Challenge to foster human capital: As bankers and finance ministers gather in Washington, the World Bank looks for fresh vigour under a new chief
How can 6,000 civil servants, mostly based in Washington, best promote development in the Third World? That is the vexing question facing Mr Lewis Preston, the former chairman of J P Morgan, the New York bank, who takes over as president of the World Bank this September. As bankers and finance ministers gathered in Washington this weekend for the spring meetings of the bank and International Monetary Fund, there was no shortage of advice. The US Treasury wants the bank to bypass the governments of developing countries and lend sizeable sums directly to the private sector. The bank is also under pressure to follow the example of Mr Jacques Attali's European Bank for Reconstruction and Development (EBRD) and attach strict political conditions to its loans. Development economists, meanwhile, are urging the bank to respect the rhetoric of last year's World Development Report and focus more on poverty alleviation. Mr Preston may relax on one count. Few in Washington now doubt that the bank is needed: new imperatives, such as reconstruction in eastern Europe and the Middle East, have merely been superimposed on older, unsolved problems: Grinding poverty is a near universal condition in much of the world: 1bn people live on less than Dollars 1 a day. More than 110m Third World children lack access even to primary education. Horrific inequality abounds. In Mexico, life expectancy for the poorest 10 per cent is 20 years less than for the richest 10 per cent. What kind of bank will Mr Preston inherit from his predecessor, Mr Barber Conable? Most reports are mixed. 'It is not an impressive bureaucracy,' says Mr John Williamson, a senior fellow at the Institute for International Economics. 'The morale of staff is lousy,' says Mr Charles Flickner, a senior analyst on the Senate Budget Committee and close observer of the bank. Mr Conable, a former Republican congressman, arrived at the bank in 1986 knowing little about either banking or development. Although now well-liked (partly for championing causes such as women's rights in the Third World), many observers say he never fully recovered from a rocky start involving a divisive internal reorganisation of the bank. Mr Percy Mistry, a scholar at Queen Elizabeth House, Oxford, and former senior adviser at the bank, says it suffered from 'presidential failure' during the 1980s. Mr Robert McNamara, a forceful chief executive in the 1970s, built a presidential institution that responded to firm leadership from the top. But neither Mr Conable nor his predecessor, Mr A W 'Tom' Clausen, a commercial banker, could fill his shoes. For a decade the bank has effectively been run by two senior - and strong-willed - vice-presidents: Mr Ernest Stern (who nearly left last year to join the EBRD) and Mr Moeen Qureshi. Mr Preston's first challenge, says Mr Mistry, will be to wrest control of the bank from Messrs Stern and Qureshi; his second, to prune legions of 'useless advisers' and install managers with real-world experience. His third, one might add, will be quickly to establish his independence from the US Treasury which always browbeats a newcomer. What kind of development legacy will Mr Preston inherit? In spite of recent progress in a few countries, such as Mexico, the past decade has been one of relative failure. Many Third World countries have gone backwards. Real per capita incomes have declined substantially in sub-Saharan Africa and the Middle East, and mildly in Latin America. The biggest drag on growth is the huge debt accumulated in the 1970s and early 1980s. Many optimists see the debt reduction strategy launched by Mr Nicholas Brady, the US Treasury Secretary, in 1989, as a 'final solution' to the debt crisis. Under the plan official agencies assume some of the burden of developing countries' private debts on condition that they implement market-oriented economic reforms. 'The Brady plan is enough,' says Mr Williamson, if developing countries are willing to embrace reform and if it is matched by greater forgiveness of official debt. Officials such as Mr David Mulford of the US Treasury say the recent forgiveness of about half of Poland's official debt will not set a precedent for other debtors. Mr Williamson laughs. 'In the long run it will be impossible to isolate Poland,' he says. 'It is not so much more deserving than other countries.' But why was a Brady-type solution not launched much earlier? For most of the 1980s, the First World doggedly refused to consider debt forgiveness. The result of delay and compound interest is a total debt burden today of some Dollars 1,341bn compared with a relatively manageable Dollars 639bn in 1980. 'The bank failed to take a timely leadership position on the debt crisis,' concludes Mr Richard Feinberg, director of the Overseas Development Council in Washington. (The IMF was equally short-sighted.) As incoming president, Mr Preston must review the bank's strategies for promoting development. The main innovation of the 1980s was a switch from project lending to 'structural adjustment' lending. Making finance conditional on structural reforms was supposed to transform the economic performance of developing countries. But studies indicate the results have been fairly unimpressive. This is both because countries failed to abide by the loan conditions and because the bank's policies were sometimes misguided. Professor John Toye, director of the Institute for Development Studies at Sussex University, recently completed an exhaustive analysis of bank programmes. He concludes (as do internal bank analyses) that policy-based lending has 'achieved something, particularly in relation to the external account, but not nearly as much as the bank and donor community hoped'. On average programmes have reduced balance of payments gaps, had a negligible impact on Gross National Product and led to falls in the ratio of investment to GNP. Mr Feinberg calls the decline in investment the 'great shortcoming of structural adjustment lending in the 1980s'. (Investment to GNP ratios have fallen markedly in Africa, the Middle East and Latin America.) He says the bank was naive to expect entrepreneurs to respond to the austerity of adjustment by increasing investment. How can the bank do better in the 1990s? One problem is that it has lost leverage over many Third World governments. The maturing of bank programmes and the failure to expand lending much in the 1980s has led to a marked shrinkage in its net transfers to developing countries.
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