968, deciding on the spot to resume lending and to set up a field office in Djakarta (reporting directly to him) charged with advising the technocrats who were trying to restore the economy so effectively shattered by Sukarno. In a short time the Bank mission, headed by Bernard Bell, had become by far the most powerful external influence on Indonesia's development planning.
But if the Bank was to give this kind of advice-a challenge to which many of its staff, as well as some Executive Directors, responded with misgiving-it plainly had to improve its own competence and understanding of the development process. So the small Economics Department McNamara inherited was substantially expanded into what became in 1972 a Development Policy Staff, headed by Hollis Chenery, which interacted with the technical and country staffs (themselves reorganized in 1971) to produce copious advice on development plans. Within a few years, there was a confidential Country Program Paper for every borrowing country showing what that country's growth points were, how the economy could best be developed, and how far the Bank's lending program could contribute to that course of development. The selective use of Bank leverage became an accepted and important part of its role as a Development Agency. And the Bank became something it had not previously been, the foremost world center for authoritative studies of key development issues and problems; this did not make it necessarily right or wise in all its advice, let alone popular, but it did mean that its voice carried great weight, and came over time to be much valued by most of the countries with which the Bank dealt.
Inevitably, too, the new policy emphasis and expansion of lending raised questions of maintaining the quality and "bankability" of the Bank's loans. It had been comparatively easy, in earlier times, to assess how a dam or transportation project would pay for itself; the new projects in agriculture and rural development, education and population control required far more careful appraisal to ensure that they were productive and that they really benefited the broad mass of the people in any community and could be sustained for some decades to come. There was also a post audit to ensure that the project had fulfilled its mission. All these checks convinced McNamara and most of those around him that though the Bank was doubling its lending, the quality of the loans, in development terms, was improving not declining.
And there was, at the outset, a related issue about the relationship between "regular" loans of fully bankable quality, and the expanded IDA credits that became a rapidly increasing share of the total aid flow, especially to the poorest countries. Taking account of the grace periods (usually ten years) before any repayment was required, and of their low interest rates, IDA's credits were recognized to be grants to the tune of roughly 80 percent. Should they not be removed from the umbrella of the IBRD and made wholly separate, so that IDA could be purely developmental without the drag of banking orthodoxy? This was indeed the suggestion of Sir Arthur Lewis, a preeminent authority (later Nobel Prize winner in economics) and member of the Pearson Commission established by George Woods and McNamara in 1968 to examine the whole development scene. McNamara responded without hesitation that if there were a choice between effective development and banking orthodoxy he would choose development; but in fact there need be no such choice, so that IBRD and IDA could always march to the same drum. In practice, IDA credits grew from an average of $267 million in the 1964-68 period to a level of $1,350 million by fiscal 1973, whereas regular loans increased from $847 million in fiscal 1968 to just over $2 billion in fiscal 1973. Both continued to be handled by the same staffs, and presented for approval by the same procedures.
To preside over a major expansion and reorienting of the Bank's activities might in itself have exhausted the capacities of a normally industrious executive. But McNamara's energy level is far above normal, and through the new changes he was trying always to put together elements of a more adequate approach to development. In this effort he drew on the advice of a constant flow of outside visitors, but above all on the Bank's staff. The analyses they prepared at his request were the basis of months of discussion, often revolving around sections of his annual speeches to the Governors in which he progressively laid down the building blocks in his development edifice. His speeches to other audiences were extremely rare; for the most part he saved his fire for the annual meeting of the world's finance ministers. One early exception, however, was a major speech on the population problem delivered at Notre Dame University in the spring of 1969-and repeated in substance that fall to a gathering of Latin American leaders in Buenos Aires. While the reception was cool on the latter occasion, over time the Bank's new emphasis on population, both in lending programs and in its advice on development, came to be accepted; within a decade McNamara had earned the gratitude and support of most Third World leaders-including those of the great Catholic populations in Latin America.
Moreover, from the outset McNamara laid great stress on intensive personal visits, especially to developing countries. He regularly scheduled four such trips a year, lasting two to three weeks each, and in his first term these took him to over 50 countries, including virtually all the major recipients of past Bank loans, but with a special new emphasis on African countries.
Part of the object of these trips was simply to get to know the rulers of these countries and to let them know what sort of a man the new President of the World Bank was.2 But while Mr. and Mrs. McNamara (who always accompanied him) had to accept a degree of ceremony, the visits stressed intensive discussions between McNamara and finance ministers and other officials, while his wife would visit the social services of the country-schools, hospitals, day nurseries, family health clinics and so on-enabling Mr. McNamara to cross-check what he was told statistically about the provision of basic needs to the poorest sections of the population. And the climax was almost always a final unstructured meeting with the head of government, when McNamara could sound out the president or prime minister on where he thought his state was going, how it fitted into the emerging world pattern, and where the World Bank could help.
