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The World Bank and world poverty

By Robert F. WasserstromRobert F. Wasserstrom is a senior associate at Washington's World Resources Institute, a research center for global environmental, energy, and resource issues. / June 25, 1984



While public attention has been focused on the growing debt burdens of Latin American countries, the World Bank has quietly revised its longstanding policy to assist the disadvantaged in developing areas. Early in May, senior bank officials gathered in Bedford Springs, Pa., to hear a special report from Paul Volcker, chairman of the Federal Reserve Board, and to dismantle the barriers that have traditionally insulated development aid from the politics of international finance.

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Since the bank was created in 1946, underdeveloped nations have borrowed large sums to build roads, dams, ports, irrigation works, factories, and power systems. Much of this money was raised in the international capital markets, where the bank's assets, supplied by such donors as the United States, France, Britain, and Japan, made it an attractive customer. This capital was re-lent with a modest markup to developing countries which could not obtain adequate credit. In cases of extreme need, such countries were even allowed to take out loans at virtually no interest for up to 50 years. The justification for these loans arose from the view that poor countries sometimes required a little extra help in laying the groundwork for self-sufficient economic growth.

Under President Robert McNamara, who took office in 1968, the World Bank adopted its much-acclaimed ''poverty orientation'' and expanded its involvement in health, nutrition, education, agricultural credit, land reform, and population control. It also devised procedures to measure how many people lived below the poverty line in underdeveloped areas. At McNamara's insistence, lending officers were then required to ensure that these people received substantial benefits from every project the bank supported. Finally, he set up a special office of environmental affairs to suggest how bank staff might improve techniques for managing natural resources and protecting the rights of ethnic minorities.

When McNamara departed in 1981, he left a unique legacy and a highly proficient technical staff whose reputation for competence and fairness set the standard for other international organizations. Unfortunately, this legacy has not been maintained. Under McNamara's successor, A. W. (Tom) Clausen, the bank's most cherished asset, its relative independence from partisan interference, appears to have eroded. In the past three years priorities have shifted from projects designed to benefit the underprivileged and now factor large-scale capital ventures which enhance the value of private investment. Programs in health, education, and rural development have been curtailed. Even agriculture has suffered.

What has brought about these changes? Pressure from the Reagan administration has played a primary role in altering the bank's fundamental commitments. Such pressure underlay the public controversy that erupted briefly last year over US contributions to IDA, the bank's special fund for disadvantaged nations. The message this controversy conveyed was reinforced by the administration's decision to abrogate previous understandings and reduce support for the fund. Simultaneously, as countries like Mexico, Brazil, Argentina, and the Philippines have fallen farther behind in payments to private lenders, US officials at the bank insisted on blurring the line between development assistance and so-called structural-adjustment loans; i.e., loans that may be used to pay external debts. The effect of this arrangement has been disturbing: Instead of stimulating economic progress, the world's largest source of public capital is now being used to bail out insolvent governments and their imprudent creditors.

Implementing the new order will involve considerable alterations in bank procedures. No longer will project officers be required to demonstrate that people below the poverty line will benefit from major investments. Lending to some financially troubled nations will be accelerated, with the paradoxical effect that the size of their external debt, not the technical merits of their investment program, may determine how much money they receive. Bank staff have been told they will have less opportunity to focus on project design and will spend less time monitoring compliance with the loan agreements. Finally, as if to ensure that supervision will become a mere formality, senior officials plan to permit more ''front-ending'' among favored borrowers; that is, loan funds will be disbursed in one lump sum rather than in a series of payments as development milestones are reached.

Clearly, such modifications spell the end of McNamara's strategy to alleviate world poverty, preserve the global environment, and further the embattled cause of ethnic and racial minorities. They also signal a new stage in the bank's history, when technical decisions may be subordinated to the political agenda of whoever happens to hold public office in the US. Most troubling of all, such policies appear to have been formulated behind closed doors without wider discussions or review. Surely, a transformation of this magnitude must undergo full congressional scrutiny before it is allowed to proceed any further than it already has.