All of this was important and educational. In Africa, where the need for help was greatest and where McNamara visited most assiduously, he had the most fruitful relations. There was mutual admiration, accompanied by plain speaking on both sides, in his exchanges with such leaders as Kaunda, Senghor, Nyerere and Kenyatta. McNamara did not talk statistics with such men, but ranged over political philosophy, poetry (with Senghor), and the long history of the African continent. Visiting Nigeria within weeks of the end of the Civil War, he made an impromptu speech to the Federal Cabinet drawing on the U.S. experience of binding up the wounds of fratricidal strife which moved several of the generals turned ministers to quite unsoldierly tears. To meet and talk with virtually all the leaders of the emergent world was in itself a unique education.
But, to those of us who watched him closely (and tried to keep up with him), the part of these trips that had the greatest impact on McNamara was the day or more which, from the first, he insisted be devoted to visits to the countryside well outside the cities. It was on these rural expeditions that McNamara came to the conclusion that poverty could never really be alleviated except by direct action at the small-holder level. This came to be the basis on which his poverty-oriented strategy was built.
For what McNamara saw was that the aid projects of earlier periods-including the capital investment stressed by the Bank in the Eugene Black era-had indeed operated to modernize, industrialize and create wealth in the modern sector, which usually meant the cities of the Third World. McNamara observed how much good had been done by these projects, but he also could see how rapid population growth had swallowed up the gains and how untouched in their poverty were those outside the modern sector, especially in the rural areas.
In effect, the new development philosophy which had emerged by about 1972 carried a step further the emphasis on population, agriculture and education which McNamara had stressed in 1968. By the time he spoke at the 1972 UNCTAD Conference in Santiago, McNamara was laying dominant stress on the "skewing of income" in the Third World, and on the plight of the "bottom 40 percent" of the population who did not contribute to development and were not touched by it. At Stockholm, in June the same year, he renewed the emphasis on their poverty as an objective in itself (while also rejecting the notion that essential economic growth need involve unacceptable environmental costs), and at his annual speech in the fall of 1972 he called bluntly for nations "to give greater priority to establishing growth targets in terms of essential human needs: in terms of nutrition, housing, health, literacy and employment-even if it be at the cost of some reduction in the pace of advance in certain narrow and highly privileged sectors whose benefits accrue to the few."
It was a pioneering statement of what became known as the "basic human needs" approach to development. Most of the elements in that approach had come to him initially from others; with the exception of his emphasis on population, McNamara was not truly an originator. But it was he who made the approach a reality, and was responsible for devoting an increasing share of the Bank's efforts to these new directions, using the enlarged resources and intellectual capacities he had created.
In late 1971 the Governors of the Bank (in effect the finance ministers of the world) began to consult about the possibility of a second five-year term for McNamara, or a change in command. (They knew that the Nixon Administration would be heavily preoccupied with its own reelection, and wished to have the matter resolved before the American political campaign reached fever pitch.) As they called for reports from the Executive Directors who represented them at the Bank headquarters they received somewhat mixed signals-the achievements were impressive but the risks were great and none of the finance ministers, not even of the Big Five who were the largest subscribers, had the comfortable feeling that they had any measure of control over the President they had somewhat reluctantly elected in 1968.3 His achievements, tirelessly quantified in his annual speeches to them, could not be ignored. The immense increase in the Bank's lending, and in IDA credits, had been accomplished without impairing the Bank's credit rating or its ability to replenish IDA funds. And the cost of the greatly increased staff had been met out of gross profits without any diminution of net profits.
The staff had been reorganized so as to give a measure of autonomy to six regional Vice Presidents, of whom three dealt wholly or in part with Africa, which was replacing the Indian subcontinent as the main focus of World Bank activity. But the reports from the Executive Directors also noted that this devolution of action responsibility did not mean that anyone moved out of Washington, nor that the regional Vice Presidents escaped from the keen oversight of the President. The charge that the Bank's management was unduly centralized, even authoritarian, was (and remains) frequently heard, both within the Bank and outside it; McNamara's answer was that only through such a style of management could the Bank operate coherently and effectively, especially in carrying out changed development strategies.
It was the feeling that McNamara was in total control of the Bank and beyond their control that most worried the 20 Executive Directors on the Board and the 117 Governors they represented. After the 1968 inaugural speech, several of the Executive Directors representing developed countries attempted to get McNamara to submit in advance to the Board his speeches to the annual meeting of Governors, on the grounds that they were policy statements and the Board was responsible for policy. But the President always firmly replied: "If you want to do that you will have to get yourselves a new President."4
Moreover, everyone was aware that there was a good deal of criticism both of the emerging poverty-oriented policy and of the increased size and power of the Bank. It came first of all from the old staff of the Bank who found themselves being hustled out of their customary rather leisurely perfectionism, and forced to deal with poverty and aid rather than with direct and visible forms of wealth creation and investment. In particular the "old colonial hands" (mostly British and French former civil servants), who had done excellent work on improving large-scale agriculture, found themselves involved in the unfamiliar and less congenial task of promoting small-holder farming. A number left, carrying home their complaints about McNamara's inattention to the most profitable methods of farming.
Similarly the International Finance Corporation-the Bank's affiliate for partnership with private enterprise-found itself being pressed to seek out developmental projects (i.e., benefiting the poor masses) rather than more immediately profitable projects, and to deal with local enterprises (which were rare in Africa, for example, save in Nigeria) rather than with large multinational companies. When IFC's Executive Vice President left to return to private business, a number of his colleagues followed him, complaining that McNamara's Bank was biased against private enterprise. On its face this may have seemed a strange charge to bring against a man who had once been President of the Ford Motor Company; his answer, basically, was that the large private companies of the industrialized world did indeed have a significant role to play in the developing countries, but that it was the Bank's special task to seek to stimulate home-grown private enterprise there.
Among the industrialized countries, there were at this stage considerable differences of opinion. The Scandinavian countries (and the Dutch) strongly supported the new emphasis on poverty-oriented projects, and indeed their Executive Director on the Board regularly opposed any large-scale farming project on the grounds that it was not helping the poorest-to the intense and articulate fury of at least one of his Latin American colleagues. On the other hand, several of the OECD countries noticed that the poverty program was not helpful to their exports of capital goods. But the usual pattern of opinion in the capital-exporting countries was a division within their governments between the finance ministries, which were skeptical, and the aid and development ministries, which were generally supportive of a program aimed at the poorest.5
In its early stages the new poverty-oriented program of the Bank had been sharply criticized by many of the middle-income recipients of Bank loans-for example, the economic minister of Brazil told McNamara he wanted "to go for take-off or bust; when that is achieved we can worry about fairer shares." And, as we have noted, several countries, particularly in Latin America but also including the Philippines, initially objected to the Bank giving advice on social matters such as population control.6
But it was in the poorest countries that McNamara had-as might have been expected-made his greatest mark. His visits to such countries had almost always found him urging new and inexperienced governments to use Bank assistance for development programs that affected the mass of the people and not just the elite in the capital city. This advice was often initially resented since it was inevitably given first to that elite, but eventually, because finance ministers needed the aid, they accepted also the advice and gave their development program a twist toward helping the poorest.
Though the World Bank with its endless supervision missions, its demands for strict accounting and innumerable statistics has never been a popular institution in the developing world, its President by these visits did convince their troubled and often shaky governments that he was their friend who was really trying to use the World Bank's power to find them a better place in the world. Their representatives on the Bank Board gave him steady support, though at the United Nations the Third World diplomats regularly demanded a larger say in the policymaking of the World Bank and its sister institution, the International Monetary Fund.
Within the Bank, moreover, the Executive Directors-who saw him constantly and at close quarters-had by then become, for the most part, supporters of McNamara. Although there were occasions when some felt overwhelmed by his barrages of statistics, he went to great pains throughout not to let the Board become polarized between developed and developing countries and not to introduce any management resolution (whether a project or a policy) for which he had not already obtained a reasonable consensus from both groups. This meant that he had usually sounded out key Executive Directors with care, and the proposed action often reflected a compromise between what he himself thought ideal and what would command the necessary support.
Thus, in the soundings of late 1971, there emerged a strong consensus among the Executive Directors that he should be reappointed. This was done under the lead of two Executive Directors, representing developed and devel-oping countries. But there was one flaw in it: it did not include the United States.
For McNamara was in Washington, if not a prophet without honor, inevitably a controversial figure. His Vietnam years had left him with enemies in the Congress, and he had had to combat a tide of opposition to foreign aid, which had come to be associated not only with the interventionist liberal approach he represented but with foreign wars. In 1969 he had rallied to the side of Edward Kennedy after Chappaquiddick, and in the summer of 1971 the publication of the Pentagon Papers had revived memories of his Vietnam role in an especially personal and critical way. All this was grist for a press corps which had always tended to polarize toward him, with some who saw him as managing the news for his own benefit. The occasional stories told by disgruntled staff members of the Bank found a ready hearing in such press circles and among congressional aides imbued with the Vietnam controversy.
"The trouble with McNamara," a wise European Executive Director said at the time, "is that he is an insider fighting desperately to keep this Bank outside Washington politics." He was indeed an insider, consulted by leading political figures and sometimes, too conspicuously, by Henry Kissinger in the White House. But his efforts to use his experience as an insider to maintain the international status and independence of the Bank-and to maintain crucial congressional support, above all for IDA replenishments-took what seemed to many on the Bank staff an inordinate share of his time. To the three-quarters of the Bank staff who were not American, it often seemed that all their President cared about was getting American support, and that he was not very successful either on the Hill or with the Administration.
Certainly-and most to the point in terms of his reappointment-he had irritated many important leaders in the Nixon Administration. They had thought that, as an American, McNamara should be responsive to policy nudges, but over and over again he proved to be unnudgeable. In one notable case, when the Nixon people pressed for a cutoff of Bank aid to Chile after the Allende regime came to power in 1970, McNamara went out of his way to send a private message by the hand of Felipe Herrera, a Chilean who had been President of the Inter-American Development Bank, saying that the World Bank hoped to maintain relations with the new regime; the fact that this initiative failed was due to Allende's own colleagues on the extreme Left.
Thus, American support for a second term for McNamara was belated and grudging. Some of the Nixon staff had little interest in the presidency of the World Bank except as a patronage plum, and it was only after McNamara had talked directly to the President himself, who respected him, and after it had been discreetly made clear that a patronage-type appointment was out of the question, that the American government came around and accepted the reappointment, which was formally approved early in 1972. It was a harbinger of the difficulties that were to beset his later relations with American Administrations.
McNamara began his second five-year term in April 1973. For a time all was clear sailing, and the September 1973 Annual Meeting in Nairobi-the first time that meeting had ever been held in Africa, and an appropriate token of the leading position that continent had assumed in the Bank's new programs-was a happy, almost a triumphal occasion.
In his opening speech at Nairobi, McNamara coined the memorable phrase, "absolute poverty," defined broadly as "conditions of deprivation that fall below any rational definition of human decency," and made these conditions the explicit target of new poverty-oriented programs aimed not at relief but at development to be achieved by making the poor more productive. The phrase was also, in fact, his answer to those who were starting to contend that the developed nations could not afford the increased amounts he was asking because of the need to tend to the poorer elements in their own societies; these, he argued, indeed deserved attention, but their status, by comparison, was only one of "relative poverty."
His impassioned plea to help the "absolute poor" received an ovation not only from the unusually large number of Third Worlders in the audience, but from the Western financiers too. Many of the Western banks were beginning to be interested in investment in Africa, and were glad to see the World Bank adapting its traditional role of financing infrastructure to the needs of primarily peasant agricultural economies. These arguments were fortified by the presence in Nairobi of large African delegations who lobbied their ex-colonial masters in favor of McNamara. At the end of the meeting the IDA funds were replenished (after a brief last-minute holdout by the United States) at a substantially higher level than before. It was a vote of confidence in Robert McNamara and his handling of the Bank at the beginning of his second term.
But within a few weeks of the Nairobi meeting, the Middle East exploded once more into war; there followed the Arab oil boycott and a little later the quadrupling of world oil prices by OPEC. The political and economic consequences of this sudden ending of the myth of cheap energy were catastrophic for the industrialized North and the developing South alike.
For the South it at first appeared as a triumph that a few of their members had been able to wring out of the North a flow of resources tenfold the amount which had ever come by way of aid. The developing countries developed a new cohesion which expressed itself in the enlarged role of the Group of 77, and in concerted demands for a New International Economic Order. In particular, many of these nations came to believe that what OPEC had done for oil they could do for other commodities, and thus finance their development programs largely by trade rather than aid.
For the North the rise in oil prices meant periodic current account deficits, and a consequent recession that is continuing today. The industrialized countries felt (however unjustifiably) that they were being robbed by the South, and became increasingly unwilling to make additional voluntary payments to the robbers' associates in the South. The United States in particular was determined at that time to force down the price of oil, and to treat the OPEC countries and their associates as enemies.
When McNamara returned from his Christmas break on New Year's Day, 1974, he found on his desk a memorandum bleakly beginning: "After the quadrupling of oil prices last week things will never be the same again. We cannot expect a return to normality. . . ." There followed statistical summaries of the results that could be expected: the most hard-hit of all would be the poorest countries, which could neither cut back on their use of oil, nor afford the new costs, nor borrow on the open market. The most benefited would be those populous developing countries which were oil exporters (Nigeria, Indonesia, Venezuela, etc.) and so could use their new wealth for long-term development. For those oil exporters with small populations (Saudi Arabia, Kuwait, etc.-even Iran as it was then judged) there was a dilemma; they would inevitably build large surpluses, but should they keep them within bounds by leaving more oil in the ground, or should they keep up the flows of oil at the West's request-in which case where should they invest their billions of surplus dollars?
Without delay, but after numerous individual soundings, McNamara came to two decisions: the developing countries would need more external financing if their rate of growth was not to fall unacceptably and there could be only one source for that extra money-the capital-surplus oil producers. At the same time, the Bank's analyses did not support the view that the prices of other commodities would rise, or could be controlled, as oil had been; there was no new reordering of comparative prices in sight.7
Accordingly, by the beginning of February McNamara was in Tehran (with his colleague Johannes Witteveen, the Managing Director of the International Monetary Fund) talking about an OPEC fund for development. The Shah insisted that if OPEC put up a lot of money it must have a large say in its disposition; McNamara insisted that the money should be given for specific projects which would be processed by World Bank professional staff to World Bank standards. The agreement was that a large proportion of the funds should be provided by the capital-surplus OPEC countries; the voting power in the controlling body should be one-third each to OPEC, the developing countries and the industrialized Western countries; but the operations would be carried out by the existing World Bank staff.
It seemed to McNamara a good and logical way out of a desperate situation, and on his return he told the Board just what he had agreed, "of course subject to your approval." But he had reckoned without the determination of the Americans (by which he seemed genuinely surprised) to break the OPEC cartel and not to collaborate with it in any way. In the face of U.S. opposition the proposals sank without trace. It was a major setback for McNamara personally and for the hope of enlisting the oil-producing countries to assume a much larger share of the foreign aid responsibility. McNamara was never truly effective in approaching these newly rich countries; although he did manage to get more help from them over time-and in the process to increase their voice in the Bank's operations-the effort was never fully successful, and there remained constant strains between the oil producers and their major industrialized customers.
Things were indeed never going to be the same again. From 1974 to the present day the Bank has been riven by a struggle for power expressed mainly in financial terms. The development policy issues were more or less settled before that, and the poverty-oriented strategy was increasingly accepted by all parties. The Bank project staff and the Development Policy staff continued to refine the theory and practice of the strategy, eventually publishing a yearly "World Development Report" which became a guiding light for the development community around the world. The intellectual leadership and the financial clout of the Bank were clearly established, but with the industrialized world in recession, and growth in the developing world slowing to a standstill, the key question remained whether there should be a stepping up of the resource flows to meet the needs of the Third World, or a slowing down of the flows to meet the felt need for economies in the industrialized world.
There was, in fact, something of a compromise: the middle-income countries (largely in South America) got loans from the international commercial banks, whose coffers were loaded with the deposits of the OPEC surpluses. But this was of no benefit to the poorer, less credit-worthy countries. McNamara's appeal was for these, and in his speeches, his conversations with finance ministers and in his dialogue within the Bank he continued to press the case for processing larger and larger amounts through the capable and effective hands of the World Bank.
During his period (May 1974 to January 1977) as Secretary of the U.S. Treasury, William Simon set himself up as the leader of the opposition to any sizable increase in Bank activity. This was partly because he passionately believed that any extra burden ought to be borne by the OPEC countries, whom he considered to be responsible for all the economic ills of the world; partly it was because he was a restrictive monetarist and partly it was a matter of institutional jealousy in that he felt the World Bank had become more powerful than the U.S. Treasury, and he wished to show who was master.
At first he tried to operate through the U.S. Executive Director on the Board, but soon found that on his home ground McNamara was unbeatable. Simon then tried to build a fence around McNamara by establishing a ministerial group of 20 (corresponding to the 20 seats on the Board) named the Development Committee. But this open demonstration of the American wish to control the Bank only led to the formation of rival groups seeking to exercise their own power. The Europeans, increasingly under German leadership, were one such group, and the developing countries in close alliance with the OPEC countries began to flex their muscles and ask for more power in the decision-making of the Bank. In such a situation it was easy for McNamara to remain independent and govern by consensus; but the open quarrel between "the largest shareholder" and the World Bank weakened both parties and boded ill for the future.
At first the advent of the Carter Administration in 1977 seemed to lighten the gloom. The White House leaked the information to the press that the President intended to double the miserably poor U.S. aid level, and subsequently the international organizations were told this on a more official basis. Only then did the Carter White House begin consultations with Congress, whose traditional distaste for "foreign aid" had been whetted by the previous Administration. The new Administration therefore decided to sweeten Congress by taking up one of Secretary Simon's pet peeves and promising to cut the salaries of the international staff of the Bank (and Fund).
There ensued an expensive 18 months' investigation, which revealed (ironically for an institution occasionally accused of lack of sympathy with private enterprise) that Bank and Fund salaries were comparable with those paid elsewhere in the world by public and private banking institutions, and rather below West European standards. Moreover, the money to pay the salaries came out of World Bank profits, not the American taxpayer's pocket, and was paid to a staff that was three-quarters non-American. Thus, the campaign had no positive results, but it did provide Congress and the Washington press corps with a great deal of ammunition for attacking the multilateral financial institutions. In consequence, their international staff, including the Executive Directors who reported back to the governments they represented, became convinced that the United States was determined to dominate or destroy the institutions.
The annual wrangles in Congress over the appropriation of funds for the World Bank strengthened these suspicions, for Congress regularly attempted to insert riders limiting the use of IDA funds to purposes which individual Congressmen approved (e.g., no funds for agricultural projects that competed with American agricultural exports). McNamara was absolutely firm that the Bank could not under its Charter accept such "tied" funds, and eventually a compromise was agreed whereby the American Executive Director would be instructed not to vote for such loans. Then the Carter Administration, under congressional mandates, acted to try and enforce its human rights policy by refusing to vote for loans to selected countries of whose regimes they disapproved. Again McNamara (who had a considerable regard for the objectives of the human rights policy) refused to bend the rules of the Bank, which stated that loans must be allocated solely on economic considerations. He had the full support of the Board, with the dismal result that the American Executive Director week after week refused to vote for loans (whether because they were in competition with American exports or because the regime was unacceptable was not stated) which were duly passed by an otherwise unanimous board.8
Yet the Bank's programs continued to grow. In McNamara's second five-year term, regular Bank loans increased from about $2 billion to over $6 billion annually, while IDA credits went from $1.3 billion to $2.3 billion. And the amounts dedicated to agriculture, education and population control-to all aspects of the human needs of the poorest people-continued to increase as a proportion of the totals. Despite the negative positions taken by the American government-under Simon toward the very expansion of programs, and under the Carter Administration toward specific loans to countries with human rights problems-McNamara's standing with the Carter Administration was generally high, and in 1977 his reappointment to a third term was affirmatively backed by the United States and went through with a minimum of friction.
But the tide of sentiment against increased aid to developing countries continued to grow; the United States in particular dropped its foreign aid proportion of GNP steadily to a level of only 0.2 percent, as against the U.N. target of 0.7 percent adopted in 1970, and other donor countries began to flag as well. In real terms, the Bank's operations were only barely keeping pace with the impact of global inflation, and as McNamara and others saw it were falling further and further below the levels actually needed. His response was the creation, in 1978, of a new commission headed by Willy Brandt, winner of the Nobel Peace Prize and former Chancellor of the Federal Republic of Germany; for the first time in the history of such commissions, this one included a full slate of representatives from developing countries. There were high hopes that its recommendations could lead to a new measure of understanding of the basic common interest of both developed and developing countries in accelerating the pace of development.
But before the Commission could make its report, the issue of American efforts to select the Bank's beneficiaries came to a head in a particularly painful episode in the fall of 1979. The crisis arose, ironically, over Vietnam. Shortly after a united Vietnamese government had taken over the seat left vacant by the collapse of South Vietnam in 1975, the Bank had negotiated an agricultural loan to the country, which was in the midst of a famine area. It passed the Board with only the American Executive Director protesting. Further loans were in the planning stage when the Vietnamese invasion of Cambodia occurred, in September 1979. Unofficially but effectively, a freeze was imposed at this point, but that was not enough for Congress, at that moment debating the sixth replenishment of IDA.
All along, the responsibility for dealing directly with the American Congress had lain with the U.S. Treasury Department, which even when wholly supportive often lacked the drive necessary to be effective on the Hill. At the staff level, word was now conveyed to McNamara that only a personal assurance from him that there would be no further loans to Vietnam would prevent the defeat of the IDA replenishment bill. In circumstances of maximum confusion and haste, he was persuaded to sign a letter to the Chairman of the relevant House Committee to this effect, which of course was immediately made public.
Then the storm burst. The Bank's Board of Executive Directors-long disturbed by American attitudes-joined unanimously to protest both the bypassing of the Board and the clear breach of the established practice that the President of the Bank dealt only with the executive authorities of member governments; to them McNamara's action underlined the determination of the United States to politicize the multilateral institutions. The episode really shook the confidence of the Board in their chairman's capacity to defend them against what they perceived as a hostile America. To make matters far worse, even after McNamara's personal reassurance Congress did not appropriate new funds for IDA and did not do so during the remainder of his term of office.
Moreover, all these apparent efforts by the United States to call the tune for the Bank inevitably intensified counter-efforts by other groups, in particular the group of developing countries at the United Nations and at UNCTAD (the Group of 77). There was constant but ineffective pressure to get the Bank to conform to the New International Economic Order, and demands that the voting structure of the Bank should be tilted somewhat away from the traditional donors, and more toward the recipients. For many years McNamara fended off these demands by sheer force of personality, explaining to individual developing country governments, and to groups of their ambassadors at the United Nations, how he was using the Bank for its proper purpose, which was the development of member countries. He won the confidence of the great majority of developing-country governments, but not always of their representatives in New York or Geneva, where there was a constant struggle to use their majority vote in U.N. bodies to seize the commanding heights of the global economy.
In 1979 this campaign took a new turn. The Group of 77 at the United Nations held their own ministerial meeting in Belgrade just before the annual meeting of the Bank and IMF. It was significant that most of their demands for change were addressed to the Fund, with the Bank being asked only to do more of what it was already doing. But on this occasion the OPEC countries, anxious to match their muscle power with America's, insisted on pressing a demand that the Palestine Liberation Organization should be an observer at the Bank/Fund meeting (it had already been admitted to such status in the U.N. General Assembly and several other U.N. bodies).
At the 1979 Annual Meeting, the issue was finessed by a ruling from a Chairman responsive to the American viewpoint. But the demand remained on the table and by the summer of 1980 it seemed clear that a new and less responsive Chairman might rule differently at the September 1980 Annual Meeting.
Having the PLO in an observer status would not have had real significance in terms of affecting the Bank's operations. But it would have been a red flag to powerful elements in the U.S. Congress, and in McNamara's judgment could have been fatal to the passage of several Bank appropriations that required congressional approval. Accordingly, in the late summer of 1980 he intervened forcefully to obtain a favorable quorum of the Bank's Executive Directors, which put the issue off to the future. The action, foreseeably, called down on his head the obloquy of the Arabs and of the developing countries generally.
Already, in June 1980, McNamara had come to the conclusion that he should not seek to serve out a full third five-year term, and had announced that he would retire at the end of June 1981. It was a decision based on his conviction that 13 years was long enough for any man to occupy the post. That the squabble over the PLO cast a shadow over his last annual meeting as President was tragic-but it was hardly fortuitous. McNamara's diplomacy was intended to maintain his independence and that of his institution, whether from pressures of America, or the Big Five on the Board, or of the United Nations or of OPEC. He had visited the Arab OPEC countries and had found some true partners in development-for instance Abdlatif Al-Hamad of Kuwait-but, though he wished to increase the voting power of the Arab OPEC countries more than the Board would agree to, he did not wish to be pressured by anyone on an extraneous political issue. A more sinuous diplomat might have extricated himself from this imbroglio-but it would not have been the Robert McNamara to whom, in the event, warm tributes were paid at that farewell meeting by Arabs and Africans, Europeans and Asians.
These episodes-and the running conflict with the American government from which they largely stemmed-darkened the last years of McNamara's tenure. It was a paradox that they should have happened to a man so quintessentially American in his whole character and outlook (who, to take only a small example, speaks no language but English). The dangers of political interference with the Bank, which he combatted so vigorously, will doubtless remain to torment his American successor-whose selection in the fall of 1980, in the middle of the American presidential campaign, was McNamara's last successful effort at dealing with the American government: the candidate he urged, A.W. Clausen, had such generally recognized qualifications that, when nominated by President Carter, his appointment was immediately endorsed by the about-to-be-elected President Reagan.
But, if astute political handling of major governments remains essential for any President of the World Bank, its basic problems run far deeper. By the time of that 1980 annual meeting, the Brandt Commission had made its report, which included not only immediate recommendations for dealing with the pressing major problems of food, energy, and monetary arrangements, but a long-term framework for a world development agency drawing on the contributions of developed countries on a fixed basis that would assure a high level of aid flows. But the world, and especially the key developed countries, was not ready to rally even to the short-term actions called for, while to many the longer term framework seemed visionary. This was not true of McNamara, who saw in the report a first blueprint of what he believed would have to come to pass in the decade of the 1990s-although he had reservations about the wisdom of outlining that ideally just world to which the developing countries aspire. McNamara was a pragmatic idealist, and he recognized that a great leap forward for the Third World was impracticable at this moment and likely to frighten off serious supporters of sustainable development.
True to his belief that power-whether in an individual or an institution-is there to be used to the full, not "wrapped in a napkin," McNamara had become determined to use his last year as President to the fullest. Accordingly he directed his final annual speech in the fall of 1980 not only to the lessons of his tenure but to his own vision of the scale of effort required.
At that farewell meeting McNamara distilled the wisdom he had gained about development:
The principal goals of development . . . are: to accelerate economic growth, and to eradicate what I have termed absolute proverty.
The two goals are intrinsically related, though governments are often tempted to pursue one without adequate attention to the other. But from a development point of view that approach always fails in the end. The pursuit of growth without a reasonable concern for equity is ultimately socially destabilizing, and often violently so. And the pursuit of equity without a reasonable concern for growth merely tends to redistribute economic stagnation.
Any successful effort to combat poverty would have to do two basic things:
- assist the poor to increase their productivity; and
- assure their access to essential public services.
Development is clearly not simply economic progress measured in terms of gross national product. It is something much more basic. It is essentially human development; that is, the individual's realization of his or her own inherent potential.
That was what he had fought for as President of the World Bank. But as he looked around the world in 1980 he saw that the problem of implementing that policy was becoming far more difficult and costly.9
Typically, instead of scaling down his program to suit the requirements of the recession-struck industrialized world, he raised his sights enormously to meet the desperate needs of the poorest and to prevent the gains in development from being lost in a global economic downward spiral. At present it seems very doubtful that his pleas will be heeded-he had finally spent all his power.
Throughout his 13 years at the Bank he was always aware that his plans could not succeed without the political will of the major economies to build a more equitable world order. He passionately believed that it was well within the capacity of the existing Western market system in partnership with the developing countries to achieve the goals he put forward-for instance the abolition of absolute poverty.
He was perhaps insufficiently aware of the aspirations of many Third World leaders because he was so conscious of the desperation of the absolutely poor, and he was not prepared to accept the Third World view that World Bank assistance was insecure because it depended so much on his continued leadership. Yet it seems likely that the developing countries were right to distrust a source of assistance that was ultimately dependent on the whims of Congress, and that McNamara was wrong in that historic instruction in April 1968 to plan "as if there were no financial constraints." In his mind, cold logic and burning conviction combined to convince him that it was in the clear interest and well within the power of the industrialized world to assist effectively the developing countries in their struggle against the downward spiral of poverty. And if this could be done, his Americanism convinced him that the United States would take the lead, so that he never sought to fashion an alternative leadership based on Europe.
At the beginning of the 1980s, after the second oil shock, the political will for development had begun to evaporate fast in both Britain and the United States, which had been the twin pillars of the World Bank. Just at this moment, the need for its assistance was redoubled by the entry of a billion Chinese into its membership, and by the realization (largely through World Bank reports) that Africa, the least developed and poorest continent, was making no progress and was, indeed, on the edge of economic disaster. If this was the result of a decade of the World Bank's special attention to the poorest, it was asked, should not some other strategy be tried? Certainly there was little effective support for the outgoing Bank President's plea for a further increase in Bank funding. Yet the problems of Africa and Asia will not go away, but will face his successor and the world community even more starkly.
Robert McNamara believed that lifting people out of absolute poverty was the foundation on which development must be built. He acted on the assumption that it was a correct use of his power to create in the World Bank a machine that if used to the full could lead many poor countries to end absolute poverty in their midst while building a reasonable level of development. There are many of us who believe that the creation of that machine was his finest achievement, and that if it is not used, soon and fully, it will be a historic blunder, which may shatter the possibility of creating a planetary order that can accommodate six billion people by the end of this century.
1 The German capital market had already become a significant source in the 1964-68 period, and the Japanese capital market became significant in 1970. In the course of McNamara's tenure, the choice among capital markets varied from year to year on the basis of cost factors, with Wall Street an occasional major source; however, it was not used at all in 1978-80. In addition to private sources, the Bank has steadily obtained approximately one-third of its requirements from Central Banks and other official sources.
2 In the early years, McNamara had to deal particularly with the stereotype that the American Secretary of Defense who had waged the Vietnam War must be a militant anti-communist. For example, General Suharto, the Indonesian leader who had come to power by a coup which involved the slaying of many Chinese communists, was anxious to prove his pro-Americanism and anti-communism by emphasizing these historic facts; when he finished Mr. McNamara asked him how he was proposing to integrate the Chinese into his state where their skills and hard work were so much needed.
3 The so-called Big Five were (and are) the United States, the Federal Republic of Germany, Japan, France and the United Kingdom.
4 In presenting McNamara with a volume of his collected speeches at his last Board Meeting in 1981, one Executive Director said: "We must recognize that these speeches would never have been made if we had succeeded in insisting on approving them in advance."
5 The attitude of the Federal Republic of Germany, for example, became significantly more favorable under the influence of Egon Bahr as Development Minister. Although McNamara had developed excellent relations with many European leaders, such as Edward Heath, Valéry Giscard d'Estaing and Helmut Schmidt (the latter two then being finance ministers), he did not cultivate close links with their Establishments, which would have welcomed him with open arms, and listened to him with open minds. As a result he appeared in Europe, Japan and Australia as a rather remote, primarily American figure.
6 At an early stage there had even been rumors, carefully circulated, that the Bank would refuse to lend to countries that did not accept McNamara's advice on population control; in time the record disproved the charge, but McNamara continued to insist that the consequences of rapid population growth were a matter that governments needed to take into account in making their sovereign decisions.
8 Under the Bank's Charter, voting weight is determined by a nation's (or group of nations') share of capital. Technically, a simple majority is required for the approval of individual projects, with higher percentages required for such major actions as increases in capital, the admission of new members, or changes in the Articles. The U.S. share of capital, now slightly less than 21 percent, remains sufficient in practice to permit a veto on such major actions; as to loans, if U.S. objections are shared by any significant group of other nations, the result would be failure to achieve the necessary consensus by which the Bank actually operates. However, the U.S. objections described above failed to attract any other support-after a brief period in which the Germans and Japanese were sympathetic.